finance data bank

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.doc#_edn1″ title=””>[i]. One of the basic
relationships in interest rate theory is that, other things held constant, for
a given change in the required rate of return, the the time to maturity, the the change in price.

a. longer; smaller.

b. shorter; larger.

c. longer; greater.

d. shorter; smaller.

e. Answers c and d are correct.

.doc#_edn2″ title=””>[ii]. Which of the following
statements is most correct?

a. All else equal, long-term
bonds have more interest rate risk than short term bonds.

b. All else equal, higher
coupon bonds have more reinvestment risk than low coupon bonds.

c. All else equal, short-term
bonds have more reinvestment risk than do long-term bonds.

d. Statements a and c are
correct.

e. All of the statements above
are correct.

.doc#_edn3″ title=””>[iii]. Which of the following
events would make it more likely that a company would choose to call its
outstanding callable bonds?

a. A reduction in market
interest rates.

b. The company’s bonds are
downgraded.

c. An increase in the call
premium.

d. Answers a and b are correct.

e. Answers a, b, and c are
correct.

.doc#_edn4″ title=””>[iv]. Other things held constant,
if a bond indenture contains a call provision, the yield to maturity that would
exist without such a call provision will generally be _________________ the YTM
with it.

a. higher than

b. lower than

c. the same as

d. either higher or lower,
depending on the level of call premium, than

e. unrelated to

.doc#_edn5″ title=””>[v]. All of the following may
serve to reduce the coupon
rate that would otherwise be required on a bond issued at par, except a

a. Sinking fund.

b. Restrictive
covenant.

c. Call provision.

d. Change in rating from Aa to
Aaa.

e. None of the answers above
(all may reduce the required coupon rate).

.doc#_edn6″ title=””>[vi]. Which of the following
statements is most correct?

a. All else equal, if a bond’s
yield to maturity increases, its price will fall.

b. All else equal, if a bond’s
yield to maturity increases, its current yield will fall.

c. If a bond’s yield to
maturity exceeds the coupon rate, the bond will sell at a premium over par.

d. All of the answers above are
correct.

e. None of the answers above is
correct.

.doc#_edn7″ title=””>[vii]. 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.

.doc#_edn8″ title=””>[viii]. A 10-year corporate bond has
an annual coupon payment of 9 percent.
The bond is currently selling at par ($1,000). Which of the following statements is most
correct?

a.
The bond’s yield to maturity is
9 percent.

b.
The bond’s current yield is 9
percent.

c.
If the bond’s yield to maturity
remains constant, the bond’s price will remain at par.

d.
Both answers a and c are
correct.

e.
All of the answers above are
correct.

.doc#_edn9″ title=””>[ix]. 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.

.doc#_edn10″ title=””>[x]. Which of the following
statements is most correct?

a. Retiring bonds under a
sinking fund provision is similar to calling bonds under a call provision in
the sense that bonds are repurchased by the issuer prior to maturity.

b. Under a sinking fund, bonds
will be purchased on the open market by the issuer when the bonds are selling
at a premium and bonds will be called in for redemption when the bonds are
selling at a discount.

c. The sinking fund provision
makes a debt issue less risky to the investor.

d. Both statements a and c are
correct.

e. All of the statements above
are correct.

.doc#_edn11″ title=””>[xi]. Which of the following
statements is most correct?

a. Junk bonds
typically have a lower yield to maturity relative to investment grade bonds.

b. A
debenture is a secured bond which is backed by some or all of the firm’s
fixed assets.

c. Subordinated
debt has less default risk than senior debt.

d. All of the
statements above are correct.

e.
None of the statements above is
correct.

.doc#_edn12″ title=””>[xii]. Which of the following
statements is most correct?

a. Rising inflation makes the actual yield to
maturity on a bond greater than the quoted yield to maturity which is based on
market prices.

b. The yield to maturity for a coupon bond that
sells at its par value consists entirely of an interest yield; it has a zero
expected capital gains yield.

c. 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.

d. The market value of a bond will always approach
its par value as its maturity date approaches.
This holds true even if the firm enters bankruptcy.

e. All of the statements above are false.

.doc#_edn13″ title=””>[xiii]. Which of the following
statements is most correct?

a. 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.

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

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

d. Both a and b are correct.

e. Both b and c are correct.

.doc#_edn14″ title=””>[xiv]. Assume that all interest
rates in the economy decline from 10 percent to 9 percent. Which of the following bonds will have the
largest percentage increase in
price?

a. A
10-year bond with a 10 percent coupon.

b. An
8-year bond with a 9 percent coupon.

c. A
10-year zero coupon bond.

d. A
1-year bond with a 15 percent coupon.

e. A
3-year bond with a 10 percent coupon.

.doc#_edn15″ title=””>[xv]. Which of the following has
the greatest price risk?

a. A 10-year, $1,000 face
value, 10 percent coupon bond with semiannual interest payments.

b. A 10-year, $1,000 face
value, 10 percent coupon bond with annual interest payments.

c. A 10-year, $1,000 face
value, zero coupon bond.

d. A 10-year $100 annuity.

e. All of the above have the
same price risk since they all mature in 10 years.

.doc#_edn16″ title=””>[xvi]. If the yield to maturity
decreased 1 percentage point, which of the following bonds would have the
largest percentage increase in value?

a. A 1-year bond with an 8
percent coupon.

b. A 1-year zero-coupon bond.

c. A 10-year zero-coupon bond.

d. A 10-year bond with an 8
percent coupon.

e. A 10-year bond with a 12
percent coupon.

.doc#_edn17″ title=””>[xvii]. If interest rates fall from 8
percent to 7 percent, which of the following bonds will have the largest
percentage increase in its value?

a. A 10-year zero coupon bond.

b. A 10-year bond with a 10
percent semiannual coupon.

c. A 10-year bond with a 10
percent annual coupon.

d. A 5-year zero coupon bond.

e. A 5-year bond with a 12
percent annual coupon.

.doc#_edn18″ title=””>[xviii]. Which of the following
statements is most correct?

a. Other things held constant,
a callable bond would have a lower
required rate of return than a noncallable bond.

b. Other things held constant,
a corporation would rather issue noncallable bonds than callable bonds.

c. Reinvestment rate risk is
worse from a typical investor’s standpoint than interest rate risk.

d. If a 10-year, $1,000 par,
zero coupon bond were issued at a price which gave investors a 10 percent rate of
return, 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 over its $1,000 par value.

e. If a 10-year, $1,000 par,
zero coupon bond were issued at a price which gave investors a 10 percent rate
of return, and if interest rates then dropped to the point where rd
= YTM = 5%, we could be sure that the bond would sell at a discount below its $1,000 par value.

.doc#_edn19″ title=””>[xix]. Which of the following
statements is most correct?

a. The market value of a bond
will always approach its par value as its maturity date approaches, provided
the issuer of the bond does not go bankrupt.

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

c. The total yield on a bond is
derived from interest payments and changes in the price of the bond.

d. Statements a and c are
correct.

e. All of the statements above
are correct.

.doc#_edn20″ title=””>[xx]. Which of the following
statements is most correct?

a. If a bond is selling for a
premium, this implies that the bond’s yield to maturity exceeds its coupon
rate.

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

c. If rates fall after its
issue, a zero coupon bond could trade for an amount above its par value.

d. Statements b and c are
correct.

e. None of the statements above
is correct.

.doc#_edn21″ title=””>[xxi]. 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.


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