Question 1

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year 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

When interest rates decline, bond prices increase. The longer the maturity of the bond, the more its price will be affected by interest rate changes. Therefore, the 15-year bond with the lower coupon rate will have a larger percentage increase in price than the 10-year bond with the higher coupon rate. Choice (A) is incorrect because the bond with the lower coupon rate will have a larger percentage increase in price. Choice (B) is incorrect because the bond with the higher coupon rate will sell at a premium, while the bond with the lower coupon rate will sell at a discount. Choice (C) is incorrect because both bonds would sell at a premium due to their coupon rates being higher than the yield to maturity. Choice (D) is incorrect because if the yield to maturity remains the same, both bonds will neither increase nor decrease in price.

Question 2

10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premiumWhich of the following statements is CORRECT?

Accepted Answer

If a bond trades at a premium, its coupon rate is higher than the YTM. As the bond approaches maturity, its price will decline towards its face value if the YTM remains constant.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

When a bond is selling at par, the coupon rate equals the yield to maturity, and therefore, the current yield also equals the yield to maturity. Choices A and B are incorrect because there could be scenarios where an investor purchases a bond with an expected capital loss or a bond that is not expected to pay any cash coupon interest. Choice D is incorrect because the current yield only takes into account the coupon payments and not the final principal payment, whereas the yield to maturity considers both. Choice E is incorrect because the yield to call is only relevant if the bond has a call provision, and it only measures the return up to the point of the call date.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

The statement in option B is correct. When a bond's yield to maturity (which is the effective interest rate earned by the investor) increases, its price will fall. This is because at a higher yield, the present value of the bond's future cash flows decreases. The other statements are incorrect:
A) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a discount (below par), not at par.
C) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a discount (below par), not at a premium.
D) If a bond's yield to maturity increases, its current yield will increase, not decrease. Current yield is the coupon payment divided by the current market price of the bond, so as the market price falls (due to higher yield), the current yield increases.
E) A zero coupon bond does not have a coupon payment, so its current yield is zero. Its yield to maturity is the only measure of return for this type of bond.

Question 5

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

Accepted Answer

The longer the maturity of a bond, the greater its price sensitivity to changes in interest rates. Additionally, zero-coupon bonds have the highest price sensitivity to changes in interest rates compared to coupon-paying bonds. Therefore, the 10-year zero coupon bond (option C) would have the largest percentage increase in price when interest rates decline.

Question 6

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?

Accepted Answer

Bond A is selling at a premium (coupon rate > YTM), so its price will decrease over time. Bond B is selling at a discount (coupon rate < YTM), so its price will increase over time.

Question 7

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?

Accepted Answer

Since the bond is selling at par and has a constant yield to maturity, there is no expected capital gain or loss, so the capital gains yield is zero, not positive.

Question 8

15-year bond has an annual coupon rate of 8% The coupon rate will remain fixed until the bond matures The bond has a yield to maturity of 6% Which of the following statements is CORRECT?

Accepted Answer

Since the bond's yield to maturity is lower than its coupon rate, the bond is selling at a premium. As it approaches maturity, its price will decrease towards its par value if market interest rates remain unchanged.

Question 9

Which of the following bonds has the greatest interest rate price risk?

Accepted Answer

Zero coupon bonds have the greatest interest rate price risk because they do not pay periodic interest, and their entire value is received at maturity, making them more sensitive to interest rate changes.

Question 10

Ranger Incwould like to issue new 20-year bonds Initially, the plan was to make the bonds non-callable If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Accepted Answer

Making the bonds callable after 5 years with a call premium would make the bond more risky to a bondholder because the issuer now has the option to redeem the bond early. This gives the bondholder less certainty in receiving their full return on the bond, and so they would demand a higher required rate of return to compensate for the increased risk. Therefore, the required rate of return would increase.

Question 11

Nicholas Industries 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, Nicholas could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund Which of the following most accurately describes the coupon rate that Nicholas would have to pay on the convertible, callable bond?

Accepted Answer

The answer of Nicholas Industries can issue a 20-year bond...

Question 12

8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% couponBoth 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?

Accepted Answer

When the yield to maturity increases, bond prices decline. The bond with the higher coupon rate (10% coupon rate of 8-year bond) will have a higher percentage decline in price than the bond with the lower coupon rate (8% coupon rate of 10-year bond). Therefore, option A is correct.

Question 13

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850 Which of the following statements is CORRECT?

Accepted Answer

The fact that the bond sells for less than its face value indicates that the yield to maturity is greater than the coupon rate. The current yield can be calculated as the annual coupon payment divided by the market price, which in this case is $100 divided by $850 or 11.76%.  However, the yield to maturity is the total return anticipated by an investor if the bond is held until it matures, taking into account the bond's current market price, its par value, its coupon interest rate, and the time remaining until maturity. Since the bond sells at a discount, its yield to maturity must be greater than its coupon rate, and therefore choice B is correct.

Question 14

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

Accepted Answer

Adding a call provision to a bond makes it more risky for investors because the issuer has the option to repay the bond before maturity, usually when interest rates have fallen. This means investors might not benefit from higher interest rates for as long as they expected. To compensate for this increased risk, issuers typically have to offer a higher coupon rate to issue the bond at par.

Question 15

YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equalBond 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 of the following statements is CORRECT?

Accepted Answer

Since all three bonds have the same YTM, their prices are not necessarily the same, and in fact, they will differ based on their coupon rates. Bond A has a lower coupon rate than Bond B and Bond C, so its price will be lower than par. Bond C has a higher coupon rate than Bond B and Bond A, so its price will be higher than par.

Since interest rates are not expected to change, the prices should remain relatively stable until maturity. Therefore, option A is incorrect. Option B is also incorrect because Bond C is already selling at a premium, so it is unlikely to increase further. Option D is incorrect because there is no reason given why any of the bond prices would change over the next year. Option E is also incorrect because current yield is the bond's annual coupon payment divided by its current market price, which will not necessarily increase each year.

Question 16

its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A decrease in yield to maturity results in an increase in bond prices. Zero-coupon bonds are the most sensitive to changes in yield, so a 10-year zero-coupon bond would have the largest percentage increase in value. The longer maturity of the bond allows for a greater impact on price for a given change in yield.

Question 17

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.

Accepted Answer

This is because high-coupon bonds generate higher cash flows, which provide a greater cushion against a decline in bond prices due to rising interest rates. Additionally, investors are willing to pay more for the higher cash flows and therefore the prices of these bonds are less affected by changes in interest rates compared to low-coupon bonds.

Question 18

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

Accepted Answer

A zero coupon bond has no coupon payments and hence has the longest duration among all bonds, making it the most sensitive to changes in interest rates. Therefore, it would have the greatest percentage increase in value if all interest rates fall by 1%.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 20

"Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers Such covenants are spelled out in bond indentures.

Accepted Answer

Restrictive covenants are indeed designed to protect bondholders by imposing certain constraints on the actions of managers. These covenants are typically included in the bond indenture, which is a legal contract between the issuer of the bonds and the bondholders. The purpose of these covenants is to ensure that the issuer meets its obligations to the bondholders and does not take actions that would jeopardize the bondholders' interests.

Quiz 4: Bonds

Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year 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?

10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premiumWhich of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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?

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?

15-year bond has an annual coupon rate of 8% The coupon rate will remain fixed until the bond matures The bond has a yield to maturity of 6% Which of the following statements is CORRECT?

Which of the following bonds has the greatest interest rate price risk?

Ranger Incwould like to issue new 20-year bonds Initially, the plan was to make the bonds non-callable If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% couponBoth 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?

Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850 Which of the following statements is CORRECT?

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

its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

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.

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

Which of the following statements is CORRECT?

"Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers Such covenants are spelled out in bond indentures.