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Question;[i]. Which of the following;statements is most correct?;a. All else equal, a bond that;has a coupon rate of 10 percent will sell at a discount if the required return;for a bond of similar risk is 8 percent.;b. Debentures generally have a;higher yield to maturity relative to mortgage bonds.;c. If there are two bonds with;equal maturity and credit risk, the bond which is callable will have a higher;yield to maturity than the bond which is noncallable.;d. Answers a and c are correct.;e. Answers b and c are correct.;[ii]. A 10-year bond has a 10;percent annual coupon and a yield to maturity of 12 percent. The bond can be called in 5 years at a call;price of $1,050 and the bond?s face value is $1,000. Which of the following statements is most;correct?;a. The;bond?s current yield is greater than 10 percent.;b. The;bond?s yield to call is less than 12 percent.;c. The;bond is selling at a price below par.;d. Both;answers a and c are correct.;e. None;of the above answers is correct.;[iii]. Which of the following;statements is most correct?;a. Distant cash flows are generally riskier than;near-term cash flows. Further, a 20-year bond that is callable after 5 years will have an expected life that is;probably shorter, and certainly no longer, than an otherwise similar noncallable 20-year bond. Therefore, investors should require a lower rate of return on the;callable bond than on the noncallable bond, assuming other characteristics are;similar.;b. A noncallable 20-year bond will generally have;an expected life that is equal to or greater than that of an otherwise;identical callable 20-year bond.;Moreover, the interest rate risk faced by investors is greater the;longer the maturity of a bond.;Therefore, callable bonds expose investors to less interest rate risk than noncallable bonds, other things;held constant.;c. Statements a and b are correct.;d. Statements a and b are false.;[iv]. Which of the following;statements is most correct?;a. A callable 10-year, 10 percent bond should sell at a higher;price than an otherwise similar noncallable bond.;b. 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.;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 be equal to or less than the actual life of a noncallable;bond with the same maturity date. Therefore, if the yield curve is upward;sloping, the required rate of return will be lower on the callable bond.;e. 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.;[v]. A company is planning to;raise $1,000,000 to finance a new plant.;Which of the following statements is most correct?;a. If debt is used to raise the million dollars;the cost of the debt would be lower if the debt is in the form of a fixed rate;bond rather than a floating rate bond.;b. If debt is used to raise the million dollars;the cost of the debt would be lower if the debt is in the form of a bond rather;than a term loan.;c. If debt is used to raise the million dollars;but $500,000 is raised as a first mortgage bond on the new plant and $500,000;as debentures, the interest rate on the first mortgage bond would be lower than;it would be if the entire $1 million were raised by selling first mortgage;bonds.;d. The company would be especially anxious to have;a call provision included in the indenture if its management thinks that;interest rates are almost certain to rise in the foreseeable future.;e. All of the statements above are false.;[vi]. Which of the following;statements is most correct?;a. A firm with a sinking fund;payment coming due would generally choose to buy back bonds in the open market;if the price of the bond exceeds the sinking fund call price.;b. Income bonds pay interest;only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a;company and this makes them safer to investors than regular bonds.;c. One disadvantage of zero;coupon bonds is that issuing firms cannot realize the tax savings from issuing;debt until the bonds mature.;d. Other things held constant;callable bonds should have a lower yield to maturity than noncallable bonds.;e. All of the above statements;are false.;[vii]. Which of the following;statements is most correct?;a. A 10-year 10 percent coupon;bond has less reinvestment rate risk than a 10-year 5 percent coupon bond;(assuming all else equal).;b. The total return on a bond;for a given year arises from both the coupon interest payments received for the;year and the change in the value of the bond from the beginning to the end of;the year.;c. The price of a 20-year 10;percent bond is less sensitive to changes in interest rates (i.e., has lower;interest rate price risk) than the price of a 5-year 10 percent bond.;d. A $1,000 bond with $100;annual interest payments with five years to maturity (not expected to default);would sell for a discount if interest rates were below 9 percent and would sell;for a premium if interest rates were greater than 11 percent.;e. Answers a, b, and c are;correct statements.;[viii]. Which of the following;statements is most correct?;a. All else equal, a 1-year;bond will have a higher (i.e., better) bond rating than a 20-year bond.;b. A 20-year bond with;semiannual interest payments has higher price risk (i.e., interest rate risk);than a 5-year bond with semiannual interest payments.;c. 10-year zero coupon bonds;have higher reinvestment rate risk than 10-year, 10 percent coupon bonds.;d. If a callable bond is;trading at a premium, then you would expect to earn the yield-to-maturity.;e. Statements a and b are;correct.;[ix]. Which of the following;Treasury bonds will have the largest amount of interest rate risk (price risk)?;a. A 7 percent coupon bond;which matures in 12 years.;b. A 9 percent coupon bond;which matures in 10 years.;c. A 12 percent coupon bond;which matures in 7 years.;d. A 7 percent coupon bond;which matures in 9 years.;e. A 10 percent coupon bond;which matures in 10 years.;[x]. All treasury securities;have a yield to maturity of 7 percent--so the yield curve is flat. If the yield to maturity on all Treasuries;were to decline to 6 percent, which of the following bonds would have the;largest percentage increase in price?;a. 15-year zero coupon Treasury;bond.;b. 12-year Treasury bond with a;10 percent annual coupon.;c. 15-year Treasury bond with a;12 percent annual coupon.;d. 2-year zero coupon Treasury;bond.;e. 2-year Treasury bond with a;15 percent annual coupon.;[xi]. Which of the following;statements is most correct?;a. If a bond sells for less;than par, then its yield to maturity is less than its coupon rate.;b. If a bond sells at par, then;its current yield will be less than its yield to maturity.;c. Assuming that both bonds are;held to maturity and are of equal risk, a bond selling for more than par with;ten years to maturity will have a lower current yield and higher capital gain;relative to a bond that sells at par.;d. Answers a and c are correct.;e. None of the answers above is;correct.;[xii]. You just purchased a 10-year;corporate bond that has an annual coupon of 10 percent. The bond sells at a premium above par. Which of the following statements is most correct?;a. The bond?s yield to maturity is less than 10;percent.;b. The bond?s current yield is greater than 10;percent.;c. If the bond?s yield to maturity stays constant;the bond?s price will be the same one year from now.;d. Statements a and c are correct.;e. None of the answers above is correct.;[xiii]. Which of the following;statements is most correct?;a. The expected return on;corporate bonds will generally exceed the yield to maturity.;b. If a company increases its;debt ratio, this is likely to reduce the default premium on its existing bonds.;c. All else equal, senior debt;will generally have a lower yield to maturity than subordinated debt.;d. Answers a and c are correct.;e. None of the answers above is;correct.;[xiv]. Which of the following;statements is most correct?;a. If a company increases its;debt ratio, this is likely to reduce the default premium on its existing bonds.;b. All else equal, senior debt;has less default risk than subordinated debt.;c. An indenture is a bond that;is less risky than a subordinated debenture.;d. Statements a and c are;correct.;e. All of the answers above are;correct.;[xv]. Which of the following;statements is most correct?;a. The expected return on a;corporate bond is always less than its promised return when the probability of;default is greater than zero.;b. All else equal, secured debt;is considered to be less risky than unsecured debt.;c. An indenture is a bond that;is less risky than a subordinated debenture.;d. Both a and b are correct.;e. All of the answers above are;correct.;[xvi]. Which of the following;statements is correct?;a. If a company is retiring bonds for sinking fund;purposes it will buy back bonds on the open market when the coupon rate is less;than the market interest rate.;b. A bond sinking fund would be good for investors;if interest rates have declined after issuance and the investor?s bonds get;called.;c. Mortgage bonds have less default risk than;debentures.;d. Both a and c are correct.;e. All of the statements above are correct.;Tough;[xvii]. Which of the following;statements is most correct?;a. If a bond's yield to;maturity exceeds its coupon rate, the bond's current yield must also exceed its;coupon rate.;b. If a bond's yield to;maturity exceeds its coupon rate, the bond's price must be less than its;maturity value.;c. 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 rate.;d. Answers b and c are correct.;e. None of the answers above is;correct.;[xviii]. Which of the following is not true about bonds? In all of;the statements, assume other things are held constant.;a. Price sensitivity, that is;the change in price due to a given change in the required rate of return;increases as a bond's maturity increases.;b. For a given bond of any;maturity, a given percentage point increase in the interest rate (rd);causes a larger dollar capital;loss than the capital gain stemming from an identical decrease in the interest;rate.;c. For any given maturity, a;given percentage point increase in the interest rate causes a smaller dollar capital loss than;the capital gain stemming from an identical decrease in the interest rate.;d. From a borrower's point of;view, interest paid on bonds is tax-deductible.;e. A 20-year zero coupon bond has less;reinvestment rate risk than a 20-year coupon;bond.;a. All else equal, an increase in interest rates;will have a greater effect on the prices of long-term bonds than it will on the;prices of short-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. An increase in interest rates will have a;greater effect on a zero coupon bond with 10 years maturity than it will have;on a 9-year bond with a 10 percent annual coupon.;d. All of the statements above are correct.;e. Answers a and c are correct.;[xix]. Which of the following;statements is most correct?;a. A 10-year bond would have;more interest rate risk than a;5-year bond, but all 10-year bonds have the same interest rate risk.;b. A 10-year bond would have;more reinvestment rate risk;than a 5-year bond, but all 10-year bonds have the same reinvestment rate risk.;c. If their maturities were the;same, a 5 percent coupon bond would have more;interest rate risk than a 10 percent coupon bond.;d. If their maturities were the;same, a 5 percent coupon bond would have less;interest rate risk than a 10 percent coupon bond.;e. Zero coupon bonds have more;interest rate risk than any other type bond, even perpetuities.........

 

Paper#50905 | Written in 18-Jul-2015

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