Exam 5: Bonds, Bond Valuation, and Interest Rates

A) All else equal,an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
B) All else equal,an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
C) If a bond's yield to maturity exceeds its coupon rate,the bond's price must be less than its maturity value.
D) If a bond's yield to maturity exceeds its coupon rate,the bond's current yield must be less than its coupon rate.
E) If two bonds have the same maturity,the same yield to maturity,and the same level of risk,the bonds should sell for the same price regardless of the bond's coupon rates.

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A) There is no reason to expect a change in the required rate of return.
B) The required rate of return would decline because the bond would then be less risky to a bondholder.
C) The required rate of return would increase because the bond would then be more risky to a bondholder.
D) It is impossible to say without more information.
E) Because of the call premium,the required rate of return would decline.

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A) Bond X has the greatest reinvestment rate risk.
B) If market interest rates decline,all of the bonds will have an increase in price,and Bond Z will have the largest percentage increase in price.
C) If market interest rates remain at 10%,Bond Z's price will be 10% higher one year from today.
D) 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.
E) If the bonds' market interest rates remain at 10%,Bond Z's price will be lower one year from now than it is today.

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A) The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm has filed for bankruptcy.
B) Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
C) The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield;it has a zero expected capital gains yield.
D) 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.
E) The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield;it has a zero current interest yield.

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

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A) The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B) The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C) If the yield curve is inverted,short-term bonds have lower yields than long-term bonds.
D) Inverted yield curves can exist for Treasury bonds,but because of default premiums,the corporate yield curve can never be inverted.
E) The higher the maturity risk premium,the higher the probability that the yield curve will be inverted.

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A) If a coupon bond is selling at a discount,then the bond's expected capital gains yield is negative.
B) If a bond is selling at a discount,the yield to call is a better measure of the expected return than the yield to maturity.
C) The current yield on Bond A exceeds the current yield on Bond B.Therefore,Bond A must have a higher yield to maturity than Bond B.
D) If a coupon bond is selling at par,its current yield equals its yield to maturity.
E) If a coupon bond is selling at a premium,then the bond's current yield is zero.

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A) $943.98
B) $968.18
C) $993.01
D) $1,017.83
E) $1,043.28

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A) A callable 10-year,10% bond should sell at a higher price than an otherwise similar noncallable bond.
B) 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.
C) 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.
D) 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.
E) 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.

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A) 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.
B) 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.
C) If a coupon bond is selling at par,its current yield equals its yield to maturity.
D) The current yield on Bond A exceeds the current yield on Bond B;therefore,Bond A must have a higher yield to maturity than Bond B.
E) If a bond is selling at a discount,the yield to call is a better measure of return than the yield to maturity.

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A) Other things held constant,a callable bond should have a lower yield to maturity than a noncallable bond.
B) Once a firm declares bankruptcy,it must then be liquidated by the trustee,who uses the proceeds to pay bondholders,unpaid wages,taxes,and lawyer fees.
C) Income bonds must pay interest only if the company earns the interest.Thus,these securities cannot bankrupt a company prior to their maturity,and this makes them safer to the issuing corporation than "regular" bonds.
D) A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
E) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.

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A) A bond is likely to be called if its market price is below its par value.
B) Even if a bond's YTC exceeds its YTM,an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.
C) A bond is likely to be called if its market price is equal to its par value.
D) A bond is likely to be called if it sells at a discount below par.
E) A bond is likely to be called if its coupon rate is below its YTM.

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A) A 10-year,$1,000 face value,zero coupon bond.
B) A 10-year,$1,000 face value,10% coupon bond with annual interest payments.
C) All 10-year bonds have the same price risk since they have the same maturity.
D) A 10-year,$1,000 face value,10% coupon bond with semiannual interest payments.

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A) The bond has a current yield greater than 8%.
B) The bond sells at a discount.
C) The bond's required rate of return is less than 7.5%.
D) If the yield to maturity remains constant,the price of the bond will decline over time.
E) The bond sells at a price below par.

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A) 0.49%
B) 0.55%
C) 0.61%
D) 0.68%
E) 0.75%

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A) A 1-year bond with a 15% coupon.
B) A 3-year bond with a 10% coupon.
C) A 10-year zero coupon bond.
D) A 10-year bond with a 10% coupon.
E) An 8-year bond with a 9% coupon.

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A) $1,077.01
B) $1,104.62
C) $1,132.95
D) $1,162.00
E) $1,191.79

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