Exam 4: Bond Valuation

A) $1,077.01
B) $1,104.62
C) $1,132.95
D) $1,162.00
E) $1,191.79

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A) if the yield to maturity remains at 8%, then the bond's price will decline over the next year.
B) the bond's coupon rate is less than 8%.
C) if the yield to maturity increases, then the bond's price will increase.
D) if the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
E) the bond's current yield is less than 8%.

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A) all else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.
B) the price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.
C) for a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.
D) when large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.
E) the total return on a bond during a given year consists only of the coupon interest payments received.

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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.

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A) a callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
B) corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
C) two bonds have the same maturity and the same coupon rate. however, one is callable and the other is not. the difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
D) the actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
E) two bonds have the same maturity and the same coupon rate. however, one is callable and the other is not. the difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

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A) $923.22
B) $946.30
C) $969.96
D) $994.21
E) $1,019.06

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A) the market value of a bond will always approach its par value as its maturity date approaches. this holds true even if the firm has filed for bankruptcy.
B) rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
C) the yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
D) 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.
E) the yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.

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A) the most likely explanation for an inverted yield curve is that investors expect inflation to increase.
B) the most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
C) if the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
D) inverted yield curves can exist for treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
E) the higher the maturity risk premium, the higher the probability that the yield curve will be inverted.

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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.

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A) 6.20%
B) 6.53%
C) 6.87%
D) 7.24%
E) 7.62%

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A) other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
B) once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
C) income bonds must pay interest only if the company earns the interest. thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
D) a firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
E) one disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.

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A) an indenture is a bond that is less risky than a mortgage bond.
B) the expected return on a corporate bond will generally exceed the bond's yield to maturity.
C) if a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
D) under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
E) all else equal, senior debt generally has a lower yield to maturity than subordinated debt.

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A) if a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
B) all else equal, if a bond's yield to maturity increases, its price will fall.
C) if a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
D) all else equal, if a bond's yield to maturity increases, its current yield will fall.
E) a zero coupon bond's current yield is equal to its yield to maturity.

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A) $839.31
B) $860.83
C) $882.90
D) $904.97
E) $927.60

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A) 3.92%
B) 4.12%
C) 4.34%
D) 4.57%
E) 4.81%

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A) $891.00
B) $913.27
C) $936.10
D) $959.51
E) $983.49

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