Chapter 07: Bonds and Their Valuation
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47. Which of the following statements is CORRECT?
a. All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
b. An indenture is a bond that is less risky than a mortgage bond.
c. The expected return on a corporate bond will generally exceed the bond’s yield to maturity.
d. If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors will also exceed its yield
to maturity.
e. Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be
liquidated.
48. Which of the following statements is CORRECT?
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.
e. If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
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51. An investor is considering buying one of two 10-year, $1,000 face value, noncallable 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%, and the YTM is expected to
remain constant for the next 10 years. Which of the following statements 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.
e. Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds
mature.
52. Which of the following statements is CORRECT?
a. If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity.
b. All else equal, bonds with longer maturities have less price risk than bonds with shorter maturities.
c. If a bond is selling at its par value, its current yield equals its capital gains yield.
d. If a bond is selling at a premium, its current yield will be less than its capital gains yield.
e. All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.
53. Which of the following statements is CORRECT?
a. If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and
if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par
value.
Chapter 07: Bonds and Their Valuation
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b. If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where
rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
c. Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than
callable bonds.
d. Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond
because it would have a shorter expected life.
e. Bonds are exposed to both reinvestment risk and price risk. Longer-term low-coupon bonds, relative to shorter-
term high-coupon bonds, are generally more exposed to reinvestment risk than price risk.
54. Which of the following statements is CORRECT?
a. If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably
observe an immediate increase in bond prices.
b. The total yield on a bond is derived from dividends plus changes in the price of the bond.
c. Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required
returns.
d. Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by
smaller companies.
e. The market price of a bond will always approach its par value as its maturity date approaches, provided the
bond’s required return remains constant.
55. Which of the following statements is CORRECT?
Chapter 07: Bonds and Their Valuation
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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 maturity (or 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.
e. If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
56. 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 is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following
statements is CORRECT?
a. If the bonds’ market interest rate remains at 10%, Bond Z’s price will be lower one year from now than it is today.
b. Bond X has the greatest reinvestment risk.
c. If market interest rates decline, the prices of all three bonds will increase, but Z’s price will have the largest
percentage increase.
d. If market interest rates remain at 10%, Bond Z’s price will be 10% higher one year from today.
e. 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.
57. 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. None of the bonds can be called. Which
of the following statements is CORRECT?
Chapter 07: Bonds and Their Valuation
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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 price 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.
e. Bond C sells at a premium over its par value.
58. Which of the following statements is CORRECT?
a. 10-year, zero coupon bonds have more reinvestment risk than 10-year, 10% coupon bonds.
b. A 10-year, 10% coupon bond has less reinvestment risk than a 10-year, 5% coupon bond (assuming all else
equal).
c. The total (rate of) 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, divided by the bond’s price at
the beginning 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.
e. A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default
would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.
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59. Which of the following statements is CORRECT?
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.
e. The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a
bond with an expected capital loss.
60. Which of the following statements is CORRECT?
a. If a coupon bond is selling at a premium, then the bond’s current yield is zero.
b. If a coupon bond is selling at a discount, then the bond’s expected capital gains yield is negative.
c. 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.
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.
e. If a coupon bond is selling at par, its current yield equals its yield to maturity.
61. Which of the following statements is CORRECT?
Chapter 07: Bonds and Their Valuation
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a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell
for the same price regardless of their coupon rates.
b. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term
bonds.
c. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on
lower-coupon bonds.
d. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.
e. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must be less than its coupon rate.
62. 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?
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 remains at 8%, Bond A’s price one year from now will be higher than it is
today, but Bond B’s price one year from now will be lower than it is today.
d. If the yield to maturity for both bonds immediately decreases to 6%, Bond A’s bond will have a larger percentage
increase in value.
e. Bond A’s current yield is greater than that of Bond B.
63. Which of the following statements is CORRECT?
Chapter 07: Bonds and Their Valuation
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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. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
c. 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.
d. 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.
e. 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.
64. Which of the following statements is CORRECT?
a. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because
the junior debt was issued first.
b. A company’s subordinated debt has less default risk than its senior debt.
c. Convertible bonds generally 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.
e. A debenture is a secured bond that is backed by some or all of the firm’s fixed assets.
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67. 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.
e. A bond is likely to be called if it sells at a discount below par.
68. Which of the following statements is CORRECT?
a. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells
at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par
bond.
b. 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.
c. If a bond sells at par, then its current yield will be less than its yield to maturity.
d. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
e. A discount bond’s price declines each year until it matures, when its value equals its par value.
