CHAPTER 4—BOND VALUATION
1. If a firm raises capital by selling new bonds, it is called the “issuing firm,” and the coupon rate is generally set equal to
the required rate on bonds of equal risk.
a.
True
b.
False
True
2. 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.
a.
True
b.
False
False
3. 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.
a.
True
b.
False
True
4. A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds
CHAPTER 4—BOND VALUATION
provide compensation to investors in the form of capital appreciation.
a.
True
b.
False
False
5. 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 and thus caused sharp declines in the prices of
outstanding bonds.
a.
True
b.
False
True
6. The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a
profit, may be estimated by determining future cash flows and then discounting them back to the present.
a.
True
b.
False
True
7. For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.
a.
True
b.
False
CHAPTER 4—BOND VALUATION
True
8. As a general rule, a company’s debentures have higher required interest rates than its mortgage bonds because mortgage
bonds are backed by specific assets while debentures are unsecured.
a.
True
b.
False
True
9. Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second
mortgage bonds.
a.
True
b.
False
True
10. There is an inverse relationship between bonds’ quality ratings and their required rates of return. Thus, the required
return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.
a.
True
b.
False
True
CHAPTER 4—BOND VALUATION
11. 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.)
a.
True
b.
False
False
12. 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.
a.
True
b.
False
False
13. 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.
a.
True
b.
False
True
CHAPTER 4—BOND VALUATION
14. 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.
a.
True
b.
False
False
15. 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.
a.
True
b.
False
False
16. You are considering 2 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.
a.
True
b.
False
CHAPTER 4—BOND VALUATION
False
Difficulty: Moderate
INTE.GENE.16.18 – LO: 4-2
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Sinking funds
17. 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.
a.
True
b.
False
False
Difficulty: Moderate
INTE.GENE.16.18 – LO: 4-2
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Floating-rate debt
18. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and
is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest
rates are greater than 10%.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.19 – LO: 4-3
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond premiums and discounts
19. You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper
that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10
years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on
CHAPTER 4—BOND VALUATION
bonds with this risk is 12%.
a.
True
b.
False
True
20. If the required rate of return on a bond (rd) 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.)
a.
True
b.
False
True
21. “Restrictive covenants” are designed primarily to protect bondholders by constraining the actions of managers. Such
covenants are spelled out in bond indentures.
a.
True
b.
False
True
CHAPTER 4—BOND VALUATION
22. 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.
a.
True
b.
False
True
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
United States – BUSPROG: Reflective Thinking
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Prices and interest rates
23. Which of the following statements is CORRECT?
a.
The time to maturity does not affect the change in the value of a bond in response to a given change in interest
rates.
b.
You hold two bonds. One is a 10-year, zero coupon, bond 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 smaller percentage decline.
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.
e.
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.
e
Difficulty: Easy
INTE.GENE.16.23 – LO: 4-4
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rates
TYPE: Multiple Choice: Conceptual
24. Which of the following events would make it more likely that a company would choose to call its outstanding callable
bonds?
a.
Market interest rates rise sharply.
b.
Market interest rates decline sharply.
c.
The company’s financial situation deteriorates significantly.
CHAPTER 4—BOND VALUATION
d.
Inflation increases significantly.
e.
The company’s bonds are downgraded.
Difficulty: Easy
INTE.GENE.16.23 – LO: 4-4
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Callable bonds
TYPE: Multiple Choice: Conceptual
25. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements 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 one year from now will be lower than its current
price.
d.
The bond’s current yield is greater than 9%.
e.
If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current
price.
c
Difficulty: Easy
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond concepts
TYPE: Multiple Choice: Conceptual
26. Which of the following statements is CORRECT?
a.
An indenture is a bond that is less risky than a mortgage bond.
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.
e.
All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
e
Difficulty: Easy
CHAPTER 4—BOND VALUATION
27. Ranger Inc. would 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?
a.
There is no reason to expect a change in the required rate of return.
b.
The required rate of return would decline because the bond would then be less risky to a bondholder.
c.
The required rate of return would increase because the bond would then be more risky to a bondholder.
d.
It is impossible to say without more information.
e.
Because of the call premium, the required rate of return would decline.
Difficulty: Moderate
INTE.GENE.16.18 – LO: 4-2
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Call provision
TYPE: Multiple Choice: Conceptual
28. 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?
a.
Adding a call provision.
b.
The rating agencies change the bond’s rating from Baa to Aaa.
c.
Making the bond a first mortgage bond rather than a debenture.
d.
Adding a sinking fund.
e.
Adding additional restrictive covenants that limit management’s actions.
Difficulty: Moderate
INTE.GENE.16.19 – LO: 4-3
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond coupon rate
TYPE: Multiple Choice: Conceptual
INTE.GENE.16.25 – LO: 4-16
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bonds, default risk
TYPE: Multiple Choice: Conceptual
CHAPTER 4—BOND VALUATION
29. Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?
a.
20-year, 10% coupon bond.
b.
20-year, 5% coupon bond.
c.
1-year, 10% coupon bond.
d.
20-year, zero coupon bond.
e.
10-year, zero coupon bond.
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rate risk
TYPE: Multiple Choice: Conceptual
30. 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.
A 1-year bond with a 15% coupon.
b.
A 3-year bond with a 10% coupon.
c.
A 10-year zero coupon bond.
d.
A 10-year bond with a 10% coupon.
e.
An 8-year bond with a 9% coupon.
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rate risk
TYPE: Multiple Choice: Conceptual
31. Which of the following bonds has the greatest interest rate price risk?
a.
A 10-year, $1,000 face value, zero coupon bond.
b.
A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
c.
All 10-year bonds have the same price risk since they have the same maturity.
d.
A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
CHAPTER 4—BOND VALUATION
32. If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in
value?
a.
A 1-year bond with an 8% coupon.
b.
A 10-year bond with an 8% coupon.
c.
A 10-year bond with a 12% coupon.
d.
A 10-year zero coupon bond.
e.
A 1-year zero coupon bond.
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rate risk
TYPE: Multiple Choice: Conceptual
33. Which of the following statements is CORRECT?
a.
Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be
available to pay off bondholders when the bonds mature.
b.
A sinking fund provision makes a bond more risky to investors at the time of issuance.
c.
Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the
company to reduce its debt over time.
d.
If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to
retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call
price.
e.
Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if
interest rates decline after the bond has been issued.
Difficulty: Moderate
INTE.GENE.16.18 – LO: 4-2
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Sinking funds
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rate risk
TYPE: Multiple Choice: Conceptual
CHAPTER 4—BOND VALUATION
34. 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?
a.
It could be less than, equal to, or greater than 6%.
b.
Greater than 6%.
c.
Exactly equal to 8%.
d.
Less than 6%.
e.
Exactly equal to 6%.
Difficulty: Moderate
INTE.GENE.16.18 – LO: 4-2
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Convertible, callable bonds
TYPE: Multiple Choice: Conceptual
35. The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk 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 of the following statements is CORRECT?
a.
Since the bonds have the same YTM, they should all have the same price, and since interest rates are not
expected to change, their prices should all remain at their current levels until maturity.
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, Bond A’s price is expected to decrease, Bond B’s price is expected to stay the same, and
Bond C’s price is expected to increase.
e.
Bond A’s current yield will increase each year.
Difficulty: Moderate
INTE.GENE.16.19 – LO: 4-3
United States – BUSPROG: Analytic
United States – OH – Default City – TBA
Bond concepts
TYPE: Multiple Choice: Conceptual
CHAPTER 4—BOND VALUATION
36. 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 yield to maturity is 9%.
b.
The bond’s current yield is 9%.
c.
If the bond’s yield to maturity remains constant, the bond will continue to sell at par.
d.
The bond’s current yield exceeds its capital gains yield.
e.
The bond’s expected capital gains yield is positive.
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond yields
TYPE: Multiple Choice: Conceptual
37. Which of the following statements is CORRECT?
a.
If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at par.
b.
All else equal, if a bond’s yield to maturity increases, its price will fall.
c.
If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
d.
All else equal, if a bond’s yield to maturity increases, its current yield will fall.
e.
A zero coupon bond’s current yield is equal to its yield to maturity.
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond yields
TYPE: Multiple Choice: Conceptual
38. Stephenson Co.’s 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements
is CORRECT?
a.
The bond’s current yield exceeds its yield to maturity.
b.
The bond’s yield to maturity is greater than its coupon rate.
c.
The bond’s current yield is equal to its coupon rate.
d.
If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.
TYPE: Multiple Choice: Conceptual
CHAPTER 4—BOND VALUATION
e.
The bond’s coupon rate exceeds its current yield.
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond yields
TYPE: Multiple Choice: Conceptual
39. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following
statements is CORRECT?
a.
If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.
b.
The bond’s coupon rate is less than 8%.
c.
If the yield to maturity increases, then the bond’s price will increase.
d.
If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year.
e.
The bond’s current yield is less than 8%.
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond yields
TYPE: Multiple Choice: Conceptual
40. Which of the following statements is CORRECT?
a.
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.
b.
On an expected yield basis, the expected current yield will always be positive because an investor would not
purchase a bond that is not expected to pay any cash coupon interest.
c.
If a coupon bond is selling at par, its current yield equals its yield to maturity.
CHAPTER 4—BOND VALUATION
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 bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond yields
TYPE: Multiple Choice: Conceptual
41. A 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?
a.
The bond is currently selling at a price below its par value.
b.
If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.
c.
The bond should currently be selling at its par value.
d.
If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
e.
If market interest rates decline, the price of the bond will also decline.
Difficulty: Moderate
INTE.GENE.16.23 – LO: 4-4
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rates and bond prices
TYPE: Multiple Choice: Conceptual
42. An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% 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.
Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
b.
The prices of both bonds would increase by the same amount.
c.
One bond’s price would increase, while the other bond’s price would decrease.
d.
The prices of the two bonds would remain constant.
e.
The prices of both bonds will decrease by the same amount.
CHAPTER 4—BOND VALUATION
43. 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 prices of both bonds will remain unchanged.
b.
The price of Bond A will decrease over time, but the price of Bond B will increase over time.
c.
The prices of both bonds will increase by 7% per year.
d.
The prices of both bonds will increase over time, but the price of Bond A will increase by more.
e.
The price of Bond B will decrease over time, but the price of Bond A will increase over time.
Difficulty: Moderate
INTE.GENE.16.23 – LO: 4-4
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond yields and prices
TYPE: Multiple Choice: Conceptual
44. Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows:
T-bond = 7.72%
A = 9.64%
AAA = 8.72%
BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:
a.
Tax effects.
b.
Default risk differences.
c.
Maturity risk differences.
d.
Inflation differences.
e.
Real risk-free rate differences.
INTE.GENE.16.26 – LO: 4-7
United States – BUSPROG: Analytic
Difficulty: Moderate
INTE.GENE.16.23 – LO: 4-4
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rates and bond prices
TYPE: Multiple Choice: Conceptual
CHAPTER 4—BOND VALUATION
45. Which of the following statements is CORRECT?
a.
All else equal, long-term bonds have less interest rate price risk than short-term bonds.
b.
All else equal, low-coupon bonds have less interest rate price 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.
e.
All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest vs. reinvestment rate risk
TYPE: Multiple Choice: Conceptual
46. Which of the following statements is CORRECT?
a.
Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
b.
If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less
interest rate risk.
c.
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.
d.
Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.
e.
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.
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest vs. reinvestment rate risk
TYPE: Multiple Choice: Conceptual
47. Which of the following statements is CORRECT?
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Interest rates
TYPE: Multiple Choice: Conceptual
CHAPTER 4—BOND VALUATION
a.
Liquidity premiums are generally higher on Treasury than corporate bonds.
b.
The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact
that the probability of default is higher on long-term bonds than on short-term bonds.
c.
Default risk premiums are generally lower on corporate than on Treasury bonds.
d.
Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
e.
If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield
curve for U.S. Treasury securities would, other things held constant, have an upward slope.
Difficulty: Moderate
INTE.GENE.16.27 – LO: 4-14
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Term structure of interest rates
TYPE: Multiple Choice: Conceptual
48. Which of the following statements is CORRECT?
a.
If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at
maturity.
b.
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.
c.
If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.
d.
If a coupon bond is selling at a premium, its current yield equals its yield to maturity.
e.
If a coupon bond is selling at par, its current yield equals its yield to maturity.
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond concepts
TYPE: Multiple Choice: Conceptual
49. A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is
CORRECT?
a.
The bond has a current yield greater than 8%.
b.
The bond sells at a discount.
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.
e.
The bond sells at a price below par.
CHAPTER 4—BOND VALUATION
Difficulty: Moderate
INTE.GENE.16.24 – LO: 4-6
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond concepts
TYPE: Multiple Choice: Conceptual
50. Bonds A and B are 15-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 15 years. Which of
the following statements is CORRECT?
a.
One year from now, Bond A’s price will be higher than it is today.
b.
Bond A’s current yield is greater than 8%.
c.
Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
d.
Both bonds have the same price today, and the price of each bond is expected to remain constant until the
bonds mature.
e.
Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
a
Difficulty: Moderate
United States – BUSPROG: Analytic
United States – AK – DISC: Stocks and Bonds
United States – OH – Default City – TBA
Bond concepts
TYPE: Multiple Choice: Conceptual
51. Which of the following statements is NOT CORRECT?
a.
All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter
maturities.
b.
If a bond is selling at its par value, its current yield equals its yield to maturity.
c.
If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
d.
All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller
coupons.
e.
If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
Difficulty: Moderate
INTE.GENE.16.21 – LO: 4-13
United States – BUSPROG: Analytic