Question 1

Which of the following Treasury bonds will have the largest amount of interest rate risk (price risk)?

Accepted Answer

The bond with the longest maturity and a lower coupon rate will have the largest amount of interest rate risk, as changes in interest rates will have a greater impact on its price. choice A is the only bond with a longer maturity than the others and a lower coupon rate.

Question 2

Which of the following statements is most correct?

Accepted Answer

Senior debt typically has priority over subordinated debt in the event of default, making it less risky and therefore typically carrying a lower interest rate. Statement A is incorrect as an increase in debt ratio typically indicates higher default risk and may result in an increase in the default premium on existing bonds. Statement C is also incorrect as an indenture is a legal document that outlines the terms and conditions of a bond, but it does not inherently determine the level of risk associated with the bond.

Question 3

If the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

Longer duration bonds, like the 10-year zero-coupon bond, are more sensitive to interest rate changes, leading to a larger percentage increase in value when yields decrease.

Question 4

Which of the following statements is most correct?

Accepted Answer

This statement is generally true as senior debt is considered less risky than subordinated debt, and thus investors are willing to accept a lower yield on senior debt. Additionally, answer choice B is incorrect as an increase in a company's debt ratio would generally increase the default premium on its existing bonds. Answer choice A is also incorrect as the expected return on corporate bonds would most likely be very similar to the yield to maturity. Therefore, only answer choice C is the most correct.

Question 5

Which of the following has the greatest price risk?

Accepted Answer

Zero coupon bonds have the greatest price risk because they do not pay periodic interest, making their price more sensitive to interest rate changes.

Question 6

Which of the following statements is most correct?

Accepted Answer

If a coupon bond is selling at par, it means that the price is equal to the face value, so the current yield (annual coupon payment divided by price) will equal the yield to maturity (the rate of return that an investor will receive if they hold the bond until maturity and receive all the interest payments and the face value). Therefore, statement C is correct. The other statements are not necessarily true. The current yield on a bond can be influenced by factors such as changes in interest rates and credit risk, and does not necessarily indicate the yield to maturity. Additionally, whether the yield to call or yield to maturity is a better measure of return depends on the specific situation and the investor's objectives.

Question 7

Which of the following statements is correct?

Accepted Answer

A) If a company is retiring bonds for sinking fund purposes it will buy back bonds on the open market when the coupon rate is less than the market interest rate - this statement is correct.
B) A bond sinking fund would be good for investors if interest rates have declined after issuance and the investor's bonds get called - this statement is incorrect. A sinking fund is set up to retire bonds over time to reduce debt, it does not guarantee call or redemption of bonds.
C) Mortgage bonds have less default risk than debentures - this statement is correct.
Therefore, choice D is correct as both statements A and C are true.

Question 8

A 10-year bond has a 10 percent annual coupon and a yield to maturity of 12 percent. The bond can be called in 5 years at a call price of $1,050 and the bond's face value is $1,000. Which of the following statements is most correct?

Accepted Answer

a) The bond's current yield can be calculated by dividing the annual coupon payment by its price in the market. Here, the annual coupon payment is $100 ($1,000 x 10%) and the market price is less than $1,000 (as the bond is selling below par). Therefore, the current yield is greater than 10%.
c) As mentioned earlier, the bond is selling below par. This is because its yield to maturity (12%) is greater than its annual coupon rate (10%). When the yield to maturity is greater than the coupon rate, the bond is said to be selling at a discount.
Hence, both answers a and c are correct.

Question 9

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 10

Which of the following statements is most correct?

Accepted Answer

Debentures, being unsecured, typically have higher yields compared to secured mortgage bonds. Callable bonds usually offer higher yields to compensate investors for the risk of the bond being called before maturity.

Question 11

Which of the following statements is most correct?

Accepted Answer

If a bond sells for less than par, its yield to maturity is greater than its coupon rate. If a bond sells at par, its current yield equals its yield to maturity. A bond selling for more than par will have a lower current yield but a capital loss, not a gain, relative to a bond that sells at par.

Question 12

Which of the following statements is most correct?

Accepted Answer

A) This statement is true because if there is a probability of default, the expected return will be lower than the promised return as investors demand compensation for the risk of default.
B) This statement is true because secured debt is backed by collateral, which reduces the risk of default compared to unsecured debt.
C) This statement is false because a subordinated debenture is a bond that is higher in risk and priority than an indenture. 
Therefore, only choices A and B are correct, making D the best answer.

Question 13

You just purchased a 10-year corporate bond that has an annual coupon of 10 percent. The bond sells at a premium above par. Which of the following statements is most correct?

Accepted Answer

Since the bond sells at a premium, its yield to maturity must be less than the coupon rate of 10 percent.

Question 14

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

Accepted Answer

Zero coupon bonds have no coupon payments and rely entirely on changes in interest rates to generate returns. Therefore, a drop in interest rates will have the greatest impact on the value of a zero coupon bond compared to a bond with coupon payments. The longer the maturity of the bond, the greater the impact of the interest rate change. The 10-year zero coupon bond has the longest maturity and no coupon payments, making it the bond with the largest percentage increase in value when interest rates fall.

Question 15

Which of the following statements is most correct?

Accepted Answer

A bond will sell at a discount if its coupon rate is lower than the required return, not higher. A discount bond's price increases over time as it approaches maturity, assuming yield to maturity remains constant. Total return includes both coupon payments and capital gains or losses, not just coupon payments.

Question 16

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 17

Which of the following statements is most correct?

Accepted Answer

The answer of Which of the following statements is most...

Question 18

Assume that all interest rates in the economy decline from 10 percent to 9 percent. Which of the following bonds will have the largest percentage increase in price?

Accepted Answer

Zero coupon bonds are the most sensitive to changes in interest rates. As there are no coupon payments, the entire return of the bond comes from the difference between the purchase price and the face value at maturity. Hence, a decline in interest rates will have the largest percentage increase in the price of a zero coupon bond.

Question 19

Which of the following statements is most correct?

Accepted Answer

The market value of a bond typically approaches its par value as it nears maturity if the issuer remains solvent (statement A). The total yield on a bond includes interest payments and changes in its price (statement C). Statement B is incorrect because an expectation of increased inflation would likely lead to a decrease in bond prices.

Question 20

Which of the following statements is most correct?

Accepted Answer

When interest rates drop, the value of existing bonds with higher coupon rates increase, and investors are willing to pay more to obtain those higher coupon payments. As a zero coupon bond does not have interest payments, its value is solely derived from its discounted future cash flows, therefore as interest rates drop, its value would increase, resulting in a price higher than its $1,000 par value, hence it would sell at a premium over its par value.

Quiz 4: Bond Valuation

Which of the following Treasury bonds will have the largest amount of interest rate risk (price risk) ?

Which of the following statements is most correct?

If the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

Which of the following statements is most correct?

Which of the following has the greatest price risk?

Which of the following statements is most correct?

Which of the following statements is correct?

A 10-year bond has a 10 percent annual coupon and a yield to maturity of 12 percent. The bond can be called in 5 years at a call price of $1,050 and the bond's face value is $1,000. Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is most correct?

You just purchased a 10-year corporate bond that has an annual coupon of 10 percent. The bond sells at a premium above par. Which of the following statements is most correct?

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

Which of the following statements is most correct?

Which of the following statements is most correct?

Which of the following statements is most correct?

Assume that all interest rates in the economy decline from 10 percent to 9 percent. Which of the following bonds will have the largest percentage increase in price?

Which of the following statements is most correct?

Which of the following statements is most correct?