A) $1,077.01
B) $1,104.62
C) $1,132.95
D) $1,162.00
E) $1,191.79
G) A) and C)
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B) False
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A) 10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.
B) A 10-year, 10% coupon bond has less reinvestment rate risk than a
10-year, 5% coupon bond (assuming all else equal) .
C) The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in
The value of the bond from the beginning to the end of the year.
D) The price of a 20-year, 10% bond is less sensitive to changes in
Interest rates than the price of a 5-year, 10% bond.
E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates
Were greater than 11%.
G) A) and E)
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A) If the bonds' market interest rate remain at 10%, Bond Z's price will be lower one year from now than it is today.
B) Bond X has the greatest reinvestment rate risk.
C) If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage
Increase in price.
D) If market interest rates remain at 10%, Bond Z's price will be 10%
Higher one year from today.
E) If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.
G) A) and B)
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A) All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
B) An indenture is a bond that is less risky than a mortgage bond.
C) The expected return on a corporate bond will generally exceed the
Bond's yield to maturity.
D) If a bond's coupon rate exceeds its yield to maturity, then its
Expected return to investors exceeds the yield to maturity.
E) Under our bankruptcy laws, any firm that is in financial distress
Will be forced to declare bankruptcy and then be liquidated.
G) None of the above
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B) False
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A) If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate
Increase in bond prices.
B) The total yield on a bond is derived from dividends plus changes in
The price of the bond.
C) Bonds are riskier than common stocks and therefore have higher
Required returns.
D) Bonds issued by larger companies always have lower yields to
Maturity (less risk) than bonds issued by smaller companies.
E) The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
G) B) and E)
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A) The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
B) The most likely explanation for an inverted yield curve is that
Investors expect inflation to increase.
C) The most likely explanation for an inverted yield curve is that
Investors expect inflation to decrease.
D) If the yield curve is inverted, short-term bonds have lower yields
Than long-term bonds.
E) Inverted yield curves can exist for Treasury bonds, but because of
Default premiums, the corporate yield curve can never be inverted.
G) All of the above
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B) False
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A) All else equal, secured debt is less risky than unsecured debt.
B) The expected return on a corporate bond must be less than its
Promised return if the probability of default is greater than zero.
C) All else equal, senior debt has less default risk than subordinated
Debt.
D) A company's bond rating is affected by its financial ratios and
Provisions in its indenture.
E) Under Chapter 11 of the Bankruptcy Act in the US, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the
Seniority of the debt as spelled out in the Act.
G) None of the above
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A) 5.01%
B) 5.27%
C) 5.54%
D) 5.81%
E) 6.10%
G) C) and D)
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A) Because of the call premium, the required rate of return would decline.
B) There is no reason to expect a change in the required rate of
Return.
C) The required rate of return would decline because the bond would
Then be less risky to a bondholder.
D) The required rate of return would increase because the bond would
Then be more risky to a bondholder.
E) It is impossible to say without more information.
G) All of the above
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B) False
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A) 1.40%
B) 1.55%
C) 1.71%
D) 1.88%
E) 2.06%
G) D) and E)
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A) 0.49%
B) 0.55%
C) 0.61%
D) 0.68%
E) 0.75%
G) All of the above
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A) You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger
Percentage decline.
B) The time to maturity does not affect the change in the value of a
Bond in response to a given change in interest rates.
C) You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage
Decline.
D) The shorter the time to maturity, the greater the change in the
Value of a bond in response to a given change in interest rates.
E) The longer the time to maturity, the smaller the change in the
Value of a bond in response to a given change in interest rates.
G) C) and D)
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A) If a coupon bond is selling at par, its current yield equals its yield to maturity.
B) If a coupon bond is selling at a discount, its price will continue
To decline until it reaches its par value at maturity.
C) If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero
Coupon bond.
D) If a bond's yield to maturity exceeds its annual coupon, then the
Bond will trade at a premium.
E) If a coupon bond is selling at a premium, its current yield equals
Its yield to maturity.
G) B) and E)
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A) Exactly equal to 6%.
B) It could be less than, equal to, or greater than 6%.
C) Greater than 6%.
D) Exactly equal to 8%.
E) Less than 6%.
G) All of the above
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A) The bond's coupon rate exceeds its current yield.
B) The bond's current yield exceeds its yield to maturity.
C) The bond's yield to maturity is greater than its coupon rate.
D) The bond's current yield is equal to its coupon rate.
E) If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.
G) C) and D)
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A) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher
Capital gains yield than the par bond.
B) A bond's current yield must always be either equal to its yield to
Maturity or between its yield to maturity and its coupon rate.
C) If a bond sells at par, then its current yield will be less than
Its yield to maturity.
D) If a bond sells for less than par, then its yield to maturity is
Less than its coupon rate.
E) A discount bond's price declines each year until it matures, when
Its value equals its par value.
G) B) and D)
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