Question 1

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

Accepted Answer

A)  A 10-year zero-coupon bond.
B)  A 10-year bond with a 10 percent semiannual coupon.
C)  A 10-year bond with a 10 percent annual coupon.
D)  A 5-year zero-coupon bond.
E)  A 5-year bond with a 12 percent annual coupon.F) A) and B)
G) A) and C)

Question 2

Foreign debt is a debt instrument sold by a foreign borrower but denominated in the currency of the country in which it is sold.

Accepted Answer

A) True 
 B)False

Question 3

A call provision gives bondholders the right to demand, or "call for," repayment of a bond.Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following types of debt are backed by some form of specific property?

Accepted Answer

A)  Debenture.
B)  Mortgage bond.
C)  Subordinated debt.
D)  All of the above.
E)  None of the above.F) D) and E)
G) B) and D)

Question 5

Which of the following statements is correct?

Accepted Answer

A)  Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is based on market prices.
B)  The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield.
C)  On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
D)  The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm enters bankruptcy.
E)  All of the above statements are false.F) A) and D)
G) C) and D)

Question 6

You are contemplating the purchase of a 20-year bond that pays $50 in interest each six months.You plan to hold th bond for only 10 years, at which time you will sell it in the marketplace.You require a 12 percent annual return, but believe the market will require only an 8 percent return when you sell the bond 10 years hence.Assuming you are a rational investor, how much should you be willing to pay for the bond today?

Accepted Answer

A)  $1,126.85
B)  $1,081.43
C)  $737.50
D)  $927.68
E)  $856.91F) C) and E)
G) A) and D)

Question 7

A bond's value will increase as interest rates rise over time.

Accepted Answer

A) True 
 B)False  False

Question 8

Call provisions on corporate bonds are generally included to protect the issuer against large declines in interest rates.They affect the actual maturity of the bond but not its price.

Accepted Answer

A) True 
 B)False

Question 9

Because junk bonds are such high-risk instruments, the returns on such bonds aren't very high and the existence of this market detracts from social welfare.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is correct?

Accepted Answer

A)  A zero coupon bond provides no interest payments during the life of the bond, but it provides its owner with a capital gain when the bond matures.In the United States, these bonds appeal to high-income investors because the tax on capital gains income is deferred until the bond matures or is sold.
B)  The "penalty" for having a low bond rating is more severe when the Security Market Line (SML)  is relatively steep than when it is not so steep.
C)  A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.
D)  A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells)  at par, therefore providing compensation to investors in the form of capital appreciation.
E)  None of the above is a correct statement.F) A) and B)
G) A) and C)

Question 11

Bonds with long maturities expose the investor to high interest rate reinvestment risk, which is the risk that income will differ from what is expected because the cash flows received from bonds will have to be reinvested at different interest rates.

Accepted Answer

A) True 
 B)False

Question 12

A bond that can be redeemed for cash at the bondholder's option is called what?

Accepted Answer

A)  Convertible bond.
B)  Putable bond.
C)  Callable bond.
D)  Debenture.
E)  Income bond.F) A) and B)
G) All of the above B

Question 13

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm," and the coupon rate is generally set equal to the required rate.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following securities is the riskiest to investors?

Accepted Answer

A)  Floating rate notes.
B)  Income bonds.
C)  Treasury bills.
D)  First mortgage bonds.
E)  Common stock.F) C) and D)
G) A) and E)

Question 15

Which of the following statements is false?

Accepted Answer

A)  Any bond sold outside the country of the borrower is called an international bond.
B)  Foreign bonds and Eurobonds are two important types of international bonds.
C)  Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
D)  The term Eurobond specifically applies to any foreign bonds denominated in U.S.currency.
E)  None of the above.F) B) and C)
G) A) and C)

Question 16

Rick bought a bond when it was issued by Macroflex Corporation 14 years ago.The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years.Interest is paid every six months; the next interest payment is scheduled for six months from today.If the yield on similar risk investments is 14 percent, what is the current market value (price)  of the bond?

Accepted Answer

A)  $841.15
B)  $1,238.28
C)  $904.67
D)  $757.26
E)  $844.45F) A) and C)
G) B) and D)

Question 17

The current price of a 10-year, $1,000 par value bond is $1,158.91.Interest on this bond is paid every six months, and the simple annual yield is 14 percent.Given these facts, what is the annual coupon rate on this bond?

Accepted Answer

A)  10%
B)  12%
C)  14%
D)  17%
E)  21%F) D) and E)
G) All of the above

Question 18

If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of the low coupon bond will be more affected by a given change in interest rates.

Accepted Answer

A) True 
 B)False  True

Question 19

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S.corporations.

Accepted Answer

A) True 
 B)False

Question 20

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000.What is the YTM (stated on a simple, or annual, basis)  if the bonds mature 10 years from today?

Accepted Answer

A)  8%
B)  6%
C)  4%
D)  2%
E)  1%F) A) and B)
G) A) and C)

Exam 6: Bonds Debt Characteristics and Valuation

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

Correct Answer
verified

Foreign debt is a debt instrument sold by a foreign borrower but denominated in the currency of the country in which it is sold.

Correct Answer
verified

A call provision gives bondholders the right to demand, or "call for," repayment of a bond.Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct Answer
verified

Which of the following types of debt are backed by some form of specific property?

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Correct Answer
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A bond's value will increase as interest rates rise over time.

Correct Answer
verified
False

Call provisions on corporate bonds are generally included to protect the issuer against large declines in interest rates.They affect the actual maturity of the bond but not its price.

Correct Answer
verified

Because junk bonds are such high-risk instruments, the returns on such bonds aren't very high and the existence of this market detracts from social welfare.

Correct Answer
verified

Which of the following statements is correct?

Correct Answer
verified

Bonds with long maturities expose the investor to high interest rate reinvestment risk, which is the risk that income will differ from what is expected because the cash flows received from bonds will have to be reinvested at different interest rates.

Correct Answer
verified

A bond that can be redeemed for cash at the bondholder's option is called what?

Correct Answer
verified
B

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm," and the coupon rate is generally set equal to the required rate.

Correct Answer
verified

Which of the following securities is the riskiest to investors?

Correct Answer
verified

Which of the following statements is false?

Correct Answer
verified

Correct Answer
verified

The current price of a 10-year, $1,000 par value bond is $1,158.91.Interest on this bond is paid every six months, and the simple annual yield is 14 percent.Given these facts, what is the annual coupon rate on this bond?

Correct Answer
verified

If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of the low coupon bond will be more affected by a given change in interest rates.

Correct Answer
verified
True

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S.corporations.

Correct Answer
verified

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000.What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

Correct Answer
verified

Exam 6: Bonds Debt Characteristics and Valuation

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

Correct AnswerverifiedShow Answer

Foreign debt is a debt instrument sold by a foreign borrower but denominated in the currency of the country in which it is sold.

Correct AnswerverifiedShow Answer

A call provision gives bondholders the right to demand, or "call for," repayment of a bond.Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Correct AnswerverifiedShow Answer

Which of the following types of debt are backed by some form of specific property?

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bond's value will increase as interest rates rise over time.

Correct AnswerverifiedFalse

Call provisions on corporate bonds are generally included to protect the issuer against large declines in interest rates.They affect the actual maturity of the bond but not its price.

Correct AnswerverifiedShow Answer

Because junk bonds are such high-risk instruments, the returns on such bonds aren't very high and the existence of this market detracts from social welfare.

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Bonds with long maturities expose the investor to high interest rate reinvestment risk, which is the risk that income will differ from what is expected because the cash flows received from bonds will have to be reinvested at different interest rates.

Correct AnswerverifiedShow Answer

A bond that can be redeemed for cash at the bondholder's option is called what?

Correct AnswerverifiedB

If a firm raises capital by selling new bonds, the buyer is called the "issuing firm," and the coupon rate is generally set equal to the required rate.

Correct AnswerverifiedShow Answer

Which of the following securities is the riskiest to investors?

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The current price of a 10-year, $1,000 par value bond is $1,158.91.Interest on this bond is paid every six months, and the simple annual yield is 14 percent.Given these facts, what is the annual coupon rate on this bond?

Correct AnswerverifiedShow Answer

If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of the low coupon bond will be more affected by a given change in interest rates.

Correct AnswerverifiedTrue

LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S.corporations.

Correct AnswerverifiedShow Answer

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000.What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

Correct AnswerverifiedShow Answer

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False

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B

Correct Answer
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True

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