Deck 6: Bonds, Bond Valuation, and Interest Rates

Question 1

Issued by the government of Canada,real return bonds are free from default risk.However,they are still subject to interest rate risk.

Answer 1

True

Question 2

Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus,these securities cannot bankrupt a company,and this makes them safer from an investor's perspective than regular bonds.

Answer 2

False

Question 3

The risk in bond prices due to fluctuations in interest rates is called reinvestment risk.

Answer 3

False

Question 4

When interest rates fall,investors have more incentive to sell their retractable bonds back to the issuer.

Question 5

If the required rate of return on a bond (r_d) is greater than its coupon interest rate and will remain above that rate,then the market value of the bond will always be below its par value until the bond matures,at which time its market value will equal its par value.(Accrued interest between interest payment dates should not be considered when answering this question.)

Question 6

A call provision gives bondholders the right to demand,or "call for," repayment of a bond.Typically,calls are exercised if interest rates rise,because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

Question 7

The desire for floating-rate bonds,and consequently their increased usage,arose out of the experience of the early 1980s,when inflation pushed interest rates up to very high levels.

Question 8

The market value of any financial asset may be estimated by determining future cash flows and then discounting them back to the present.

Question 9

Suppose you are considering two bonds that will be issued tomorrow.Both are rated triple B (BBB,the lowest investment-grade rating),both mature in 20 years,both have a 10% coupon,neither can be called except for sinking fund purposes,and both are offered to you at their $1,000 par values.However,Bond SF has a sinking fund while Bond NSF does not.Under the sinking fund,the company must call and pay off 5% of the bonds at par each year.The yield curve at the time is upward sloping.The bond's prices,being equal,are probably not in equilibrium,as Bond SF,which has the sinking fund,would generally be expected to have a higher yield than Bond NSF.

Question 10

Junk bonds are high-risk,high-yield debt instruments.They are often used to finance leveraged buyouts and mergers,and to provide financing to companies of questionable financial strength.

Question 11

With no interim interest payment,zero bonds are not a good investment kept in the RRSP account.

Question 12

Under no circumstances are bondholders allowed to turn in their holdings unless the bonds are retractable.

Question 13

Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity.Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

Question 14

Other things being equal,a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

Question 15

Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise.Since floating-rate debt shifts interest rate risk to companies,it offers no advantages to issuers.

Question 16

Maple bonds are issued by the government of Canada in Canadian dollars but sold to only foreign investors.

Question 17

A bond that is callable has a chance of being retired earlier than its stated term to maturity.Therefore,if the yield curve is upward sloping,an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

Question 18

A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity.(Assume that the bonds have equal default risk and equal coupon rates,and they cannot be called.)

Question 19

The Canada call feature stops a bond being called prior to its maturity because a higher buyback price is involved.

Question 20

There is an inverse relationship between bonds' quality ratings and their required rates of return.

Question 21

Which of the following statements best describes interest rates?

A)You hold two bonds. One is a 10-year, zero coupon issue, and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.
B)The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C)The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
D)The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.

Question 22

Which statement regarding sinking funds is true?

A)Sinking fund provisions sometimes adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.
B)Most sinking funds require the issuer to provide funds to a trustee, which saves the money so that it will be available to pay off bondholders when the bonds mature.
C)A sinking fund provision makes a bond more risky to investors at the time of issuance.
D)Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.

Question 23

Assume that all interest rates in the economy decline from 10% to 9%.Which bond would have the largest percentage increase in price?

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

Question 24

Which statement regarding bond maturity is true?

A)Any maturity is legally permissible.
B)The longest term of maturity for corporate bonds is 50 years.
C)Real return bonds have the shortest term of maturity.
D)Perpetuity bonds must have a specified maturity date.

Question 25

Which bond would have the greatest percentage increase in value if all interest rates fall by 1%?

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

Question 26

If its yield to maturity declined by 1%,which bond would have the largest percentage increase in value?

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 zero coupon bond

Question 27

Which bond has the greatest interest rate price risk?

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.

Question 28

Suppose a Chinese company in Canada issues a bond that is denominated in Canadian dollars.What is this an example of?

A)a domestic bond
B)a global bond
C)a foreign bond
D)a Eurobond

Question 29

Tucker Corporation is planning to issue new 20-year bonds.Initially,the plan was to make the bonds noncallable.If the bonds were made callable after 5 years at a 5% call premium,how would this affect their required rate of return?

A)Because of the call premium, the required rate of return would decline.
B)There is no reason to expect a change in the required rate of return.
C)The required rate of return would decline because the bond would then be less risky to a bondholder.
D)The required rate of return would increase because the bond would then be more risky to a bondholder.

Question 30

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.Which statement about this bond is correct?

A)The bond is selling below its par value.
B)The bond is selling at a discount.
C)If the yield to maturity remains constant, the bond's price 1 year from now will be lower than its current price.
D)The bond's current yield is greater than 9%.

Question 31

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things held constant.

Question 32

Which of the following statements is correct?

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

Question 33

Under normal conditions,which action would be most likely to increase the coupon rate required to enable a bond to be issued at par?

A)adding additional restrictive covenants that limit management's actions
B)adding a call provision
C)the rating agencies changing the bond's rating from Baa to Aaa
D)adding a sinking fund

Question 34

A bond rating agency will rely exclusively on quantitative data to determine the risk that a firm may default on its debt servicing obligations.

Question 35

Which event would make it more likely that a company would choose to call its outstanding callable bonds?

A)The company's bonds are downgraded.
B)Market interest rates decline sharply.
C)The company's financial situation deteriorates significantly.
D)Inflation increases significantly.

Question 36

Amram Inc.can issue a 20-year bond with a 6% annual coupon.This bond is not convertible,is not callable,and has no sinking fund.Alternatively,Amram could issue a 20-year bond that is convertible into common equity,may be called,and has a sinking fund.What is the coupon rate that Amram would have to pay on the convertible,callable bond?

A)It could be less than, equal to, or greater than 6%.
B)It is greater than 6%.
C)It is exactly equal to 6%.
D)It is less than 6%.

Question 37

Because short-term interest rates are much more volatile than long-term rates,you would,in the real world,generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

Question 38

A 15-year corporate bond was issued 10 years ago.What is it today?

A)a long-term bond with 5 years to maturity
B)a medium-term bond with 5 years to maturity
C)a long-term bond with 15 years to maturity
D)a medium-term bond with 15 years to maturity

Question 39

In corporate bonds,what is a "Canada call" used for calculating?

A)the maturity date
B)the default probability
C)the market risk
D)the buy-back price

Question 40

Three $1,000 face value bonds that mature in 10 years have the same level of risk,hence their YTMs are equal.Bond A has an 8% annual coupon,Bond B has a 10% annual coupon,and Bond C has a 12% annual coupon.Bond B sells at par.Assuming interest rates remain constant for the next 10 years,which statement about these bonds is true?

A)Bond A's current yield will increase each year.
B)Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
C)Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
D)Over the next year, prices of Bond A, B, and C are expected to decrease, stay the same, and increase, respectively.

Question 41

A 10-year Treasury bond has an 8% coupon,and an 8-year Treasury bond has a 10% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount,which of the following statements would be correct?

A)The prices of both bonds will decrease by the same amount.
B)Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
C)The prices of both bonds would increase by the same amount.
D)One bond's price would increase, while the other bond's price would decrease.

Question 42

Which of the following statements regarding bond current yields is NOT true?

A)If a bond is selling at a discount to par, then its current yield will be less than its yield to maturity.
B)If a bond is selling at its par value, then its current yield equals its yield to maturity.
C)If a bond is selling at a premium, then its current yield will be greater than its yield to maturity.
D)A bond's current yield will remain unchanged as the bond's term to maturity changes.

Question 43

A government bond has an 8% annual coupon and a 7.5% yield to maturity.Which statement regarding this bond is correct?

A)The bond sells at a price below par.
B)The bond has a current yield greater than 8%.
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.

Question 44

Which of the following statements about bond yields is true?

A)If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B)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.
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.

Question 45

Which statement regarding reinvestment rate risk is true?

A)All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
B)All else equal, low-coupon bonds have less reinvestment rate risk than high-coupon bonds.
C)All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.
D)All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

Question 46

A 10-year bond pays an annual coupon,its YTM is 8%,and it currently trades at a premium.Which statement regarding the bond's yield is true?

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 remains at 8%, then the bond's price will remain constant over the next year.

Question 47

Which of the following statements is correct?

A)If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for government securities would, other things held constant, have an upward slope.
B)Liquidity premiums are generally higher on government than corporate bonds.
C)Default risk premiums are generally lower on corporate than on government bonds.
D)Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.

Question 48

Which statement regarding bonds is true?

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

Question 49

A bond with a par value of $1,000 has an annual interest payment of $85.The bond currently sells for $850 and has 8 years to maturity.Which of the following is true?

A)The current yield on the bond must be 8.5%.
B)The investor's required rate of return must be 8.5%.
C)The coupon rate must be 8.5%.
D)The yield to maturity must be 8.5%.

Question 50

A 15-year bond with a face value of $1,000 currently sells for $850.Which statement regarding the bond's yield is true?

A)The bond's coupon rate exceeds its current yield.
B)The bond's current yield exceeds its yield to maturity.
C)The bond's yield to maturity is greater than its coupon rate.
D)The bond's current yield is equal to its coupon rate.

Question 51

A 10-year corporate bond has an annual coupon of 9%.The bond is currently selling at par ($1,000).Which of the following statements is NOT correct?

A)The bond's expected capital gains yield is positive.
B)The bond's yield to maturity is 9%.
C)The bond's current yield is 9%.
D)The bond's current yield exceeds its capital gains yield.

Question 52

A 12-year bond has an annual coupon rate of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which statement regarding the bond's price is true?

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.

Question 53

Which statement regarding interest rate risk is true?

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.

Question 54

Which statement regarding interest rate risk is true?

A)If the market interest rate for a bond is less than the bond's coupon rate, the bond will sell at a premium.
B)If the market interest rate for a bond is greater than the bond's coupon rate, the bond will sell at a premium.
C)If the market interest rate for a bond is less than the bond's coupon rate, the bond will sell at a discount.
D)If the market interest rate for a bond is greater than the bond's coupon rate, the bond will sell at a discount.

Question 55

Which statement regarding bond yields is true?

A)A zero coupon bond's current yield is equal to its yield to maturity.
B)If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
C)All else being equal, if a bond's yield to maturity increases, its price will fall.
D)If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.

Question 56

Which statement regarding bond prices is true?

A)If a coupon bond is selling at par, its current yield equals its yield to maturity.
B)If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.
C)If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.
D)If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

Question 57

What does the yield to maturity on bonds refer to?

A)the number of years before the bond's maturity
B)the amount of interest income received by investors each year
C)the promised rate of return on the bonds if purchased at current price and held to maturity
D)the capital gain that investors can get in relation to the average industry price of the bonds

Question 58

An investor is considering buying one of two 10-year,$1,000 face value bonds: Bond A has a 7% annual coupon,while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%,which is expected to remain constant for the next 10 years.Which statement regarding these bonds is correct?

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.

Question 59

You are considering two bonds.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity,and the YTM is expected to remain constant.Which of the following statements is correct?

A)The price of Bond B will decrease over time, but the price of Bond A will increase over time.
B)The prices of both bonds will remain unchanged.
C)The price of Bond A will decrease over time, but the price of Bond B will increase over time.
D)The prices of both bonds will increase over time, but the price of Bond A will increase by more.

Question 60

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings,all of which are noncallable,are as follows:What most probably caused the differences in rates among these issues?

A)real risk-free rate differences
B)default risk differences
C)maturity risk differences
D)inflation differences

Question 61

Which statement regarding bond yields is true?

A)If a coupon bond is selling at a premium, then the bond's current yield is zero.
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.

Question 62

What effect would a 100 basis point drop in yield have on bond prices?

A)It would have a larger impact on bond prices when yields are high.
B)It would have a larger impact on bond prices when yields are low.
C)It would have the same impact on bond prices regardless of whether yields are high or low.
D)It would cause bond prices to fall in general.

Question 63

Which of the following statements is correct?

A)The total return on a bond during a given year consists only of the coupon interest payments received.
B)The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
C)For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
D)When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.

Question 64

Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Each of the bonds has a maturity of 10 years and a yield to maturity of 10%.Which statement regarding bonds is true?

A)If the bonds' market interest rate remains at 10%, Bond Z's price will be lower 1 year from now than it is today.
B)Bond X has the greatest reinvestment rate risk.
C)If market interest rates remain at 10%, Bond Z's price will be 10% higher 1 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.

Question 65

A company is planning to raise $1 million to finance a new plant.Which statement regarding the cost of debt is true?

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 $1 million, with $500,000 as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate 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 $1 million, 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.

Question 66

Which statement regarding bonds is true?

A)The total yield on a bond is derived from dividends plus changes in the price of the bond.
B)Bonds are riskier than common stocks and therefore have higher required returns.
C)Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
D)The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

Question 67

Assume that the current corporate bond yield curve is upward sloping.Under this condition,what could we be sure of?

A)Inflation is expected to decline in the future.
B)Long-term bonds are a better buy than short-term bonds.
C)Maturity risk premiums could help to explain the yield curve's upward slope.
D)Long-term interest rates are more volatile than short-term rates.

Question 68

Which statement regarding types of debt is true?

A)Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.
B)Subordinated debt has less default risk than senior debt.
C)Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
D)Junk bonds typically provide a lower yield to maturity than investment-grade bonds.

Question 69

Which of the following statements is correct?

A)One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.
B)Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
C)Once a firm declares bankruptcy, it must then be liquidated by the trustee, which uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
D)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.

Question 70

Which statement regarding bond yields is true?

A)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.
B)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.
C)Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
D)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.

Question 71

Which of the following statements is correct?

A)A bond is likely to be called if its coupon rate is below its YTM.
B)A bond is likely to be called if its market price is below its par value.
C)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.
D)A bond is likely to be called if its market price is equal to its par value.

Question 72

Which statement regarding yield is true?

A)A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
B)If a bond sells at par, then its current yield will be less than its yield to maturity.
C)If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
D)A discount bond's price declines each year until it matures, when its value equals its par value.

Question 73

Which statement regarding callable bonds is true?

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)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.

Question 74

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,and an 8% yield to maturity.Which of the following statements is correct?

A)Bond A's capital gains yield is greater than Bond B's capital gains yield.
B)Bond A trades at a discount, whereas Bond B trades at a premium.
C)If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.
D)Bond A's current yield is greater than that of Bond B.

Question 75

Short Corp.just issued bonds that will mature in 10 years,and Long Corp.issued bonds that will mature in 20 years.Both bonds promise to pay a semiannual coupon,they are not callable or convertible,and they are equally liquid.Further,assume that the yield curve is based only on expectations about future inflation,i.e.,that the maturity risk premium is zero for government bonds.Under these conditions,which of the following statements is correct?

A)If the yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must have the lower yield under all conditions.
B)If the yield curve is downward sloping, Long's bonds must have the lower yield under all conditions.
C)If the yield curve is flat, Short's bond must have the same yield as Long's bonds under all conditions.
D)If Long's and Short's bonds have the same default risk, their yields must be equal under all conditions.

Question 76

Which of the following statements is correct?

A)All else being equal, secured debt is more risky than unsecured debt.
B)The expected return on a corporate bond must be more than its promised return if the probability of default is greater than zero.
C)All else being equal, senior debt has more default risk than subordinated debt.
D)A company's bond rating is affected by its financial ratios and provisions in its indenture.

Question 77

Which statement regarding bonds is true?

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 is 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.

Question 78

Which statement regarding the yield curve is true?

A)If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope.
B)If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.
C)If the maturity risk premium (MRP) equals zero, the yield curve must be flat.
D)The yield curve can never be downward sloping.

Question 79

Bonds A,B,and C all have a maturity of 10 years and a yield to maturity of 7%.Bond A's price exceeds its par value,Bond B's price equals its par value,and Bond C's price is less than its par value.Which statement regarding bonds is true?

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.

Question 80

Which statement regarding bonds is true?

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.