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Finance 534 week 8 quiz 7

Finance 534 week 8 quiz 7

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Finance 534 week 8 quiz 7

 

Question 1

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Answer

The company’s bonds are downgraded.

Market interest rates rise sharply.

Market interest rates decline sharply.

The company's financial situation deteriorates significantly.

Inflation increases significantly.
 

2 points  

Question 2

Which of the following statements is CORRECT?

Answer

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.

The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

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.

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.

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.
 

2 points  

Question 3

A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon.  Both bonds have the same yield to maturity.  If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Answer

The prices of both bonds will decrease by the same amount.

Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.

The prices of both bonds would increase by the same amount.

One bond's price would increase, while the other bond’s price would decrease.

The prices of the two bonds would remain constant.
     

2 points  

Question 4

Which of the following statements is CORRECT?

Answer

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.

Liquidity premiums are generally higher on Treasury than corporate bonds.

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.

Default risk premiums are generally lower on corporate than on Treasury bonds.

Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
 

2 points  

Question 5

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%.  Which of the following statements is CORRECT?

Answer

If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.

The bond is selling below its par value.

The bond is selling at a discount.

If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

The bond’s current yield is greater than 9%.

2 points  

Question 6

Which of the following statements is CORRECT?

Answer

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

The total yield on a bond is derived from dividends plus changes in the price of the bond.

Bonds are riskier than common stocks and therefore have higher required returns.

Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.

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.
  
 

2 points  

Question 7

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Answer

10-year, zero coupon bond.

20-year, 10% coupon bond.

20-year, 5% coupon bond.

1-year, 10% coupon bond.

20-year, zero coupon bond.
 

2 points  

Question 8

Which of the following statements is CORRECT?

Answer

If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

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.

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.

If a coupon bond is selling at par, its current yield equals its yield to maturity.

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.

2 points  

Question 9

An investor is considering buying one of two 10-year, $1,000 face value 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%, which is expected to remain constant for the next 10 years.  Which of the following statements is CORRECT?

Answer

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

One year from now, Bond A’s price will be higher than it is today.

Bond A’s current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
 

2 points  

Question 10

A 12-year bond has an annual coupon rate of 9%.  The coupon rate will remain fixed until the bond matures.  The bond has a yield to maturity of 7%.  Which of the following statements is CORRECT?

Answer

If market interest rates decline, the price of the bond will also decline.

The bond is currently selling at a price below its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.

The bond should currently be selling at its par value.

If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.
 

2 points  

Question 11

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

Answer

The bond’s current yield is less than 8%.

If the yield to maturity remains at 8%, then the bond’s price will decline over the next year.

The bond’s coupon rate is less than 8%.

If the yield to maturity increases, then the bond’s price will increase.

If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year.
   

2 points  

Question 12

Assume that all interest rates in the economy decline from 10% to 9%.  Which of the following bonds would have the largest percentage increase in price?

Answer

An 8-year bond with a 9% coupon.

A 1-year bond with a 15% coupon.

A 3-year bond with a 10% coupon.

A 10-year zero coupon bond.

A 10-year bond with a 10% coupon.
 

2 points  

Question 13

Which of the following statements is CORRECT?

Answer

If a coupon bond is selling at par, its current yield equals its yield to maturity.

If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.

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.

If a bond’s yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

2 points  

Question 14

Which of the following statements is CORRECT?

Answer

All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

All else equal, long-term bonds have less interest rate price risk than short-term bonds.

All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.

All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.

All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

2 points  

Question 15

Amram Inc. can issue a 20-year bond with a 6% annual coupon.  This bond is not convertible, is not callable, and has no sinking fund.  Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund.  Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond?

Answer

Exactly equal to 6%.

It could be less than, equal to, or greater than 6%.

Greater than 6%.

Exactly equal to 8%.

Less than 6%.

2 points  

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