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 riskier than common stocks and therefore have higher required returns.
D) Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
E) The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.
G) A) and C)
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E
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B) False
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True
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A) A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
B) For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
C) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
D) Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
E) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
G) B) and C)
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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%.
G) None of the above
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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) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
G) C) and E)
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B) False
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A) A 1-year zero coupon bond.
B) A 1-year bond with an 8% coupon.
C) A 10-year bond with an 8% coupon.
D) A 10-year bond with a 12% coupon.
E) A 10-year zero coupon bond.
G) C) and D)
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B) False
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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.
G) A) and B)
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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 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.
G) A) and C)
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A) The prices of both bonds will decrease by the same amount.
B) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
C) The prices of both bonds would increase by the same amount.
D) One bond's price would increase, while the other bond's price would decrease.
E) The prices of the two bonds would remain constant.
G) None of the above
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A) If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
B) All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.
C) If a bond is selling at its par value, its current yield equals its yield to maturity.
D) If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
E) All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.
G) D) and E)
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A) Because of the call premium, the required rate of return would decline.
B) There is no reason to expect a change in the required rate of return.
C) The required rate of return would decline because the bond would then be less risky to a bondholder.
D) The required rate of return would increase because the bond would then be more risky to a bondholder.
E) It is impossible to say without more information.
G) None of the above
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A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the 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 then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer 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 gave 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.
G) A) and B)
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A) You hold two bonds.One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon.The same market rate, 6%, applies to both bonds.If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.
B) The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C) You hold two bonds.One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon.The same market rate, 6%, applies to both bonds.If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
D) The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
E) The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
G) A) and C)
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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.
G) A) and B)
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B) False
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A) If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
C) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.
E) 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.
G) C) and D)
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A) $1,077.01
B) $1,104.62
C) $1,132.95
D) $1,162.00
E) $1,191.79
G) All of the above
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A) Adding additional restrictive covenants that limit management's actions.
B) Adding a call provision.
C) The rating agencies change the bond's rating from Baa to Aaa.
D) Making the bond a first mortgage bond rather than a debenture.
E) Adding a sinking fund.
G) A) and D)
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B
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