Question 1

Which of the following statements is most correct?

a. Sinking fund provisions do not require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.

b. Sinking fund provisions sometimes work to the detriment of bondholders--particularly if interest rates have declined over time.

c. If interest rates have increased since the time a company issues bonds with a sinking fund provision, the company is more likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.

d. Statements a and b are correct.

e. Statements b and c are correct.

Question 2

Which of the following statements is most correct?

a. If a bond's yield to maturity exceeds its annual coupon, then the bond will be trading at a premium.

b. If interest rates increase, the relative price change of a 10-year coupon bond will be greater than the relative price change of a 10-year zero coupon bond.

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

d. Both a and c are correct.

e. None of the answers above is correct.

Question 3

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. The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant over time.

c. The total return on a bond for a given year consists only of the coupon interest payments received.

d. Both b and c are correct.

e. All of the statements above are correct.

Question 4

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.

Question 5

Which of the following statements is most correct?

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.

Question 6

A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of $1,000, and makes semiannual payments. If the price is $934.96, what is the annual nominal yield to maturity on the bond?

a. 8%

b. 9%

c. 11%

d. 10%

e. 12%

Question 7

Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

a. $1,103.19

b. $1,102.74

c. $905.35

d. $1,106.76

e. $1,149.63

Question 8

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest paid semiannually. The required nominal rate on this debt has now risen to 16 percent. What is the current value of this bond?

a. $550

b. $1,000

c. $7,783

d. $ 450

e. $1,273

Question 9

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet, as of today, is as follows:

Long-term debt (bonds, at par)

$10,000,000

Preferred stock

2,000,000

Common stock ($10 par)

10,000,000

Retained earnings

4,000,000

Total debt and equity

$26,000,000

The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm's debt?

a. $5,480,000

b. $5,412,000

c. $2,531,000

d. $7,706,000

e. $7,056,000

Question 10

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?

a. 14%

b. 17%

c. 10%

d. 12%

e. 21%

Question 11

A bond matures in 12 years, and pays an 8 percent annual coupon. The bond has a face value of $1,000, and currently sells for $985. What is the bond's current yield and yield to maturity?

a. Current yield = 8.20%; yield to maturity = 8.37%.

b. Current yield = 8.12%; yield to maturity = 8.37%.

c. Current yield = 8.00%; yield to maturity = 7.92%.

d. Current yield = 8.12%; yield to maturity = 8.20%.

e. Current yield = 8.12%; yield to maturity = 7.92%.

Question 12

Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds?

a. 9.25%

b. 8.00%

c. 9.89%

d. 10.09%

e. 11.13%

Question 13

A corporate bond matures in 14 years. The bond has an 8 percent semiannual coupon and a par value of $1,000. The bond is callable in five years at a call price of $1,050. The price of the bond today is $1,075. What are the bond's yield to maturity and yield to call?

a. YTM = 6.64%; YTC = 4.78%

b. YTM = 14.29%; YTC = 14.09%

c. YTM = 7.14%; YTC = 7.34%

d. YTM = 7.14%; YTC = 7.05%

e. YTM = 3.57%; YTC = 3.52%

Question 14

You have just been offered a $1,000 par value bond for $847.88. The coupon rate is 8 percent, payable annually, and annual interest rates on new issues of the same degree of risk are 10 percent. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many interest payments remain?

a. 10

b. 15

c. 14

d. 20

e. 12

Question 15

A corporate bond which matures in 12 years, pays a 9 percent annual coupon, has a face value of $1,000, and a yield to maturity of 7.5 percent. The bond can first be called four years from now. The call price is $1,050. What is the bond's yield to call?

a. 7.50%

b. 6.73%

c. 7.10%

d. 13.45%

e. 11.86%

Question 16

Meade Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semiannual basis. What are the current yield and capital gains yield on the bonds for this year? (Assume that interest rates do not change over the course of the year).

a. Current yield = 8.50%, capital gains yield = 1.50%

b. Current yield = 9.35%, capital gains yield = 0.65%

c. Current yield = 9.35%, capital gains yield = -0.85%

d. Current yield = 10.00%, capital gains yield = 0.00%

e. None of the answers above is correct.