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b. 2,596
c. 3,073
d. 5,282
e. 4,275
75. Cold Boxes Corporation has 100 bonds outstanding with a maturity value of $1,000. The required rate of return on
these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current
market value is $768 per bond. Which of the following is the annual coupon interest rate?
a. 8%
b. 6%
c. 4%
d. 2%
e. 0%
76. The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and
the simple annual yield is 14 percent. From the given information, calculate the annual coupon rate on the bond.
a. 10%
b. 12%
c. 14%
d. 17%
e. 21%
77. Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face
value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest
payment is scheduled for six months from today. Assuming the yield on similar risk investments is 14 percent, calculate
the current market value (price) of the bond.
a. $841.15
b. $1,238.28
c. $904.67
d. $757.26
e. $844.45
78. Devine Divots issued a bond a few years ago. The bond has a face value equal to $1,000 and pays investors $30
interest every six months. The bond has eight years remaining until maturity. If an investor requires a 7 percent rate of
return to invest in this bond, what is the maximum price the investor should be willing to pay to purchase the bond?
a. $761.15
b. $939.53
c. $940.29
d. $965.63
e. $1,062.81
79. Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the
court permitted a new indenture on an outstanding bond issue of face value $1,000 to be put into effect. The issue has 10
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years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for
five years. Then, interest payments will be resumed for the next five years. Finally, at maturity (Year 10), the principal
plus the interest that was not paid during the first five years will be paid. However, no interest will be paid on the deferred
interest. If the required return is 20 percent, what should the bonds sell for in the market today?
a. $242.26
b. $281.69
c. $578.31
d. $362.44
e. $813.69
80. Tony’s Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45
interest every 6 months. Current market conditions are such that the bonds will be sold at net $937.79. What is the yield to
maturity (YTM) of the issue as a broker would quote it to an investor?
a. 11%
b. 10%
c. 9%
d. 8%
e. 7%
81. The current market price of Smith Corporation’s 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid
semiannually, and the par value is equal to $1,000. What is the yield to maturity (YTM), (stated on a simple, or annual,
basis) if the bonds mature 10 years from today?
a. 8%
b. 6%
c. 4%
d. 2%
e. 1%
82. A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually,
and can be called in 5 years at a price of $1,100. Calculate the bond’s yield to maturity.
a. 6.05%
b. 10.00%
c. 10.06%
d. 8.59%
e. 11.26%
83. _____ bonds are often called by the firm prior to maturity.
a. Floating rate
b. Mortgage
c. Callable
d. Municipal
e. Corporate
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84. The computation for the yield to call (YTC) is the same as that for the yield to maturity (YTM), except that we
substitute the _____ of the bond for the maturity (par) value and _____ for the years to maturity.
a. market price; the number of years until the bond can be first called
b. face value; five years
c. call price; the number of years until the bond can be first called
d. principal value; 10 years
e. issue price; the number of years until the bond can be first called
85. The average rate of return earned on a callable bond if it is held until the first call date is the:
a. yield to call.
b. yield to market.
c. yield to principal price.
d. yield to issue price.
e. yield to maturity.
86. If an investor buys a bond and holds it until it matures, the average rate of return the investor will earn per year is
called the bond’s:
a. coupon rate.
b. yield to maturity.
c. yield to call.
d. current yield.
e. capital gains yield.
87. At the time a bond is issued, the coupon rate on the bond is set at a level that will cause:
a. the coupon rate to be equal to the yield to call on the bond.
b. the market interest rate to be greater than the coupon rate of the bond.
c. the yield to maturity to be less than the market yield on the bond.
d. the issuing price to be equal the face (par) value of the bond.
e. the market value to be greater than the maturity value of the bond.
88. A change in market conditions causes the market price of a bond to change because of changes in the bond’s:
a. coupon rate.
b. current (interest) yield.
c. yield to maturity.
d. principal value.
e. maturity value.
89. Two years ago, Synergy Inc. issued a 15-year callable bond with a $1,000 face value and a 12 percent coupon rate of
interest (paid semiannually). The bond cannot be called until five years after issue, at which time the call price will equal
$1,120. Currently, the bond is selling for $989.What is the bond’s yield to call (YTC).
a. 7.88%
b. 15.76%
c. 12.45%
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d. 12.17%
e. 12.56%
90. Which of the following statements is true of a bond?
a. The maturity value of a bond is always more than the market value of the bond.
b. Interest payments on a bond increase throughout the duration of the bond.
c. The maturity date of a bond is contractually fixed.
d. The call provision of a callable bond is normally exercised in the last year of the bond.
e. The market value of a bond is stated in the bond indenture.
91. The _____ of a bond fluctuates continuously during its life.
a. principal value
b. face value
c. maturity value
d. coupon rate
e. market value
92. Rolling Coast Inc. issued BBB bonds two years ago. These bonds provided a yield to maturity (YTM) of 11.5 percent.
Long-term risk-free government bonds were yielding 8.7 percent at the time. The current risk premium on BBB bonds
versus government bonds is half of what it was two years ago. If the risk-free long-term government bonds are currently
yielding 7.8 percent, then at what interest rate should Rolling Coast expect to issue new bonds?
a. 7.8%
b. 8.7%
c. 9.2%
d. 10.2%
e. 12.9%
93. GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds with a face value of $1,000, 15 years ago.
The bonds are not callable, but they do have a sinking fund, which requires GP&L to redeem 5 percent of the original face
value of the issue each year ($50,000), beginning in Year 11. To date, 25 percent of the issue has been retired. The
company can either call bonds at par for sinking fund purposes or purchase bonds in the open market, spending sufficient
money to redeem 5 percent of the original face value each year. If the current market yield of the bonds is 14 percent,
what is the least amount of money GP&L must put in to satisfy the sinking fund provision for the next redemption?
a. $43,858
b. $50,127
c. $37,532
d. $43,796
e. $39,422
94. Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10.65 percent currently have a
yield to maturity (YTM) equal to 15.25 percent. Based on this information, it is understood that BB&C’s bonds must
currently be selling at _____ in the financial markets.
a. the par value
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b. a discount
c. a premium
d. the inflation adjusted interest rate
e. a floating interest rate
95. If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be:
a. selling at a discount; i.e., the bond’s market price should be less than its face (maturity) value.
b. selling at a premium; i.e., the bond’s market price should be greater than its face value.
c. selling at par; i.e., the bond’s market price should be the same as its face value.
d. a floating-rate bond yielding market adjusted interest.
e. an indexed bond that adjusts interest payments on the basis of an inflation index.
96. Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently
selling for $1,000, which is the bond’s face value. If interest is paid semiannually, the bond’s yield to maturity is:
a. equal to 12 percent.
b. greater than 12 percent.
c. less than 12 percent.
d. equal to 7.2 percent.
e. greater than 16.8 percent.
97. Which of the following statements is correct?
a. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the
issuer will purchase bonds in the financial markets because their prices will be less than the par value.
b. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the
bond’s maturity value would be more than its par value.
c. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the
bond will mature in 15 years and not in 10 years.
d. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the
bond will sell at a premium.
e. If a 10-year, $1,000 par value bond is issued at a coupon rate of 10 percent and if its market yield is 5 percent, the
bond’s coupon rate would decrease from 10 percent to 5 percent.
98. Which of the following statements about a bond that sells for its par value is correct?
a. The yield to maturity is comprised of a capital gains yield equal to the face value of the bond.
b. As long as market rates remain constant, the bond’s capital gains yield will equal to zero.
c. The yield to maturity is comprised of an interest yield equal to the capital yield on the bond.
d. The yield to maturity is equal to the present value of interest payments received from the bond.
e. The yield to maturity is equal to the future value of interest payments received from the bond.
99. The percentage rate of return that investors earn on a bond consists of a(n):
a. interest yield plus a capital gains yield.
b. interest yield plus the maturity value of the bond.
c. expected interest yield plus the principal value of the bond.
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d. expected capital gains yield plus the future value of coupon payments.
e. market interest rate plus the coupon interest rate.
100. Which of the following statements about a bond that is selling at a discount is correct?
a. Because the coupon rate remains constant, the market value of the bond also remains constant throughout its life.
b. The market price of the bond will be greater than the bond’s face value.
c. The market price of the bond will increase and will approach its face value as the maturity date gets closer.
d. Both the market price of the bond and the interest received will increase as the maturity date nears.
e. The par value of the bond will increase with every increase in the market price of the bond until the maturity date
is reached.
101. Omega Software Corporation’s bond with a face value of $1,000 is currently selling at a premium in the financial
markets. If the bond’s yield to maturity is 11.5 percent, then the bond’s:
a. coupon rate of interest must be less than 11.5 percent.
b. coupon rate of interest must be greater than 11.5 percent.
c. coupon rate of interest must be equal to 11.5 percent.
d. maturity value must be greater than $1,000.
e. maturity value must be less than $1,000.
102. Stephanie purchased a corporate bond that matures in three years. The bond has a coupon interest rate of 9 percent
and its yield to maturity is 6 percent. If market interest rates remain constant and Stephanie sells the bond in 12 months,
her capital gain from holding the bond will be:
a. positive because she purchased the bond at a discount and the bond price will approach its face value as it nears
its maturity.
b. negative because she purchased the bond at a discount and the bond price will approach its face value as it nears
its maturity.
c. positive because she purchased the bond at a premium and the bond price will approach its market price as it nears
its maturity.
d. negative because she purchased the bond at a premium and the bond price will approach its face value as it nears
its maturity.
e. positive because she purchased the bond at a discount and the bond price will approach its market price as it nears
its maturity.
103. Assuming other things are held constant, which of the following is correct?
a. The change in the price of a bond due to a change in the interest rate is more significant in bonds with longer
maturity periods.
b. For a bond of any maturity, a given percentage point increase in the interest rate causes a larger dollar capital gain
than the capital loss stemming from an identical decrease in the interest rate.
c. For any given maturity, a percentage point decrease in the interest rate causes a smaller dollar capital loss than the
capital gain stemming from an identical increase in the interest rate.
d. In the year of purchase of bonds, an investor gets a deduction for the difference in the market value of bonds
purchased at a premium and the face value of the bonds.
e. A 20-year bond has more interest rate reinvestment risk than a two-year bond.
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104. The interest rate on a 10 percent, 10-year zero-coupon bond with a $1,000 face value falls from 8 percent to 7
percent. Which of the following is true of the value of the bond?
a. The value of the bond at 8 percent is $385.54.
b. The value of the bond at 10 percent is $463.19.
c. The maturity value of the bond at 8 percent is $508.34.
d. The maturity value of the bond at 7 percent is $508.34.
e. The value of the bond at 7 percent is $508.34.
105. If a bond’s yield to maturity exceeds its coupon rate, the bond’s:
a. current yield is equal to the coupon rate.
b. price must be less than its par value.
c. maturity value is more than its face value.
d. current yield is equal to the capital gain on the maturity of the bond.
e. maturity value is less than the bond’s market value.
106. All else being equal, an increase in the yield to maturity of a bond will result in:
a. an increase in the market price of the bond.
b. a greater interest rate price risk on a long-term bond than on a short-term bond.
c. an increase in the maturity value of the bond.
d. a decrease in the rate of return at which the cash flows from the portfolios can be reinvested.
e. a lower risk of suffering losses in the market values of the bond portfolios.
107. Which of the following equations is used to compute the percentage rate of return on a bond?
a. Percentage rate of return on a bond = Current yield + Coupon rate of interest
b. Percentage rate of return on a bond = Current yield + Capital gains yield
c. Percentage rate of return on a bond = Market return + Maturity value
d. Percentage rate of return on a bond = Market yield + Current yield
e. Percentage rate of return on a bond = Market yield + Capital gains yield
108. If interest rates decline, bondholders will earn:
a. a lower rate of return on reinvested cash flows.
b. a higher current yield.
c. no capital gain on the bond’s maturity.
d. a lower coupon interest on the bond.
e. a higher maturity value on the maturity date.
109. The risk that income from a bond portfolio will vary because cash flows must be reinvested at current market rates is
called:
a. interest rate price risk.
b. market yield risk.
c. interest rate reinvestment risk.
d. capital gain yield risk.
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e. yield to maturity risk.
110. An increase in interest rates will help increase the future value of a portfolio because the cash flows produced by the
portfolio:
a. will increase the maturity value of the bond.
b. can be reinvested at higher rates of return.
c. can be used to recall high-rate bonds.
d. will generate cash to pay future coupon interest.
e. will decrease the yield to maturity of the bond.
111. The current market interest rate declines from 10 percent to 8 percent. Due to interest rate reinvestment risk, the
bondholders will:
a. receive a lower market value for the bond.
b. receive a higher principal at the maturity of the bond.
c. call back the bond before its maturity.
d. earn a lower return on the reinvested cash flows.
e. receive a lower coupon interest than mentioned in the bond indenture.
112. Mortgage bonds are backed by assets of the issuing firm, whereas debentures are not.
a. True
b. False
113. A call provision gives bondholders the right to demand, or “call for,” the 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
114. Zero coupon bonds are offered at substantial discounts below their par values.
a. True
b. False
115. Floating-rate bonds pay interest based on an inflation index, such as the consumer price index (CPI).
a. True
b. False
116. As junk bonds are high-risk instruments, the returns on such bonds are not very high.
a. True
b. False
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117. LIBOR is the acronym for London Interbank Offer Rate, which is an average of interest rates offered by London
banks to U.S. corporations.
a. True
b. False
118. In general, long-term unsecured debts have lower interest rates (costs) than long-term secured debts for a particular
firm.
a. True
b. False
119. Foreign debt is a debt instrument sold by a foreign borrower that is denominated in the currency of the country in
which it is sold.
a. True
b. False
120. Foreign debt is a debt instrument sold in a country other than the one in whose currency the debt is denominated.
a. True
b. False
121. Eurobonds have a higher level of required disclosure than normally applies to bonds issued in domestic markets,
particularly in the United States.
a. True
b. False
122. Unlike bonds issued in the United States, which are bearer bonds, Eurobonds are typically issued as registered bonds.
a. True
b. False
123. Eurocredits are bank loans that are denominated in the currency of a country other than where the lending bank is
located.
a. True
b. False
124. Although common stock represents a riskier investment to an individual than bonds, bonds represent a riskier method
of financing to a corporation than common stock.
a. True
b. False
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125. Restrictive covenants are designed to protect both the bondholder and the issuer even though they might constrain the
actions of the firm’s managers. Such covenants are contained in the bond’s indenture.
a. True
b. False
126. One of the disadvantages of issuing a zero coupon bond is that any tax shield associated with the bond’s price
appreciation cannot be claimed until the bond matures.
a. True
b. False
127. Floating-rate debt is advantageous to investors because the interest rate earned on the debt increases when market
rates rise.
a. True
b. False
128. If a firm raises capital by selling new bonds, the buyer is called the “issuing firm” and the coupon rate is generally set
equal to the firm’s required rate.
a. True
b. False
129. The financial pages of the local newspaper helped Mary in identifying that she can buy a bond ($1,000 par) for $800.
If the coupon rate is 10 percent, the annual interest payments equal $80.
a. True
b. False
130. Call provisions on corporate bonds are generally included to protect the issuer against large increases in interest
rates. They affect the actual maturity of the bond but not its price.
a. True
b. False
131. If a bond is callable and if interest rates in the economy decline, then the company can sell a new issue of low-
interest-rate bonds and use the proceeds to “call” the old bonds in and effectively refinance its debt at a lower rate.
a. True
b. False
132. There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest
for AAA rated bonds, and required returns increase as the ratings get lower (worse).
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a. True
b. False
133. If there are two bonds with a simple interest rate yield of 9 percent, but one bond is compounded quarterly while the
other bond is compounded monthly, the bond with quarterly compounding will have a higher effective annual yield.
a. True
b. False
134. A 20-year original maturity bond with one year left to maturity has half the interest rate price risk of a 10-year
original maturity bond with one year left to maturity. (Assume that the bonds have equal default risk and equal coupon
rates.)
a. True
b. False
135. Regardless of the size of the coupon payment, the price of a bond moves in the opposite direction to interest rate
movements. For example, if interest rates rise, bond prices fall.
a. True
b. False
136. Because short-term interest rates are much more volatile than long-term rates, an investor would, in the real world, be
subject to much more interest rate price risk if he or she purchased a 30-day bond than if he or she bought a 30-year bond.
a. True
b. False
137. A bond’s value will increase when interest rates increase.
a. True
b. False
138. A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to
default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were
greater than 11%.
a. True
b. False
139. Bonds issued by BB&C Communications that have a coupon rate of interest equal to 10 percent currently have a
yield to maturity (YTM) equal to 8 percent. Based on this information, it is understood that BB&C’s bonds must currently
be selling at a premium in the financial markets.
a. True
b. False
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140. If a bond’s yield to maturity is less than its coupon rate, the bond should be selling at a discount; i.e., the bond’s
market price should be less than its face (maturity) value.
a. True
b. False
141. If a bond is selling for less than its face, or maturity, value and the market interest rate remains unchanged during the
life of the bond, then the price (value) of the bond will increase as the maturity date nears.
a. True
b. False
142. The longer the maturity of the bond, the more significantly its price changes in response to a given change in interest
rates.
a. True
b. False