Exam 7: Bonds and Their Valuation

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

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E

A) $903.04
B) $925.62
C) $948.76
D) $972.48
E) $996.79

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A) 3.42%
B) 3.60%
C) 3.79%
D) 3.99%
E) 4.20%

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A) An 8-year bond with a 9% coupon.
B) A 1-year bond with a 15% coupon.
C) A 3-year bond with a 10% coupon.
D) A 10-year zero coupon bond.
E) A 10-year bond with a 10% coupon.

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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.

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A) $1,105.69
B) $1,133.34
C) $1,161.67
D) $1,190.71
E) $1,220.48

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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.

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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.

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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.

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A) A 10-year $100 annuity.
B) A 10-year, $1,000 face value, zero coupon bond.
C) A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
D) All 10-year bonds have the same price risk since they have the same maturity.
E) A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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B

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.

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E

A) $817.12
B) $838.07
C) $859.56
D) $881.60
E) $903.64

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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.

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A) 10-year, zero coupon bond.
B) 20-year, 10% coupon bond.
C) 20-year, 5% coupon bond.
D) 1-year, 10% coupon bond.
E) 20-year, zero coupon bond.

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A) A zero coupon bond's current yield is equal to its yield to maturity.
B) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
C) All else equal, if a bond's yield to maturity increases, its price will fall.
D) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
E) All else equal, if a bond's yield to maturity increases, its current yield will fall.

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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.

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