Answer Choices:
a. 10-year, zero coupon bond.
b. 20-year, 10% coupon bond.
c. 20-year, 5% coupon bond.
d. 1-year, 10% coupon bond.
Answer: a. True
Question: The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
Answer Choices:
a. True
b. False
Answer: a. 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 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?
Answer Choices:
a. The bond’s current yield is less than 8%.
b. If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.
Answer: a. True
Question: Which of the following events would make it more likely that a company would call its outstanding callable bonds? a. The company’s bonds are downgraded. b. Market interest rates rise sharply.
Answer Choices:
a. True
b. False
Answer: b. False
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 Choices:
True
False
Answer: b. False
Question: In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.
Answer Choices:
a. True
b. False
Answer: a. True
Question: You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
Answer Choices:
a. The price of Bond B will decrease over time, but the price of Bond A will increase over time.
b. The prices of both bonds will remain unchanged.
c. The price of Bond A will decrease over time, but the price of Bond B will increase over time.
d. The prices of both bonds will increase by 7% per year.
e. The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.
Answer: b. True
Question: Which of the following bonds has the greatest price risk?
Answer Choices:
a. A 10-year $100 annuity.
b. A 10-year, $1,000 face value, zero coupon bond.
c. A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
d. All 10-year bonds have the same price risk since they have the same maturity.
e. A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.
Answer: b. True
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
b. A company’s subordinated debt has less default risk than its senior debt.
c. Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
d. Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
e. A debenture is a secured bond that is backed by some or all of the firm’s fixed assets.
Answer: c. True
Question: Inflation is expected to increase steadily over the next 10 years, there is a positive maturity risk premium on both Treasury and corporate bonds, and the real risk-free rate of interest is expected to remain constant. Which of the following statements is CORRECT?
Answer Choices:
a. The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.
b. The yield on any corporate bond must exceed the yields on all Treasury bonds.
c. The yield on 7-year corporate bonds must exceed the yield on 10-year Treasury bonds.
d. The stated conditions cannot all be true—they are internally inconsistent.
e. The Treasury yield curve under the stated conditions would be humped rather than have a consistent positive or negative slope.
Answer: a. The yield on 10-year Treasury securities must exceed the yield on 7-year Treasury securities.