Question: All else constant, a bond will sell at the yield to maturity ___ when the coupon rate is ___
Answer Options:
a premium; less than
a premium; equal to
a discount; less than
a discount; higher than par; less than
Answer: C — a discount; less than
Question: Which one of the following relationships applies to a premium bond?
Answer Options:
Yield to maturity > Current yield > Coupon rate
Coupon rate = Current yield = Yield to maturity
Coupon rate > Yield to maturity > Current yield
Coupon rate < Yield to maturity < Current yield
Coupon rate > Current yield > Yield to maturity
Answer: E — Coupon rate > Current yield > Yield to maturity
Question: A newly issued bond has a coupon rate of 6.4 percent and semiannual interest payments. The bonds are currently priced at par. The yield to maturity earned by these bonds must be:
Answer Options:
3.2 percent
greater than 3.2 percent but less than 6.4 percent
6.4 percent
greater than 6.4 percent
less than 3.2 percent
Answer: C — 6.4 percent
Question: In response to a change in the market rate of interest, the price sensitivity of a bond increases as the:
Answer Options:
coupon rate increases
time to maturity decreases
coupon rate decreases and the time to maturity increases
time to maturity and coupon rate both decrease
coupon rate and time to maturity both increase
Answer: C — coupon rate decreases and the time to maturity increases
Question: You purchased a 10-year bond at par value when it was originally issued. It has an annual coupon of 7.5 percent and matures five years from now. Coupons are paid semiannually. Which one of the following statements applies to this bond if the relevant market interest rate is now 6 percent?
Answer Options:
The current yield to maturity is greater than 7.5 percent
The current yield is 7.5 percent
The next interest payment will be $75
The bond is currently valued at one-half of its issue price
You will realize a capital gain on the bond if you sell it today
Answer: E — You will realize a capital gain on the bond if you sell it today
Question: You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?
Answer Options:
Short-term; low coupon
Short-term; high coupon
Long-term; zero coupon
Long-term; low coupon
Long-term; high coupon
Answer: C — Long-term; zero coupon
Question: A premium bond that pays $75 in interest annually matures in eight years. The bond was originally issued two years ago at par. Which one of the following statements is accurate in respect to this bond today?
Answer Options:
The face value of the bond today is greater than it was when the bond was issued
The bond is worth less today than when it was issued
The yield to maturity is less than the coupon rate
The coupon rate is less than the current yield
The yield to maturity equals the current yield
Answer: C — The yield to maturity is less than the coupon rate
Question: Callable bonds generally:
Answer Options:
grant the bondholder the option to call the bond any time after the deferment period
are callable at par as soon as the call-protection period ends
are called when market interest rates increase
are called within the first three years after issuance
have a sinking fund provision
Answer: B — are callable at par as soon as the call-protection period ends
Question: An example of a negative covenant that might be found in a bond indenture is a statement that the company:
Answer Options:
shall maintain a current ratio of 1.5 or higher
cannot lease any major assets without bondholder approval
must maintain the loan collateral in good working order
shall provide audited financial statements in a timely manner
shall maintain a cash surplus of $500,000 at all times
Answer: B — cannot lease any major assets without bondholder approval
Question: A corporation issued bonds three years ago. Which one of the following is most apt to be included in the bond’s indenture?
Answer Options:
Current yield
Written record of all the current bond holders
List of collateral used as bond security
Current market price
Price at which a bondholder can resell a bond to another bondholder
Answer: C — List of collateral used as bond security
Question: A firm has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:
Answer Options:
at par
in registered form
in street form
as debentures
as callable bonds
Answer: B — in registered form
Question: A firm just issued 15-year, 7.35 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?
Answer Options:
Note
Discounted
Zero coupon
Callable
Debenture
Answer: E — Debenture