Answer Choices:
a. If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity.
b. A life equal, bonds with longer maturities have less price risk than bonds with shorter maturities.
c. If a bond is selling at its par value, its current yield equals its capital gains yield.
d. If a bond is selling at a premium, its current yield will be less than its capital gains yield.
e. All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.
Answer: a. True
Question: A zero coupon bond is a bond that pays no interest and is offered (and initially sells) at par. These bonds provide compensation to investors in the form of capital appreciation.
Answer Choices:
True
False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
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: d. 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?
Answer Choices:
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: a. True
Question: Restrictive covenants are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
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: a. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. 10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds.
b. A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else equal).
c. The total (rate of) 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, divided by the bond’s price at the beginning 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%.
Answer: c. True
Question: Which of the following statements is CORRECT?
Answer Choices:
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.
Answer: c. The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
Question: If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?
Answer Choices:
a. A 1-year zero coupon bond.
b. A 1-year bond with an 8% coupon.
c. A 10-year bond with an 8% coupon.
d. A 10-year bond with a 12% coupon.
e. A 10-year zero coupon bond.
Answer: e. 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