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Question # 00004803 Posted By: spqr Updated on: 12/06/2013 02:53 PM Due on: 12/31/2013
Subject Accounting Topic Accounting Tutorials:
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[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.

[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.

[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.

[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

[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).

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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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  1. Tutorial # 00004599 Posted By: spqr Posted on: 12/06/2013 03:14 PM
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