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MCQ FIN 534 assign chapter 5 Hard

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Question;1. Three $1,000 face;value bonds that mature in 10 years have the same level of risk, hence their;YTMs 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. Bond A?s current yield will increase each year.;b. 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.;c. Bond C sells at a premium (its price is greater than;par), and its price is expected to increase over the next year.;d. Bond A sells at a discount (its price is less than par);and its price is expected to increase over the next year.;e. 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. 8% is below;market, 10% is par and 12% is above market.;2. Which of the following statements is CORRECT?;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. Callible bonds are usually higher to attract;more risky investors.;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.;3. 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. Current Yield + Capital Gain Yield = Yield to;Maturity;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;4. Suppose a new company decides to raise a total of $200;million, with $100 million as common equity and $100 million as long-term debt.;The debt can be mortgage bonds or debentures, but by an iron-clad provision in;its charter, the company can never raise any additional debt beyond the original;$100 million. Given these conditions, which of the following statements is;CORRECT?;a. The higher the percentage of debt represented by mortgage;bonds, the riskier both types of bonds will be and, consequently, the higher;the firm?s total dollar interest charges will be.;b. If the debt were raised by issuing $50 million of;debentures and $50 million of first mortgage bonds, we could be certain that;the firm?s total interest expense would be lower than if the debt were raised;by issuing $100 million of debentures.;c. In this situation, we cannot tell for sure how, or;whether, the firm?s total interest expense on the $100 million of debt would be;affected by the mix of debentures versus first mortgage bonds. The interest;rate on each of the two types of bonds would increase as the percentage of;mortgage bonds used was increased, but the result might well be such that the;firm?s total interest charges would not be affected materially by the mix;between the two.;d. The higher the percentage of debentures, the greater the;risk borne by each debenture, and thus the higher the required rate of return;on the debentures.;e. If the debt were raised by issuing $50 million of;debentures and $50 million of first mortgage bonds, we could be certain that;the firm?s total interest expense would be lower than if the debt were raised;by issuing $100 million of first mortgage bonds. Secured debt usually has a;lower interest rate because there is something to take in case of default.;5. Cosmic Communications Inc. 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 Cosmic issue to raise;$3,000,000? Disregard flotation costs, and round your final answer up to a;whole number of bonds.;The bonds would sell at $935 leaving a discount of $65. 1000;x 6.5%;a. 4,228 4228/.035 x 25 years = 3020000 (10%-6.5% = 3.5%);b. 4,337;c. 4,448;d. 4,562

 

Paper#48362 | Written in 18-Jul-2015

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