CHAPTER 7 BONDS AND THEIR VALUATIO

Bond coupon rate

[i]. 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 statements
above. (All may reduce the required
coupon rate.)

Bond concepts

[ii]. 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 statements above
are correct.
e. None of the statements above
is correct.

Bond concepts

[iii]. 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. Statements a and c are
correct.
e. None of the statements above is correct.

Bond
concepts

[iv]. 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. Statements a and c are correct.
e. All of the statements above are correct.

Bond concepts

[v]. A 15-year bond with a face
value of $1,000 currently sells for $850. Which of the following statements is
most correct?

a. The bond’s yield to maturity
is greater than its coupon rate.
b. If the yield to maturity
stays constant until the bond matures, the bond’s price will remain at $850.
c. The bond’s current yield is
equal to the bond’s coupon rate.
d. Statements b and c are
correct.
e. All of the statements above
are correct.

Bond concepts

[vi]. A
Treasury bond has an 8 percent annual coupon and a yield to maturity equal to
7.5 percent. Which of the following
statements is most correct?

a. The bond has a current yield
greater than 8 percent.
b. The bond sells at a price
above par.
c. If the yield to maturity
remains constant, the price of the bond is expected to fall over time.
d. Statements b and c are
correct.
e. All of the statements above
are correct.

Bond concepts

[vii]. You
are considering investing in three different bonds. Each bond matures in 10 years and has a face
value of $1,000. The bonds have the same
level of risk, so the yield to maturity is the same for each. Bond A has an
8 percent annual coupon, Bond B has a 10 percent annual coupon, and Bond C has
a 12 percent annual coupon. Bond B sells
at par. Assuming that interest rates are
expected to remain at their current level for the next 10 years, which of the
following statements is most correct?

a. Bond A sells at a discount
(its price is less than par), and its price is expected to increase over the
next year.
b. Bond A’s price is expected
to decrease over the next year, Bond B’s price is expected to stay the same,
and Bond C’s price is expected to increase over the next year.
c. Since the bonds have the
same yields to maturity, they should all have the same price, and since
interest rates are not expected to change, their prices should all remain at
their current levels until the bonds mature.
d. Bond C sells at a premium
(its price is greater than par), and its price is expected to increase over the
next year.
e. Statements b and d are
correct.

Bond concepts

[viii]. An investor is considering
buying one of two bonds issued by Carson City Airlines. Bond A has a 7 percent annual coupon, whereas
Bond B has a
9 percent annual coupon. Both bonds have
10 years to maturity, face values of $1,000, and yields to maturity of 8
percent. Assume that the yield to
maturity for both of the bonds will remain constant over the next 10 years. Which of the following statements is most
correct?

a. Bond A has a higher price than Bond B today, but one year from now
the bonds will have the same price as each other.
b. Bond B has a higher price than Bond A today, but one year from now
the bonds will have the same price as each other.
c. Both bonds have the same price today, and the price of each bond is
expected to remain constant until the bonds mature.
d. One year from now, Bond A’s price will be higher than it is today.
e. Bond A’s current yield (not to be confused with its yield to
maturity) is greater than 8 percent.

Bond concepts

[ix]. A 10-year bond with a 9
percent annual coupon has a yield to maturity of 8 percent. Which of the following statements is most
correct?

a. The bond is selling at a
discount.
b. The bond’s current yield is
greater than 9 percent.
c. If the yield to maturity
remains constant, the bond’s price one year from now will be lower than its
current price.
d. Statements a and b are
correct.
e. None of the statements above
is correct.