a. All else equal, secured debt is more risky than unsecured debt.
b. The expected return on a corporate bond must be greater than its promised return if the probability of default is greater than zero.
c. All else equal, senior debt has more default risk than subordinated debt.
d. A company’s bond rating is affected by its financial ratios but not by provisions in its indenture.
e. Under Chapter 7 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off claims against it according to the priority of the claims as spelled out in the Act.
Answer Options:
a. False
b. False
c. False
d. False
e. True
Answer: e. True
Question: Which of the following statements is CORRECT?
Answer Options:
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the ends of the periods.
d. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
Answer: d. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
Question: Which of the following statements is CORRECT?
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 generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.
Answer Options:
a. False
b. False
c. False
d. False
e. True
Answer: e. True
Question: Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?
a. If the bonds’ market interest rate remains at 10%, Bond Z’s price will be lower one year from now than it is today.
b. Bond X has the greatest reinvestment risk.
c. If market interest rates decline, the prices of all three bonds will increase, but Z’s price will have the largest percentage increase.
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.
Answer Options:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate decrease 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 generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
e. The market price of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.
Answer Options:
a. False
b. False
c. False
d. False
e. True
Answer: e. True
Question: Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.
Answer Options:
a. True
b. False
Answer: b. False
Question: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm’s stockholders.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. The yield curve should be downward sloping, with the rate on a 1-year bond at 6%.
b. The interest rate today on a 2-year bond should be approximately 6%.
c. The interest rate today on a 2-year bond should be approximately 7%.
d. The interest rate today on a 3-year bond should be approximately 7%.
e. The interest rate today on a 3-year bond should be approximately 8%.
Answer Options:
Answer: a. The yield curve should be downward sloping, with the rate on a 1-year bond at 6%.
Question: Which of the following is a good “non-dairy source” of calcium?
Answer Options:
[A] Kale
[B] Turnip and collard greens
[C] Sardines
[D] All of the above
[E] Only a and c.
Answer: All of the above
Question: Chemical digestion begins in the mouth with the production of ____________.
a) Amylase
b) Pepsin
c) Lipase
d) Protease
Answer Options:
Answer: a) Amylase
Question: Which of the following statements is CORRECT?
a. If a coupon bond is selling at a premium, then the bond’s current yield is zero.
b. If a coupon bond is selling at a discount, then the bond’s expected capital gains yield is negative.
c. If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
d. The current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A must have a higher yield to maturity than Bond B.
e. If a coupon bond is selling at par, its current yield equals its yield to maturity.
Answer Options:
a. False
b. False
c. False
d. False
e. True
Answer: e. True
Question: Which of the following statements is CORRECT?
a. If a coupon bond is selling at par, its current yield equals its yield to maturity.
b. If rates fall after its issue, a zero coupon bond could trade at a price above its maturity (or par) value.
c. If rates fall rapidly, a zero coupon bond’s expected appreciation could become negative.
d. If a firm moves from a position of strength toward financial distress, its bonds’ yield to maturity would probably decline.
e. If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
Answer Options:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: An investor is considering buying one of two 10-year, $1,000 face value, noncallable bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, and the YTM is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?
a. Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
b. One year from now, Bond A’s price will be higher than it is today.
Answer Options:
a. False
b. True
Answer: b. True