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Ch 05 Bonds, Bond Valuation, and Interest Rates
d.
$7,706,000
e.
$7,898,650
33. McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually
(2.875% each 6 months), and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity,
and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual
payment bond sell?
a.
$943.98
Ch 05 Bonds, Bond Valuation, and Interest Rates
b.
$968.18
c.
$993.01
d.
$1,017.83
e.
$1,043.28
34. Reinegar Corporation is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and
it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year
maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with
the same effective yield, how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs,
and round your final answer up to a whole number of bonds.
a.
4,228
b.
4,337
Ch 05 Bonds, Bond Valuation, and Interest Rates
c.
4,448
d.
4,562
e.
4,676
35. 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.
Ch 05 Bonds, Bond Valuation, and Interest Rates
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.
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.
Ch 05 Bonds, Bond Valuation, and Interest Rates
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.
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.
e.
The bond's coupon rate exceeds its current yield.
Ch 05 Bonds, Bond Valuation, and Interest Rates
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%.
Ch 05 Bonds, Bond Valuation, and Interest Rates
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.
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.
41. 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.
Ch 05 Bonds, Bond Valuation, and Interest Rates
42. 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.
43. 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
Ch 05 Bonds, Bond Valuation, and Interest Rates
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.
44. Which of the following statements is CORRECT?
a.
The total yield on a bond is derived from dividends plus changes in the price of the bond.
b.
Bonds are riskier than common stocks and therefore have higher required returns.
c.
Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by
smaller companies.
d.
The market value of a bond will always approach its par value as its maturity date approaches, provided the
bond's required return remains constant.
e.
If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably
observe an immediate increase in bond prices.
Ch 05 Bonds, Bond Valuation, and Interest Rates
45. Which of the following statements is CORRECT?
a.
If rates fall after its issue, a zero coupon bond could trade at a price above its par value.
b.
If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
c.
If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would
probably decline.
d.
If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
e.
If a coupon bond is selling at par, its current yield equals its yield to maturity.
46. Which of the following statements is CORRECT?
a.
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.
b.
Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is
based on market prices.
c.
The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it
Ch 05 Bonds, Bond Valuation, and Interest Rates
has a zero expected capital gains yield.
d.
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.
e.
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.
47. Which of the following statements is CORRECT?
a.
If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
b.
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.
c.
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.
d.
If a coupon bond is selling at par, its current yield equals its yield to maturity.
e.
If a coupon bond is selling at a premium, then the bond's current yield is zero.
Ch 05 Bonds, Bond Valuation, and Interest Rates
48. 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, and an 8% yield to maturity. Which of the following statements is CORRECT?
a.
Bond A trades at a discount, whereas Bond B trades at a premium.
b.
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.
c.
If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger
percentage increase in value.
d.
Bond A's current yield is greater than that of Bond B.
e.
Bond A's capital gains yield is greater than Bond B's capital gains yield.
49. Which of the following statements is CORRECT?
a.
A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
b.
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.
c.
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.
d.
The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with
Ch 05 Bonds, Bond Valuation, and Interest Rates
the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on
the callable bond.
e.
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.
50. Which of the following statements is CORRECT?
a.
A bond is likely to be called if its market price is below its par value.
b.
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.
c.
A bond is likely to be called if its market price is equal to its par value.
d.
A bond is likely to be called if it sells at a discount below par.
e.
A bond is likely to be called if its coupon rate is below its YTM.
Ch 05 Bonds, Bond Valuation, and Interest Rates
51. Which of the following statements is CORRECT?
a.
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.
b.
If a bond sells at par, then its current yield will be less than its yield to maturity.
c.
If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
d.
A discount bond's price declines each year until it matures, when its value equals its par value.
e.
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.
Ch 05 Bonds, Bond Valuation, and Interest Rates
52. Which of the following statements is CORRECT?
a.
All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term
bonds.
b.
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.
c.
If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
d.
If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.
e.
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 the bond's coupon rates.
53. Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of
$95, and a par value of $1,000. What is their yield to maturity?
a.
6.20%
b.
6.53%
c.
6.87%
d.
7.24%
Ch 05 Bonds, Bond Valuation, and Interest Rates
e.
7.62%
54. Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and
have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?
a.
8.56%
b.
9.01%
c.
9.46%
d.
9.93%
e.
10.43%
Ch 05 Bonds, Bond Valuation, and Interest Rates
55. Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price
of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?
a.
5.56%
b.
5.85%
c.
6.14%
d.
6.45%
e.
6.77%
Ch 05 Bonds, Bond Valuation, and Interest Rates
56. Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon
and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?
a.
6.39%
b.
6.72%
c.
7.08%
d.
7.45%
e.
7.82%
57. Perry Inc.'s bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of
$1,000. What is their current yield?
a.
7.39%
b.
7.76%
c.
8.15%
d.
8.56%
e.
8.98%
Ch 05 Bonds, Bond Valuation, and Interest Rates
58. Currently, Bruner Inc.'s bonds sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000
par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred
to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current
levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the
YTM.)
a.
2.11%
b.
2.32%
c.
2.55%
d.
2.80%
e.
3.09%
Ch 05 Bonds, Bond Valuation, and Interest Rates
59. Gilligan Co.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, and are
callable in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the
bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future.
Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC
or the YTM?
a.
3.92%
b.
4.12%
c.
4.34%
d.
4.57%
e.
4.81%
