Strayer FIN 534 Week 3 Homework Assignment Chapter 5

FIN 534 Week 3 Homework
Assignment Chapter 5
1. Ranger Inc. would like to
issue new 20-year bonds. Initially, the plan was to make the bonds
non-callable. If the bonds were made callable after 5 years at a 5% call
premium, how would this affect their required rate of return?
a. There is no reason to expect a
change in the required rate of return.
b. The required rate of return
would decline because the bond would then be less risky to a bondholder.
c. The required rate of return
would increase because the bond would then be more risky to a bondholder.
d. It is impossible to say
without more information.
e. Because of the call premium,
the required rate of return would decline.
2. Under normal conditions, which
of the following would be most likely to increase the coupon rate required to
enable a bond to be issued at par?
a. Adding a call provision.
b. The rating agencies change the
bond’s rating from Baa to Aaa.
c. Making the bond a first
mortgage bond rather than a debenture.
d. Adding a sinking fund.
e. Adding additional restrictive
covenants that limit management’s actions.
3. Which of the following bonds
would have the greatest percentage increase in value if all interest rates fall
by 1%?
a. 20-year, 10% coupon bond.
b. 20-year, 5% coupon bond.
c. 1-year, 10% coupon bond.
d. 20-year, zero coupon bond.
e. 10-year, zero coupon bond.
4. 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.
5. 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.