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Question;16. Which of the following statements is CORRECT?;a. All else equal, high-coupon bonds have less;reinvestment rate risk than low-coupon bonds.;b. All else equal, long-term bonds have less;interest rate price risk than short-term bonds.;c. All else equal, low-coupon bonds have less;interest rate price risk than high-coupon bonds.;d. All else equal, short-term bonds have less;reinvestment rate risk than long-term bonds.;e. All else equal, long-term bonds have less reinvestment rate risk;than short-term bonds.;17. Which of the following statements is CORRECT?;a. 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.;b. Long-term bonds have less interest rate price risk but more;reinvestment rate risk than short-term bonds.;c. If interest rates increase, all bond prices will increase, but the increase will be;greater for bonds that have less interest rate risk.;d. 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.;e. Long-term bonds have less interest rate price risk and also less;reinvestment rate risk than short-term bonds.;18. Which of the following statements is CORRECT?;a. 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.;b. Liquidity premiums;are generally higher on Treasury than corporate bonds.;c. 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.;d. Default risk premiums are generally lower on corporate than on Treasury bonds.;e. Reinvestment rate risk is lower, other;things held constant, on long-term than on short-term bonds.;19. Which of the following statements is CORRECT?;a. All else equal, senior debt generally has a lower yield to maturity than;subordinated debt.;b. An indenture is a bond that is less risky;than a mortgage bond.;c. The expected return on a corporate bond will generally exceed the bond's yield;to maturity.;d. If a bond?s coupon rate exceeds its yield to maturity, then its expected;return to investors will also exceed its yield to maturity.;e. Under our bankruptcy;laws, any firmthatis in financial distress will be forced to declare bankruptcy;and then be liquidated.;20. Which of the following statements is CORRECT?;a. If a coupon bond is selling at par, its;current yield equals its yield to maturity.;b. If a coupon bond is selling at a discount;its price will continue to decline until it reaches its par value at maturity.;c. 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.;d. If a bond?s yield to maturity exceeds its;annual coupon, then the bond will trade at a premium.;e. If a coupon bond is selling at a premium;its current yield equals its yield to maturity.;21. A 10-year bond with a 9% annual coupon;has a yield to maturity of 8%. Which of;the following statements is CORRECT?;a. If the yield to maturity remains constant, the bond?s price one year from now;will be higher than its current price.;b. The bond is selling below its par value.;c. The bond is selling at a discount.;d. If the;yield to maturity remains constant, the bond?s price one year from now will be;lower than its current price.;e. The bond?s;current yield is greater than 9%.;22. 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 sells at a price below par.;b. The bond;has a current yield greater than 8%.;c. The bond sells at a discount.;d. The bond?s;required rate of return is less than 7.5%.;e. If the yield;to maturity remains constant, the price of the bond will decline over time.;23. An investor is considering buying one;of two 10-year, $1,000 face value, noncallable 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%, and the YTM is expected to remain constant for the next 10;years. Which of the following statements;is CORRECT?;a. Bond B has;a higher price than Bond A today, but one year from now the bonds will have the;same price.;b. One year from now, Bond A?s price will be;higher than it is today.;c. Bond A?s current;yield is greater than 8%.;d. Bond A has;a higher price than Bond B today, but one year from now the bonds will have the;same price.;e. Both bonds;have the same price today, and the price of each bond is expected to remain;constant until the bonds mature.;24. Which of the following statements is CORRECT?;a. If a bond is selling at a discount to par;its current yield will be greater than its yield to maturity.;b. All else equal;bonds with longer maturities have less interest rate (price) risk than bonds;with shorter maturities.;c. If a bond is selling at its par value, its;current yield equals its capital gains yield.;d. If a bond is selling at a premium, its;current yield will be less than its capital gains yield.;e. All else equal, bonds with larger coupons;have less interest rate (price) risk than bonds with smaller coupons.;25. Which of the following statements is;CORRECT?;a. If a 10-year;$1,000 par, zero coupon bond were issued at a price that gave investors;a 10% yield to maturity, and if interest rates then dropped to the point where;rd = YTM = 5%, the bond would sell at a premium over its $1,000 par;value.;b. If a 10-year;$1,000 par, 10% coupon bond were issued at par, and if interest rates then;dropped to the point where rd = YTM = 5%, we could be sure that the;bond would sell at a premium above its $1,000 par value.;c. Other things held constant, including the;coupon rate, a corporation would;rather issue noncallable bonds than callable bonds.;d. Other;things held constant, a callable bond would have a lower required rate;of return than a noncallable bond because it would have a shorter expected;life.;e. Bonds;are exposed to both reinvestment rate and interest rate price risk. Longer-term low-coupon bonds, relative to;shorter-term high-coupon bonds, are generally more exposed to reinvestment rate;risk than interest rate price risk.;26. Which of the following statements is CORRECT?;a. If the Federal;Reserve unexpectedly announces that it expects inflation to increase, then we;would probably observe an immediate increase in bond prices.;b. The total;yield on a bond is derived from dividends plus changes in the price of the;bond.;c. Bonds are;generally regarded as being riskier than common stocks, and therefore bonds;have higher required returns.;d. Bonds issued;by larger companies always have lower yields to maturity (due to less risk);than bonds issued by smaller companies.;e. The market;price of a bond will always approach its par value as its maturity date;approaches, provided the bond?s required return remains constant.;27. Which of the following statements is;CORRECT?;a. If a coupon;bond is selling at par, its current yield equals its yield to maturity.;b. If rates fall after its issue, a zero;coupon bond could trade at a price above its maturity (or par) value.;c. If rates fall rapidly, a zero coupon bond?s;expected appreciation could become negative.;d. If a firm;moves from a position of strength toward financial distress, its bonds? yield;to maturity would probably decline.;e. If a bond;is selling at a premium, this implies that its yield to maturity exceeds its;coupon rate.;28. Bond X has an 8% annual coupon, Bond Y;has a 10% annual coupon, and Bond Z has a 12% annual coupon. Each of the bonds is noncallable, has a;maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?;a. If the bonds;market interest rate remains at 10%, Bond Z?s price will be lower one year from;now than it is today.;b. Bond X has;the greatest reinvestment rate risk.;c. If market;interest rates decline, the prices of all three bonds will increase, but Z's;price will have the largest percentage increase.;d. If market;interest rates remain at 10%, Bond Z?s price will be 10% higher one year from;today.;e. If market;interest rates increase, Bond X?s price will increase, Bond Z?s price will;decline, and Bond Y?s price will remain the same.;29. Bonds A, B, and C all have a maturity;of 10 years and a yield to maturity of 7%.;Bond A?s price exceeds its par value, Bond B?s price equals its par;value, and Bond C?s price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT?;a. If the yield to maturity on each bond decreases to 6%, Bond A will have the;largest percentage increase in its price.;b. Bond A has the most interest rate risk.;c. If the yield to maturity on the three bonds remains constant, the prices of the;three bonds will remain the same over the next year.;d. If the yield to maturity on each bond increases to 8%, the prices of all three;bonds will decline.;e. Bond C sells at a premium over its par value.;30. Which of the following statements is CORRECT?;a. 10-year, zero coupon bonds have more;reinvestment rate risk than 10-year, 10% coupon bonds.;b. A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5%;coupon bond (assuming all else equal).;c. The total (rate of) return on a bond during a given year is the sum of the coupon;interest payments received during the year and the change in the value of the;bond from the beginning to the end of the year, divided by the bond's price at;the beginning of the year.;d. The price of a 20-year, 10% bond is less sensitive to changes in interest rates;than the price of a 5-year, 10% bond.;e. A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is;not expected to default would sell at a discount if interest rates were below;9% and at a premium if interest rates were greater than 11%.

Paper#50903 | Written in 18-Jul-2015

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