1. If a firm raises capital by selling new bonds, it would be called the "issuing firm," and the coupon rate is usually set equal to the required rate on bonds of equal risk.
a. True
b. False
2. Which of the given statements is CORRECT?
a. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
b. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
c. You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
d. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant.
e. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
3. Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?
a. $1,113.48
b. $1,142.03
c. $1,232.15
d. $1,171.32
e. $1,201.35
4. Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par.
Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT?
a. Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year.
b. Bond 8's current yield will increase each year.
c. Since the bonds have the same YTM, 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 maturity.
d. Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
e. Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.
5. Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?
a. The required rate of return would increase because the bond would then be more risky to a bondholder.
b. Because of the call premium, the required rate of return would decline.
c. There is no reason to expect a change in the required rate of return.
d. The required rate of return would decline because the bond would then be less risky to a bondholder.
e. It is impossible to say without more information.
6. A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, companies call bonds if interest rates rise and do not call them if interest rates decline.
a. True
b. False
7. Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 8.2% on these bonds. What is the bond's price?
a. $925.62
b. $948.76
c. $903.04
d. $972.48
e. $996.79
8. McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)
a. 2.88%
b. 3.17%
c. 3.48%
d. 3.83%
e. 2.62%
9. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?
a. The bond's yield to maturity is above 9%.
b. The bond's current yield is above 9%.
c. If the bond's yield to maturity declines, the bond will sell at a discount.
d. The bond's expected capital gains yield is zero.
e. The bond's current yield is less than its expected capital gains yield.
10. Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?
a. Adding additional restrictive covenants that limit management's actions.
b. Adding a call provision.
c. The rating agencies change the bond's rating from Baa to Aaa.
d. Making the bond a first mortgage bond rather than a debenture.
e. Adding a sinking fund.