Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. If a bond is selling at a discount, the yield to call is a better measure of return than is the yield to maturity.
b. 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.
c. On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
Answer Options:
a. True
b. False
c. False
Answer: a. True
Question: Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.
Answer Options:
a. True
b. False
Answer: a. True
Question: The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called “interest rate risk,” or “price risk.”
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. Downward-sloping yield curves are inconsistent with the expectations theory.
b. The actual shape of the yield curve depends only on expectations about future inflation.
c. If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future.
d. If the yield curve is upward sloping, the maturity risk premium must be positive and the inflation rate must be zero.
e. Yield curves must be either upward or downward sloping—they cannot first rise and then decline.
Answer Options:
Answer: c. If the pure expectations theory is correct, a downward-sloping yield curve indicates that interest rates are expected to decline in the future.
Question: Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?
a. Adding additional restrictive covenants that limit management’s actions.
b. Adding a call provision.
c. The rating agencies change the bond’s rating from Baa to Aaa.
d. Making the bond a first mortgage bond rather than a debenture.
e. Adding a sinking fund.
Answer Options:
a. False
b. True
c. False
d. False
e. False
Answer: b. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.
b. If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
c. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
d. The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
e. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
Answer: b. If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.
Question: Which of the following statements is CORRECT?
a. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued.
b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature.
c. A sinking fund provision makes a bond more risky to investors at the time of issuance.
d. Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time.
e. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price.
Answer Options:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: If a firm raises capital by selling new bonds, it could be called the “issuing firm,” and the coupon rate is generally set equal to the required rate on bonds of equal risk.
Answer Options:
a. True
b. False
Answer: b. False
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the availability of production opportunities and their expected rates of return. If production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: When food planning during the Coronavirus pandemic, what guidance does the MyPlate website provide?
Answer Options:
[A] Check what you have at home first.
[B] Make sure to use a home delivery shopping option.
[C] Investigate your shopping options.
[D] Include only non-perishable items.
[E] All of the above
[F] Only a and c.
Answer: Only a and c.
Question: One of the four most fundamental factors that affect the cost of money as discussed in the text is the current state of the weather. If the weather is dark and stormy, the cost of money will be higher than if it is bright and sunny, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.
d. If you solve for I and get a negative number, then you must have made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you can still solve for I.
Answer: e. If CF0 is positive and all the other CFs are negative, then you can still solve for I.
Question: Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A’s price exceeds its par value, Bond B’s price equals its par value, and Bond C’s price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?
a. If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
b. Bond A has the most price risk.
c. If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
d. If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
e. Bond C sells at a premium over its par value.
Answer Options:
a. False
b. False
c. True
d. True
e. False
Answer: d. True
Question: Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)
Answer Options:
a. True
b. False
Answer: b. False
Question: Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.
Answer Options:
a. True
b. False
Answer: a. True
Question: When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio’s risk.
Answer Options:
a. True
b. False
Answer: b. False