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Question;31. Which of the following statements is CORRECT?;a. 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.;b. 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.;c. Rising inflation makes the actual yield to maturity on a bond;greater than a quoted yield to maturity that is based on market prices.;d. The yield to maturity on a coupon bond that;sells at its par value consists entirely of a current interest yield, it has a;zero expected capital gains yield.;e. The expected capital gains yield on a bond will always be zero;or positive because no investor would purchase a bond with an expected capital;loss.;32. Which of the following statements is;CORRECT?;a. If a coupon bond is selling at a premium;then the bond's current yield is zero.;b. If a coupon bond is selling at a discount;then the bond's expected capital gains yield is negative.;c. 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.;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 coupon bond is selling at par, its current yield equals its yield to;maturity.;33. Which of the following statements is CORRECT?;a. 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 their;coupon rates.;b. All else equal, an increase in interest;rates will have a greater effect on the prices of short-term than long-term;bonds.;c. 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.;d. If a bond?s yield to maturity exceeds its coupon rate, the bond?s price must;be less than its maturity value.;e. If a bond?s yield to maturity exceeds its coupon rate, the bond?s current;yield must be less than its coupon rate.;34. Which of the following statements is CORRECT?;a. If inflation is expected to increase in the;future, and if the maturity risk premium (MRP) is greater than zero, then the;Treasury yield curve will have an upward slope.;b. If the maturity risk premium (MRP) is;greater than zero, then the yield curve must have an upward slope.;c. Because long-term bonds are riskier than short-term bonds, yields on long-term;Treasury bonds will always be higher than yields on short-term T-bonds.;d. If the maturity risk premium (MRP) equals;zero, the yield curve must be flat.;e. The yield curve can never be downward;sloping.;35. Assume that the current corporate bond yield curve is;upward sloping. Under this condition;then we could be sure that;a. Inflation is expected to decline in the future.;b. The economy is not in a recession.;c. Long-term bonds are a better buy than short-term bonds.;d. Maturity risk premiums could help to explain the yield curve?s upward slope.;e. Long-term interest rates are more volatile than short-term rates.;36. Which of the following statements is CORRECT?;a. The higher the maturity risk premium, the higher the probability that;the yield curve will be inverted.;b. The most likely explanation for an inverted;yield curve is that investors expect inflation to increase.;c. The most likely explanation for an inverted;yield curve is that investors expect inflation to decrease.;d. If the yield curve is inverted, short-term;bonds have lower yields than long-term bonds.;e. Inverted yield curves can exist for Treasury bonds, but because of default;premiums, the corporate yield curve can never be inverted.;37. Short Corp. just issued bonds that;will mature in 10 years, and Long Corp. issued bonds that will mature in 20;years. Both bonds promise to pay a;semiannual coupon, they are not callable or convertible, and they are equally;liquid. Further, assume that the;Treasury yield curve is based only on expectations about future inflation;i.e., that the maturity risk premium is zero for T-bonds but not necessarily;for corporate bonds. Under these;conditions, which of the following statements is correct?;a. If the Treasury yield curve is upward sloping and Short has less default;risk than Long, then Short?s bonds must under all conditions have the lower;yield.;b. If the Treasury yield curve is downward sloping, Long?s bonds must under;all conditions have the lower yield.;c. If the yield curve for Treasury securities is upward sloping, Long?s bonds;must under all conditions have a higher yield than Short?s bonds.;d. If the yield curve for Treasury securities is flat, Short?s bond must under;all conditions have the same yield as Long?s bonds.;e. If Long?s and Short?s bonds have the same;default risk, their yields must under all conditions be equal.;38. 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, an 8% yield to maturity, and are;noncallable. Which of the following;statements is CORRECT?;a. Bond A?s capital gains yield is greater than Bond B?s capital gains yield.;b. Bond A trades at a discount, whereas Bond B trades at a premium.;c. 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.;d. If the yield to maturity for both bonds;immediately decreases to 6%, Bond A?s bond will have a larger percentage;increase in value.;e. Bond A?s current yield is greater than that;of Bond B.;39. 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.;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.;40. Which of the following statements is CORRECT?;a. Senior debt is debt that has been more recently issued, and in;bankruptcy it is paid off after junior debt because the junior debt was issued;first.;b. A company's subordinated debt has less default risk than its senior;debt.;c. Convertible bonds generally have lower coupon rates than non-convertible bonds of;similar default risk because they offer the possibility of capital gains.;d. Junk bonds typically provide a lower yield to maturity than;investment-grade bonds.;e. A debenture is a secured bond that is backed by some or all of the;firm?s fixed assets.;41. Which of the following statements is;CORRECT?;a. One disadvantage of zero coupon bonds is that the issuing firm;cannot realize any tax savings from the use of debt until the bonds mature.;b. Other things held constant, a callable bond should have a lower yield to maturity;than a noncallable bond.;c. Once a firm declares bankruptcy, it must be liquidated by the;trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and;legal fees.;d. Income bonds must pay interest only if the company earns the;interest. Thus, these securities cannot;bankrupt a company prior to their maturity, and this makes them safer to the;issuing corporation than "regular" bonds.;e. A firm with a sinking fund that gives it;the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open;market purchase if the coupon rate exceeded the going interest rate.;42. Which of the following statements is;CORRECT?;a. The total return on a bond during a given;year is based only on the coupon interest payments received.;b. All else equal, a bond that has a coupon;rate of 10% will sell at a discount if the required return for bonds of similar;risk is 8%.;c. The price of a discount bond will increase over time, assuming that the bond?s;yield to maturity remains constant.;d. For a given firm, its debentures are likely;to have a lower yield to maturity than its mortgage bonds.;e. When large firms are in financial distress;they are almost always liquidated, whereas smaller firms are generally;reorganized.;43. Which of the following statements is CORRECT?;a. All else equal, secured debt is more risky;than unsecured debt.;b. The expected return on a corporate bond must be greater than its promised;return if the probability of default is greater than zero.;c. All else equal, senior debt has more default;risk than subordinated debt.;d. A company?s bond rating is affected by its;financial ratios but not by provisions in its indenture.;e. Under Chapter 11 of the Bankruptcy Act, the;assets of a firm that declares bankruptcy must be liquidated, and the sale;proceeds must be used to pay off claims against it according to the priority of;the claims as spelled out in the Act.;44. Grossnickle Corporation issued;20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one;year ago. Today, the market interest;rate on these bonds is 5.5%. What is the;current price of the bonds, given that they now have 19 years to maturity?;a. $1,113.48;b. $1,142.03;c. $1,171.32;d. $1,201.35;e. $1,232.15;45. A 25-year, $1,000 par value bond has;an 8.5% annual payment coupon. The bond;currently sells for $925. If the yield;to maturity remains at its current rate, what will the price be 5 years from;now?;a. $884.19;b. $906.86;c. $930.11;d. $953.36;e. $977.20;46. Moerdyk Corporation's bonds have a;15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is;6.20%, based on semiannual compounding.;What is the bond?s price?;a. $1,047.19;b. $1,074.05;c. $1,101.58;d. $1,129.12;e. $1,157.35;47. In order to accurately assess the;capital structure of a firm, it is necessary to convert its balance sheet;figures from historical book values;to market values. KJM Corporation's;balance sheet (book values) as of today is as follows;Long-term debt (bonds, at par) $23,500,000;Preferred stock 2,000,000;Common stock ($10 par) 10,000,000;Retained earnings 4,000,000;Total debt and equity $39,500,000;The;bonds have a 7.0% coupon rate, payable semiannually, and a par value of;$1,000. They mature exactly 10 years;from today. The yield to maturity is;11%, so the bonds now sell below par.;What is the current market value of the firm's debt?;a. $17,436,237;b. $17,883,320;c. $18,330,403;d. $7,706,000;e. $7,898,650

 

Paper#50904 | Written in 18-Jul-2015

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