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. Trueb. False
Answer: b. False
Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by: a. Real risk-free rate differences. b. Tax effects. c. Default and liquidity risk differences. d. Maturity risk differences. e. Inflation differences.
Answer Choices:
a. Falseb. Falsec. Trued. Falsee. False
Answer: c. True
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 Choices:
a. Falseb. Truec. Falsed. Falsee. False
Answer: b. True
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 Choices:
a. Trueb. Falsec. Falsed. Falsee. False
Answer: a. True
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. Falseb. Truec. Falsed. Falsee. False
Answer: b. True
Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return? a. Because of the call premium, the required rate of return would decline. b. There is no reason to expect a change in the required rate of return. c. The required rate of return would decline because the bond would then be less risky to a bondholder. d. The required rate of return would increase because the bond would then be more risky to a bondholder. e. It is impossible to say without more information.
Answer Choices:
a. Falseb. Falsec. Falsed. Truee. False
Answer: d. True
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. Trueb. Falsec. Falsed. Falsee. False
Answer: a. True
Which of the following statements is CORRECT? a. A zero coupon bond’s current yield is equal to its yield to maturity. b. If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at par. c. All else equal, if a bond’s yield to maturity increases, its price will fall. d. If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. e. All else equal, if a bond’s yield to maturity increases, its current yield will fall.
Answer Choices:
a. Falseb. Falsec. Trued. Falsee. False
Answer: c. True
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. Falseb. Falsec. Trued. Falsee. False
Answer: c. True
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 Choices:
a. Trueb. Falsec. False
Answer: a. True
Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT? a. Bond 8’s current yield will increase each year. b. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. c. Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year. d. Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. e. Over the next year, Bond 8’s price is expected to decrease, Bond 10’s price is expected to stay the same, and Bond 12’s price is expected to increase.
Answer Choices:
a. Falseb. Falsec. Falsed. Truee. False
Answer: d. True
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? 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. c. The bond’s coupon rate is less than 8%. d. If the yield to maturity increases, then the bond’s price will increase. e. If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year.
Answer Choices:
a. Falseb. Truec. Falsed. Falsee. False
Answer: b. True
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. Falseb. Falsec. Falsed. Falsee. True
Answer: e. True
A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither is callable, and both have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT? a. The prices of both bonds will decrease by the same amount. b. Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price. c. Both bonds would decline in price, but the 8-year bond would have the greater percentage decline in price. d. A market yield increase is the same as a yield to maturity increase. e. The prices of both bonds would increase by the same amount.
Answer Choices:
a. Falseb. Truec. Falsed. Falsee. False
Answer: b. True
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? 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 Choices:
a. Falseb. Falsec. Trued. Falsee. False
Answer: c. True
Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%? 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 Choices:
a. Falseb. Falsec. Falsed. Falsee. True
Answer: e. True
Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price? a. An 8-year bond with a 9% coupon. b. A 1-year bond with a 15% coupon. c. A 3-year bond with a 10% coupon. d. A 10-year zero coupon bond. e. A 10-year bond with a 10% coupon.
Answer Choices:
a. Falseb. Falsec. Falsed. Truee. False
Answer: d. True
Which of the following bonds has the greatest price risk? 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 Choices:
a. Falseb. Truec. Falsed. Falsee. False
Answer: b. True