Exam 5: Bonds, Bond Valuation, and Interest Rates

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.

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A) All else equal, senior debt generally has a lower yield to maturity
Than subordinated debt.
B) An indenture is a bond that is less risky than a mortgage bond.
C) The expected return on a corporate bond will generally exceed the
Bond's yield to maturity.
D) If a bond's coupon rate exceeds its yield to maturity, then its
Expected return to investors exceeds the yield to maturity.
E) Under our bankruptcy laws, any firm that is in financial distress
Will be forced to declare bankruptcy and then be liquidated.

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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.

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A) 7.39%
B) 7.76%
C) 8.15%
D) 8.56%
E) 8.98%

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A) $829.21
B) $850.47
C) $872.28
D) $894.65
E) $917.01

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A) 10-year, zero coupon bonds have higher reinvestment rate risk than
10-year, 10% coupon bonds.
B) A 10-year, 10% coupon bond has less reinvestment rate risk than a
10-year, 5% coupon bond (assuming all else equal) .
C) The total 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.
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%.

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A) 0.49%
B) 0.55%
C) 0.61%
D) 0.68%
E) 0.75%
Medium/Hard:

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A) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the
Coupon rate.
B) A callable 10-year, 10% bond should sell at a higher price than an
Otherwise similar noncallable bond.
C) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were
Used.
D) Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the
Coupon rate.
E) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate
Of return will be lower on the callable bond.

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A) 1.90%
B) 2.09%
C) 2.30%
D) 2.53%
E) 2.78%

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A) 10-year, zero coupon bond.
B) 20-year, 10% coupon bond.
C) 20-year, 5% coupon bond.
D) 1-year, 10% coupon bond.
E) 20-year, zero coupon bond.

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A) Exactly equal to 6%.
B) It could be less than, equal to, or greater than 6%.
C) Greater than 6%.
D) Exactly equal to 8%.
E) Less than 6%.

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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 interest rate 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.

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A) One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
B) Long-term bonds have less interest rate price risk but more
Reinvestment rate risk than short-term bonds.
C) If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate
Risk.
D) Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment
Rate risk.
E) Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.

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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 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.

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