11 Which of the following statements is CORRECT a The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates b 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 c 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 d 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 e 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 12 Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds a Market interest rates rise sharply b Market interest rates decline sharply c The company's financial situation deteriorates significantly d Inflation increases significantly e The company's bonds are downgraded 13 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 a A 1 year bond with a 15 coupon b A 3 year bond with a 10 coupon c A 10 year zero coupon bond d A 10 year bond with a 10 coupon e An 8 year bond with a 9 coupon 14 Which of the following bonds has the greatest interest rate price risk a A 10 year, $1,000 face value, zero coupon bond b A 10 year, $1,000 face value, 10 coupon bond with annual interest payments c All 10 year bonds have the same price risk since they have the same maturity d A 10 year, $1,000 face value, 10 coupon bond with semiannual interest payments 15 If its yield to maturity declined by 1 , which of the following bonds would have the largest percentage increase in value a A 1 year bond with an 8 coupon b A 10 year bond with an 8 coupon c A 10 year bond with a 12 coupon d A 10 year zero coupon bond e A 1 year zero coupon bond 16 Which of the following statements is NOT CORRECT a All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities b If a bond is selling at its par value, its current yield equals its yield to maturity c If a bond is selling at a premium, its current yield will be greater than its yield to maturity d All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons e If a bond is selling at a discount to par, its current yield will be less than its yield to maturity 17 Which of the following statements is CORRECT a If a 10 year, $1,000 par, 10 coupon bond were issued at par, and if interest rates then dropped to the point where r d YTM 5 , we could be sure that the bond would sell at a premium above its $1,000 par value b Other things held constant, a corporation would rather issue noncallable bonds than callable bonds c Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond d Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon e 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 r d YTM 5 , the bond would sell at a premium over its $1,000 par value 18 Suppose International Digital Technologies decides to raise a total of $200 million, with $100 million as long term debt and $100 million as common equity The debt can be mortgage bonds or debentures, but by an iron clad provision in its charter, the company can never raise any additional debt beyond the original $100 million Given these conditions, which of the following statements is CORRECT a If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures b In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two c The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures d If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds e The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be 19 Rogoff Co 's 15 year bonds have an annual coupon rate of 9 5 Each bond has face value of $1,000 and makes semiannual interest payments If you require an 11 0 nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond a $891 00 b $913 27 c $936 10 d $959 51 e $983 49 20 Haswell Enterprises' bonds have a 10 year maturity, a 6 25 semiannual coupon, and a par value of $1,000 The going interest rate (r d ) is 4 75 , based on semiannual compounding What is the bond's price a 1,063 09 b 1,090 35 c 1,118 31 d 1,146 27 e 1,174 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11 . Which of the following statements is CORRECT? a. The time to maturity does not affect the change in the value of a bond

11. Which of the following statements is CORRECT?

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

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

	a.	Market interest rates rise sharply.
	b.	Market interest rates decline sharply.
	c.	The company's financial situation deteriorates significantly.
	d.	Inflation increases significantly.
	e.	The company's bonds are downgraded.

13. 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?

	a.	A 1-year bond with a 15% coupon.
	b.	A 3-year bond with a 10% coupon.
	c.	A 10-year zero coupon bond.
	d.	A 10-year bond with a 10% coupon.
	e.	An 8-year bond with a 9% coupon.

14. Which of the following bonds has the greatest interest rate price risk?

	a.	A 10-year, $1,000 face value, zero coupon bond.
	b.	A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.
	c.	All 10-year bonds have the same price risk since they have the same maturity.
	d.	A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

15. If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

	a.	A 1-year bond with an 8% coupon.
	b.	A 10-year bond with an 8% coupon.
	c.	A 10-year bond with a 12% coupon.
	d.	A 10-year zero coupon bond.
	e.	A 1-year zero coupon bond.

16. Which of the following statements is NOT CORRECT?

	a.	All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.
	b.	If a bond is selling at its par value, its current yield equals its yield to maturity.
	c.	If a bond is selling at a premium, its current yield will be greater than its yield to maturity.
	d.	All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.
	e.	If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.

17. Which of the following statements is CORRECT?

	a.	If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where r_d = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.
	b.	Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.
	c.	Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.
	d.	Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.
	e.	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 r_d = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

18. Suppose International Digital Technologies decides to raise a total of $200 million, with $100 million as long-term debt and $100 million as common equity. The debt can be mortgage bonds or debentures, but by an iron-clad provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT?

	a.	If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
	b.	In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.
	c.	The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.
	d.	If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.
	e.	The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be.

19. Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

	a.	$891.00
	b.	$913.27
	c.	$936.10
	d.	$959.51
	e.	$983.49

20. Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (r_d) is 4.75%, based on semiannual compounding. What is the bond's price?