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11
19) Lee is considering buying one of two newly-issued bonds. Bond A is a twenty-year, 7.5%
coupon bond that is non-callable. Bond B is a twenty-year, 8.25% bond that is callable after
two years. Both bonds are comparable in all other aspects. Lee plans on holding his bond to
maturity. What should Lee do if he feels that interest rates are going to decline by 2% in the
near future and then remain relatively stable thereafter?
A) purchase Bond A
B) purchase Bond B
C) purchase neither A nor B at this time
D) negotiate a higher rate on Bond A
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
20) Which of the following are true concerning bond ratings?
I. They have a greater impact on the price and yield of junk bonds than on investment grade
bonds.
II. They provide investors with a convenient way to assess the relative risk of various bond
issues.
III. They are provided by an independent government agency.
IV. They have a significant effect on a bond's price and yield.
A) I and II only
B) II and IV only
C) III only
D) I, II and IV only
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
21) Which one of the following is the most junior in terms of its claim on earnings and assets?
A) subordinated debenture
B) mortgage bond
C) collateral trust bond
D) equipment trust certificate
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12
22) Bonds are least likely to be called if
A) they are selling at a substantial premium.
B) they are selling at a substantial discount.
C) the price is close to par value.
D) if they do not mature for at least 5 years.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
23) Which of the following bond features is least desirable to investors ?
A) serial maturity dates
B) a nonrefundable provision
C) a call provision
D) sinking fund
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
24) Bonds with one of the top four ratings (Aaa through Baa, or AAA through BBB) are
designated as
A) split bonds.
B) investment grade bonds.
C) illiquid bonds.
D) high-yield bonds.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
13
25) When the economy is moving toward a recession, the yield on riskier bonds will tend to
A) rise.
B) fall.
C) stagnate.
D) become volatile.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
26) If a bond rating moves from a BB to a BBB rating
A) the bond will still be classified as junk.
B) it must also move from a Ba to a Baa rating.
C) the market yield on the bond will rise.
D) the market price of the bond will rise.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
27) Which of the following factors are included in the rating analysis of a corporate bond?
I. the issue's indenture provisions
II. the liquidity position of the issuing company
III. the issuing company's relative debt burden
IV. the stability of the company's earnings
A) I and II only
B) I, II and III only
C) II, III and IV only
D) I, II, III and IV
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
14
28) Bond ratings are an important element of the bond market. Explain what bond ratings are,
who issues the ratings, and what the ratings mean to the average investor.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
29) Every bond is issued with a call feature. Explain what it means for a bond to be "called,"
then briefly describe the three most common types of call features. Also explain why investors
suffer when bonds are called.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
15
Copyright © 2017 Pearson Education, Inc.
10.3 Learning Goal 3
1) When interest rates change, the prices of short-term bonds will change more than those of
long-term bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
2) Interest rates and bond prices are positively related.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
3) An increase in the market rate of interest can cause a bondholder to realize a capital loss on
the sale of their bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
4) When the market rate of interest drops below a bond's coupon rate, the bond will sell at a
premium.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
5) Issuers must redeem outstanding bonds for at least their par value.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
16
6) If you want to reduce the price volatility of your bond portfolio, you should shorten the time-
to-maturity of your portfolio.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7) If you feel interest rates are going to drop significantly, you could potentially realize large
capital gains by purchasing long-term zero coupon bonds prior to the rates decreasing.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8) Junk bond prices are more sensitive to ratings changes than investment grade bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
9) Which one of the following variables has the greatest effect on bond prices?
A) economic growth
B) interest rates
C) inflation
D) stock market returns
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
17
10) An increase in the market rate of return on an outstanding bond will
A) increase the coupon rate.
B) decrease the coupon rate.
C) increase the bond price.
D) decrease the bond price.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
11) The Franklin Company issued a 6% bond three years ago at par value. The market interest
rate on comparable bonds today is 5%. The Franklin Company bond currently pays ________ a
year in interest and the bond sells at a ________.
A) $60; discount
B) $60; premium
C) $50; discount
D) $50; premium
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12) Solstice Corporation issued a 3% bond four years ago at par value. The market interest rate
on comparable bonds today is 4%.
A) This bond sells at a discount and the coupon rate is higher than the yield.
B) This bond sells at a premium and the coupon rate is lower than the yield.
C) This bond sells at a discount and the coupon rate is lower than the yield.
D) This bond sells at a premium and the coupon rate is higher than the yield.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
18
13) Two years ago, Mathew purchased a 10 year government bond with a yield of 4.75%.
Today, the interest rate on government bonds with 8 years to maturity is 3.5%. If Mathew sells
his bond today, he most likely will
A) realize a capital gain.
B) realize a capital loss.
C) sell the bond at face value.
D) sell the bond at par value.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14) At the time you purchase a bond, you know the exact holding period return you will earn if
A) the bond is called at any time prior to maturity.
B) you resell the bond in exactly one year from the date of purchase.
C) the market rate of interest declines within the next year.
D) you hold the bond to maturity.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15) When the market rate of return exceeds the coupon rate, a bond will sell at
A) par.
B) face value.
C) a premium.
D) a discount.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
19
16) Which one of the following combination of features causes bond prices to be the most
volatile?
A) low coupon, short maturity
B) high coupon, short maturity
C) low coupon, long maturity
D) high coupon, long maturity
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
17) Bob expects to retire in a few years and his primary goal is to avoid major losses in his 401-
K account. Which of the following bond characteristics should he be seeking?
I. long maturities
II. high ratings
III high yields
IV. short maturities
A) I and III only
B) I, III and III only
C) II and IV only
D) II, III and IV only
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
18) If you expect market interest rates to rise, you should purchase
A) short term, low coupon bonds.
B) short term, high coupon bonds.
C) long term, low coupon bonds.
D) long term, high coupon bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
20
19) A bond quoted at a price of 101.2
A) is a deep discount bond.
B) yields 10.12%.
C) yields 12%.
D) has a coupon rate that exceeds the market rate.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
20) As bonds approach their maturity dates
A) premiums or discounts will increase.
B) the risk of a call will increase.
C) the bonds prices will become more sensitive to changes in interest rates.
D) prices will approach their par values.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
10.4 Learning Goal 4
1) A debenture is secured only by the issuer's promise to repay the debt.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
2) The par value of a Treasury inflation-indexed obligation is established as $1,000 over the life
of the bond.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
