Chapter 7 The Valuation and Characteristics of Bonds

18) Which of the following statements is MOST correct?

A) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield (interest yield) must also exceed its coupon rate.

B) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.

C) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate.

D) Answers B and C are correct.

19) a Heights Inc. bonds have a coupon rate of 7%, a yield to maturity of 10%, a face value of $1,000, and mature in 10 years. Which of the following statements is MOST correct?

A) An investor who purchases the bond today will earn a return of 10% if he sells the bond after one year.

B) An investor who purchases the bond today will earn a return of 7% if he sells the bond after one year.

C) An investor who purchases the bond today will earn a return of 17% per year if he holds the bond until it matures.

D) An investor who purchases the bond today will earn a return of 10% per year if he holds the bond until it matures.

20) A corporate bond has a coupon rate of 9%, a face value of $1,000, and matures in 15 years. Which of the following statements is MOST correct?

A) An investor with a required return of 10% will value the bond at more than $1,000.

B) An investor who buys the bond for $900 and holds the bond until maturity will have a capital loss.

C) An investor who buys the bond for $900 will have a yield to maturity on the bond greater than 9%.

D) If the bond's market price is $900, then the annual interest payments on the bond will be $81.

21) PBJ Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for an PBJ Corporation bond on January 1, 2012 if the market price of the bond on that date is $950?

A) 5.50%

B) 6.23%

C) 8.43%

D) 10.50%

22) William Corp. Bonds have a current yield of 7% and mature in 10 years. Smith Corp. Bonds have a current yield of 5% and mature in 10 years. Given this information, which of the following statements is MOST correct?

A) William Corp. Bonds will have a higher yield to maturity than Smith Corp. Bonds.

B) Smith Corp. Bonds will sell for a lower price than William Corp. Bonds.

C) Smith Corp. Bonds are riskier than William Corp. Bonds.

D) If both bonds have the same yield to maturity, then the price of Smith Corp. Bonds must be less than the price of William Corp. Bonds.

23) While checking the Wall Street Journal bond listings you notice that the price of an AT&T bond is the same as the price of a K-Mart bond. Based on this information you know that

A) the bond with the lower coupon rate will have the lower current yield.

B) both bonds have the same yield to maturity.

C) both bonds will have the same bond rating.

D) the bond with the longest time to maturity will have the highest yield to maturity.

24) A $1,000 par value 14-year bond with a 10 percent coupon rate recently sold for $965. The yield to maturity is

A) 10.49%.

B) 10.00%.

C) 8.87%.

D) 6.50%.

25) Which of the following is NOT a definition of yield to maturity?

A) discount rate that equates present value of future cash flows with a bond's price.

B) investors' required rate of return on a bond investment.

C) return that an investor will earn if they buy the bond for its market price and hold it until maturity.

D) discount rate that equates present value of future cash flows with a bond's face value.

26) If the market price of a bond decreases, then

A) the yield to maturity decreases.

B) the coupon rate increases.

C) the yield to maturity increases.

D) the coupon rate decreases.

27) Pentrax Corp issued 25 year bonds in 2002 with a coupon rate of 6% and a face value of $1,000. The bonds sold for face value when issued. Since 2002, interest rates have increased, so the going rate on similar bonds is now 9%. Which of the following statements is most accurate?

A) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until it matures expects to earn 6% per year over the life of the bond.

B) Pentrax Corp must now pay bondholders interest payments of $90 per year due to the increase in interest rates.

C) An investor who purchased an Pentrax bond in 2002 and plans to keep the bond until it matures expects an increase in return from 6% per year to 9% per year.

D) The price of an Pentrax Corp bond should be higher than $1,000 due to the increase in rates.