Exam 5: Bonds, Bond Valuation, and Interest Rates

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A) 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.
B) All else equal, an increase in interest rates will have a greater
Effect on the prices of short-term than long-term bonds.
C) 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.
D) If a bond's yield to maturity exceeds its coupon rate, the bond's
Price must be less than its maturity value.
E) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.

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A) $839.31
B) $860.83
C) $882.90
D) $904.97
E) $927.60

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A) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
B) One year from now, Bond A's price will be higher than it is today.
C) Bond A's current yield is greater than 8%.
D) Bond A has a higher price than Bond B today, but one year from now
The bonds will have the same price.
E) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

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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.

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A) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates
Then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
B) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par
Value.
C) Other things held constant, a corporation would rather issue
Noncallable bonds than callable bonds.
D) Other things held constant, a callable bond would have a lower
Required rate of return than a noncallable bond.
E) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.

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B

A) $923.22
B) $946.30
C) $969.96
D) $994.21
E) $1,019.06

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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) 4,228
B) 4,337
C) 4,448
D) 4,562
E) 4,676

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

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A) If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all
Conditions have the lower yield.
B) If the Treasury yield curve is downward sloping, Long's bonds must
Under all conditions have the lower yield.
C) If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than
Short's bonds.
D) If the yield curve for Treasury securities is flat, Short's bond
Must under all conditions have the same yield as Long's bonds.
E) If Long's and Short's bonds have the same default risk, their
Yields must under all conditions be equal.

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A) If a coupon bond is selling at a premium, then the bond's current yield is zero.
B) If a coupon bond is selling at a discount, then the bond's expected
Capital gains yield is negative.
C) 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.
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 coupon bond is selling at par, its current yield equals its
Yield to maturity.

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A) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest
Rates are almost certain to rise in the foreseeable future.
B) If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by
Selling first mortgage bonds.
C) If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interest
Rate.
D) If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond
Rather than a floating-rate bond.
E) If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.

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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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A

A) 8.56%
B) 9.01%
C) 9.46%
D) 9.93%
E) 10.43%

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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.

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C

A) A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity.
B) If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10%
Coupon bond.
C) A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same
Amount of reinvestment rate risk.
D) A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same
Amount of interest rate price risk.
E) If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10%
Coupon bond.

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