Fundamentals of Corporate Finance 3e Test Bank
60.
Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is
the yield to maturity on this bond? (Round your percentage answer to two decimal places.)
A)
7.60%
B)
8.68%
C)
9.66%
D)
10.67%
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
61.
Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for
$981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round
to the nearest percent.)
A)
7%
B)
8%
C)
11%
D)
10%
Ans:
D
Fundamentals of Corporate Finance 3e Test Bank
Fundamentals of Corporate Finance 3e Test Bank
62.
Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon
of 15 percent semiannually. Today, the bond is priced at $961.22. If she sold the bond today,
what would be her realized yield? (Round to the nearest percent.)
A)
17%
B)
18%
C)
9%
D)
10%
Ans:
A
Fundamentals of Corporate Finance 3e Test Bank
63.
Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10
percent semiannually. Today, the bond is priced at $1,054.36. If he sells the bond today, what
will be his realized yield? (Round to the nearest percent.)
Fundamentals of Corporate Finance 3e Test Bank
A)
12%
B)
8%
C)
11%
D)
9%
Ans:
C
Fundamentals of Corporate Finance 3e Test Bank
64.
Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a
year. What is the effective annual yield (EAY) on this investment? (Round to two decimal
places.)
A)
12.80%
B)
6.40%
C)
6.50%
D)
13.21%.
Ans:
D
AICPA: Measurement
65.
Which of the following statements is true?
A)
Long-term bonds have lower price volatility than short-term bonds of similar risk.
B)
As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of
bonds decline.
C)
All other things being equal, short-term bonds are riskier than long-term bonds.
D)
Interest rate risk decreases as maturity increases.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
66.
Which one of the following statements is NOT true?
A)
Interest rate risk is the risk that bond prices will change as interest rates change.
B)
Interest rate changes and bond prices are inversely related.
C)
As interest rates increase, bond prices increase.
D)
Long-term bonds are more price volatile than short-term bonds of similar risk.
:
AICPA: Measurement
67.
Which of the following statements is true?
A)
The longer the maturity of a security, the greater its interest rate risk.
B)
If investors believe inflation will be subsiding in the future, the prevailing yield will be
upward sloping.
C)
The real rate of interest varies with the business cycle, with the lowest rates seen at the
end of a period of business expansion and the highest at the bottom of a recession.
D)
The interest rate risk premium always adds a downward bias to the slope of the yield
curve.
:
A
Fundamentals of Corporate Finance 3e Test Bank
68.
Which of the following statements is true?
A)
For a given change in market interest rates, the prices of higher-coupon bonds change
more than the prices of lower-coupon bonds.
B)
If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond.
C)
If interest rates rise, bond prices will rise.
D)
If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.
Ans:
D
69.
Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The
bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment?
(Round percentage to two decimal places.)
A)
13.4%
B)
6.81%
C)
6.70%
D)
None of the above
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
70.
Marketability is the ability of an investor
A)
to sell a security quickly, at a low transaction cost, and at a price close to its fair market
value.
B)
to sell at a profit under all circumstances.
C)
to sell the security above its par value.
D)
None of the above
Ans:
A
AICPA: Measurement
71.
Which of the following statements is true?
A)
The lower the transaction costs are, the greater a security’s marketability.
B)
The interest rate, or yield, on a security varies with its degree of marketability.
C)
U.S. Treasury bills have the largest and most active secondary market and are considered
to be the most marketable of all securities.
D)
All of the above are true.
Ans:
D
AICPA: Measurement
72.
Which of the following statements is NOT true?
A)
The risk that the lender may not receive payments as promised is called default risk.
B)
Investors must pay a premium to purchase a security that exposes them to default risk.
C)
U.S. Treasury securities are the best proxy measure for the risk-free rate.
D)
All of the above are true statements.
Ans:
B
Learning Objective: LO 6
Fundamentals of Corporate Finance 3e Test Bank
AICPA: Measurement
73.
Downward-slopping yield curves are observed
A)
when the economy is growing.
B)
when the economy is stagnant.
C)
before the beginning of a recession.
D)
None of the above.
Ans:
C
AICPA: Measurement
74.
Which one of the following statements is NOT true?
A)
The relationship between yield to maturity and marketability is known as the term
structure of interest rates.
B)
The shape of the yield curve is not constant over time.
C)
As the general level of interest rises and falls over time, the yield curve shifts up and
down and has different slopes.
D)
Yield curves show graphically how market yields vary as term to maturity changes.
Ans:
A
AICPA: Measurement
75.
The three economic factors that affect the shape of the yield curve are:
A)
the real rate of interest, the expected rate of inflation, and marketability.
B)
the real rate of interest, the expected rate of inflation, and interest rate risk.
C)
the nominal rate of interest, the expected rate of inflation, and default risk.
D)
the real rate of interest, the nominal rate of interest, and currency risk.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
76.
Which of the following statements is true?
A)
Investment grade bonds are those rated single B and higher.
B)
Federal laws typically allow insurance companies and pension funds to purchase non-
investment grade bonds.
C)
Because investors are risk averse, they require a premium to purchase a security that
exposes them to default risk.
D)
All else equal, the higher a bond’s rating the higher the coupon rate.
Ans:
C
AICPA: Measurement
77.
Which of the following statements is true?
A)
Downward sloping yield curves typically appear in the early to mid-period of a business
expansion.
B)
Interest rate risk premium always adds an upward bias to the slope of the yield curve.
C)
If investors believe that inflation will be increasing in the near future, the yield curve will
be downward sloping.
D)
Downward-sloping yield curve is the yield curve most commonly observed.
Ans:
B
Fundamentals of Corporate Finance 3e Test Bank
78.
What is the marketability risk premium? Why should an issuing firm consider paying this
premium?
79.
Why does the default risk premium vary over the business cycle?
Fundamentals of Corporate Finance 3e Test Bank
80.
What economic factors affect the level and the shape of the yield curve? Explain.