a. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.
b. The bond is selling below its par value.
c. The bond is selling at a discount.
d. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
e. The bond’s current yield is greater than 9%.
Answer Choices:
a. False
b. False
c. False
d. True
e. False
Answer: d. True
Question: The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond’s remaining maturity.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?
a. The bond’s expected capital gains yield is zero.
b. The bond’s yield to maturity is above 9%.
c. The bond’s current yield is above 9%.
d. If the bond’s yield to maturity declines, the bond will sell at a discount.
e. The bond’s current yield is less than its expected capital gains yield.
Answer Choices:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: A call provision gives bondholders the right to demand, or “call for,” repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
Answer Choices:
a. True
b. False
Answer: b. False
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 Choices:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
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.
Answer Choices:
a. False
b. False
c. True
d. False
e. False
Answer: c. True
Question: Which of the following statements is CORRECT?
a. You hold two bonds, a 10-year, zero coupon, and 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 its 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.
Answer Choices:
a. True
b. False
c. False
d. False
e. False
Answer: a. True
Question: Amram Inc. can issue a 20-year bond with a 6% annual coupon at par. This bond is not convertible, not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond, the convertible, callable bond with the sinking fund, to have it sell initially at par?
a. The coupon rate should be exactly equal to 6%.
b. The coupon rate could be less than, equal to, or greater than 6%, depending on the specific terms set, but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.
c. The rate should be slightly greater than 6%.
d. The rate should be over 7%.
e. The rate should be over 8%.
Answer Choices:
a. False
b. True
c. False
d. False
e. False
Answer: b. True
Question: The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.
Answer Choices:
a. True
b. False
Answer: a. True
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 Choices:
a. False
b. False
c. True
d. True
e. False
Answer: d. True
Question: A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. All else equal, high-coupon bonds have less reinvestment risk than low-coupon bonds.
b. All else equal, long-term bonds have less price risk than short-term bonds.
c. All else equal, low-coupon bonds have less price risk than high-coupon bonds.
d. All else equal, short-term bonds have less reinvestment risk than long-term bonds.
e. All else equal, long-term bonds have less reinvestment risk than short-term bonds.
Answer Choices:
a. True
b. False
c. False
d. True
e. False
Answer: d. True
Question: A bond that had a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)
Answer Choices:
a. True
b. False
Answer: b. False
Question: A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?
a. The bond sells at a price below par.
b. The bond has a current yield greater than 8%.
c. The bond sells at a discount.
d. The bond’s required rate of return is less than 7.5%.
e. If the yield to maturity remains constant, the price of the bond will decline over time.
Answer Choices:
a. False
b. False
c. False
d. False
e. True
Answer: e. True
Question: Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor’s perspective than regular bonds.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
b. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
c. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
d. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.
e. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must be less than its coupon rate.
Answer Choices:
a. True
b. False
c. False
d. True
e. False
Answer: d. True
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?
a. If market interest rates decline, the price of the bond will also decline.
b. The bond is currently selling at a price below its par value.
c. If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.
d. The bond should currently be selling at its par value.
e. If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
Answer Choices:
a. False
b. False
c. False
d. False
e. True
Answer: e. True