Question 1

Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

We can tell by inspection that c,d,and e are all incorrect.That leaves answers a and b as the only possibly correct statements.Also,recognize that longer-term bonds,and also bonds whose payments come late (like low coupon bonds)are most sensitive to changes in interest rates.Thus,the 15-year,8% coupon bond would be more sensitive to a decline in rates.Finally,we can do some calculations to confirm that a is the correct answer:
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Question 2

Assuming all else is constant,which of the following statements is CORRECT?

Accepted Answer

It is relatively easy to eliminate a,c,and d.When choosing between b and e,think about the graph that shows the relationship between a bond's price and the going interest rate.This curve is concave,indicating that at any interest rate,the decline in price from an increase in rates is less than the gain in price from a similar interest rate decline.It would be easy to confirm this statement with an example.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

D) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. This is because the price of a bond inversely relates to its yield; as yields rise above the coupon rate, the price falls below par value to offer a higher return to maturity.

Question 4

Radoski Corporation's bonds make an annual coupon interest payment of 7.35% every year.The bonds have a par value of $1,000,a current price of $920,and mature in 12 years.What is the yield to maturity on these bonds?

Accepted Answer

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Question 5

Which of the following statements is CORRECT?

Accepted Answer

C) The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant, is correct because as the bond approaches its maturity date, its price converges towards its face value, assuming constant yield to maturity.

Question 6

Which of the following statements is CORRECT?

Accepted Answer

Convertible bonds offer the possibility of capital gains through the option to convert to common stock, so they generally have lower coupon rates than non-convertible bonds of similar default risk.

Question 7

A company is planning to raise $1,000,000 to finance a new plant.Which of the following statements is CORRECT?

Accepted Answer

In statement b,note that if only $500,000 of 1st mortgage bonds were secured by $1 million of property,each of those bonds would be less risky than if there were $1 million of bonds backed by the $1 million of property.Note too that the cost of the total $1 million of debt would be an average of the cost of the mortgage bonds and the debentures,and that average cost could be higher,lower,or the same as if only mortgage bonds or only debentures were used.

Question 8

Listed below are some provisions that are often contained in bond indentures.Which of these provisions,viewed alone,would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?
​1)Fixed assets are used as security for a bond.
2)A given bond is subordinated to other classes of debt.
3)The bond can be converted into the firm's common stock.
4)The bond has a sinking fund.
5)The bond has a call provision.
6)The indenture contains covenants that restrict the use of additional debt.

Accepted Answer

Provisions such as using fixed assets as security (1), offering convertibility into common stock (3), having a sinking fund (4), and containing covenants that restrict additional debt (6) generally make a bond more attractive to investors by reducing their risk, which in turn lowers the yield to maturity they require.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A bond would not be called unless the current rate was below the YTM,in which case it would sell at a premium,because only then would it be profitable to refund the bond.The investor would get the funds,then reinvest at the new low market rate.Thus,the investor would end up earning less than the YTM,even after receiving the call premium.

Question 10

Dyl Inc.'s bonds currently sell for $870 and have a par value of $1,000.They pay a $65 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to maturity (YTM)?

Accepted Answer

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Question 11

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 12

Suppose a new company decides to raise a total of $200 million,with $100 million as common equity and $100 million as long-term debt.The debt can be mortgage bonds or debentures,but by an iron-clad provision in its charter,the company can never raise any additional debt beyond the original $100 million.Given these conditions,which of the following statements is CORRECT?

Accepted Answer

The higher the percentage of mortgage bonds,the less the collateral backing each bond,so these bonds' risk and thus required return would be higher.Also,the higher the percentage of mortgage bonds,the less free assets would be backing the debentures,so their risk and required return would also be higher.However,mortgage bonds are less risky than debentures,so mortgage bond rates are lower than rates on debentures.We end up with a situation where the greater the percentage of mortgage bonds,the higher the rate on both types of debt,but the average cost to the company could be higher,lower,or constant.Note that we could draw a graph of the situation,with % mortgage on the horizontal axis and rates on the vertical axis,the graph would look like the WACC graph in the cost of capital chapter.

Question 13

Bond A has a 9% annual coupon,while Bond B has a 7% annual coupon.Both bonds have the same maturity,a face value of $1,000,an 8% yield to maturity,and are noncallable.Which of the following statements is CORRECT?

Accepted Answer

The answer of Bond A has a 9% annual coupon,while...

Question 14

Which of the following statements is CORRECT?

Accepted Answer

Answer a is incorrect because a premium bond must have a negative capital gains yield.Answer c is incorrect because a bond selling at par must have a current yield equal to its YTM.Answer d is incorrect because a bond selling at below par must have a YTM > the coupon rate.Answer e is incorrect because a discount bond's price must rise over time.That leaves answer b as the only possibly correct answer.Note that YTM = Current yield +/- Capital gains yield,so Current yield = YTM +/- Capital gains yield.The capital gains yield will be positive or negative depending on whether the coupon rate is above or below the YTM.That means that the current yield must either equal the YTM or be between the YTM and the coupon rate.b's correctness is also demonstrated below: 11ea856c_8bcf_e07e_9aec_f9ff9095b714_TB1222_00 ?

Question 15

Which of the following statements is CORRECT?

Accepted Answer

Income bonds indeed require the company to pay interest only if it has earned enough income to cover the interest payments, reducing the risk of bankruptcy due to inability to make interest payments.

Question 16

Which of the following statements is CORRECT?

Accepted Answer

a is correct because,with the current market rate below the coupon bond,both bonds will sell at a premium,but the premium will be larger for the noncallable bond.The same logic explains why d is false.

Question 17

Adams Enterprises' noncallable bonds currently sell for $910.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

Accepted Answer

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Question 18

Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC)?

Accepted Answer

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Question 19

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Accepted Answer

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Question 20

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 6.1% on these bonds.What is the bond's price?

Accepted Answer

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Quiz 7: Bonds and Their Valuation

Assume that a noncallable 10-year T-bond has a 12% annual coupon,while a 15-year noncallable T-bond has an 8% annual coupon.Assume also that the yield curve is flat,and all Treasury securities have a 10% yield to maturity.Which of the following statements is CORRECT?

Assuming all else is constant,which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Radoski Corporation's bonds make an annual coupon interest payment of 7.35% every year.The bonds have a par value of $1,000,a current price of $920,and mature in 12 years.What is the yield to maturity on these bonds?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

A company is planning to raise $1,000,000 to finance a new plant.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Dyl Inc.'s bonds currently sell for $870 and have a par value of $1,000.They pay a $65 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to maturity (YTM) ?

Which of the following statements is CORRECT?

Bond A has a 9% annual coupon,while Bond B has a 7% annual coupon.Both bonds have the same maturity,a face value of $1,000,an 8% yield to maturity,and are noncallable.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Adams Enterprises' noncallable bonds currently sell for $910.They have a 15-year maturity,an annual coupon of $85,and a par value of $1,000.What is their yield to maturity?

Sadik Inc.'s bonds currently sell for $1,300 and have a par value of $1,000.They pay a $105 annual coupon and have a 15-year maturity,but they can be called in 5 years at $1,100.What is their yield to call (YTC) ?

Ryngaert Inc.recently issued noncallable bonds that mature in 15 years.They have a par value of $1,000 and an annual coupon of 5.7%.If the current market interest rate is 7.0%,at what price should the bonds sell?

Morin Company's bonds mature in 8 years,have a par value of $1,000,and make an annual coupon interest payment of $65.The market requires an interest rate of 6.1% on these bonds.What is the bond's price?