Ch.

7 M/C
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1. A $1,000 par value bond pays interest of $35 each C 5. 90. A bond with a $1,000 face value and an 8 percent B
quarter and will annual coupon pays
mature in 10 years. If your nominal annual required rate interest semiannually. The bond will mature in 15 years.
of return is The nominal
12 percent with quarterly compounding, how much yield to maturity is 11 percent. What is the price of the
should you be willing bond today?
to pay for this bond? a. $ 784.27
a. $ 941.36 b. $ 781.99
b. $1,051.25 c. $1,259.38
c. $1,115.57 d. $1,000.00
d. $1,391.00 e. $ 739.19
e. $ 825.49
6. All of the following may serve to reduce the coupon rate C
2. A 10-year corporate bond has an annual coupon E that would
payment of 9 percent. otherwise be required on a bond issued at par, except a
The bond is currently selling at par ($1,000). Which of the a. Sinking fund.
following b. Restrictive covenant.
statements is most correct? c. Call provision.
a. The bond's yield to maturity is 9 percent. d. Change in rating from Aa to Aaa.
b. The bond's current yield is 9 percent. e. None of the answers above (all may reduce the
c. If the bond's yield to maturity remains constant, the required coupon rate).
bond's price
7. Assume that you wish to purchase a 20-year bond that D
will remain at par.
has a maturity
d. Both answers a and c are correct.
value of $1,000 and makes semiannual interest payments
e. All of the answers above are correct.
of $40. If you
3. A 12-year bond pays an annual coupon of 8.5 percent. D require a 10 percent nominal yield to maturity on this
The bond has a investment, what
yield to maturity of 9.5 percent and a par value of $1,000. is the maximum price you should be willing to pay for
What is the bond?
the bond's current yield?
a. 6.36% A: $619
b. 2.15% B: $674
c. 8.95% C: $761
d. 9.14% D: $828
e. 10.21%
8. Assume that you wish to purchase a bond with a 30-year C
4. A 20-year bond with a par value of $1,000 has a 9 D maturity, an
percent annual annual coupon rate of 10 percent, a face value of $1,000,
coupon. The bond currently sells for $925. If the bond's and
yield to semiannual interest payments. If you require a 9 percent
maturity remains at its current rate, what will be the price nominal
of the yield to maturity on this investment, what is the
bond 5 years from now? maximum price you
a. $ 966.79 should be willing to pay for the bond?
b. $ 831.35 a. $905.35
c. $1,090.00 b. $1,102.74
d. $ 933.09 c. $1,103.19
e. $ 925.00 d. $1,106.76
e. $1,149.63
9. A bond has an annual 8 percent coupon rate, a maturity B 14. A corporate bond matures in 14 years. The bond has an E
of 10 years, a 8 percent
face value of $1,000, and makes semiannual payments. If semiannual coupon and a par value of $1,000. The bond
the price is is callable in
$934.96, what is the annual nominal yield to maturity on five years at a call price of $1,050. The price of the bond
the bond? today is
a. 8% $1,075. What are the bond's yield to maturity and yield
b. 9% to call?
c. 10% a. YTM = 14.29%; YTC = 14.09%
d. 11% b. YTM = 3.57%; YTC = 3.52%
e. 12% c. YTM = 7.14%; YTC = 7.34%
d. YTM = 6.64%; YTC = 4.78%
10. A bond has an annual 11 percent coupon rate, an annual B
e. YTM = 7.14%; YTC = 7.05%
interest payment
of $110, a maturity of 20 years, a face value of $1,000, 15. A corporate bond with a $1,000 face value pays a $50 C
and makes coupon every six
annual payments. It has a yield to maturity of 8.83 months. The bond will mature in ten years, and has a
percent. If the nominal yield to
price is $1,200, what rate of return will an investor expect maturity of 9 percent. What is the price of the bond?
to receive a. $ 634.86
during the next year? b. $1,064.18
c. $1,065.04
11. A bond matures in 12 years, and pays an 8 percent B
d. $1,078.23
annual coupon. The
e. $1,094.56
bond has a face value of $1,000, and currently sells for
$985. What is 16. One of the basic relationships in interest rate theory is E
the bond's current yield and yield to maturity? that, other
a. Current yield = 8.00%; yield to maturity = 7.92%. things held constant, for a given change in the required
b. Current yield = 8.12%; yield to maturity = 8.20%. rate of
c. Current yield = 8.20%; yield to maturity = 8.37%. return, the the time to maturity, the the change in
d. Current yield = 8.12%; yield to maturity = 8.37%. price.
e. Current yield = 8.12%; yield to maturity = 7.92%. a. longer; smaller.
b. shorter; larger.
12. Consider a $1,000 par value bond with a 7 percent B
c. longer; greater.
annual coupon. The
d. shorter; smaller.
bond pays interest annually. There are 9 years remaining
e. Answers c and d are correct.
until
maturity. What is the current yield on the bond assuming 17. Other things held constant, if a bond indenture contains B
that the a call
required return on the bond is 10 percent? provision, the yield to maturity that would exist without
a. 10.00% such a call
b. 8.46% provision will generally be _________________ the YTM with
c. 7.00% it.
d. 8.52% a. higher than
e. 8.37% b. lower than
c. the same as
13. A corporate bond has a face value of $1,000, and pays a C
d. either higher or lower, depending on the level of call
$50 coupon
premium, than
every six months (i.e., the bond has a 10 percent
e. unrelated to
semiannual coupon).
The bond matures in 12 years and sells at a price of
$1,080. What is
the bond's nominal yield to maturity?
a. 8.28%
b. 8.65%
c. 8.90%
d. 9.31%
e. 10.78%
18. Palmer Products has outstanding bonds with an annual A 22. Which of the following statements is most correct? E.
8 percent coupon. a. All else equal, long-term bonds have more interest
The bonds have a par value of $1,000 and a price of rate risk than
$865. The bonds short term bonds.
will mature in 11 years. What is the yield to maturity on b. All else equal, higher coupon bonds have more
the bonds? reinvestment risk than
a. 10.09% low coupon bonds.
b. 11.13% c. All else equal, short-term bonds have more
c. 9.25% reinvestment risk than do
d. 8.00% long-term bonds.
e. 9.89% d. Statements a and c are correct.
e. All of the statements above are correct.
19. Rollincoast Incorporated issued BBB bonds two years C
ago that provided a 23. Which of the following statements is most correct? C
yield to maturity of 11.5 percent. Long-term risk-free a. If a bond's yield to maturity exceeds its annual
government coupon, then the
bonds were yielding 8.7 percent at that time. The current bond will be trading at a premium.
risk premium b. If interest rates increase, the relative price change of
on BBB bonds versus government bonds is half what it a 10-year
was two years ago. coupon bond will be greater than the relative price
If the risk-free long-term governments are currently change of a 10-
yielding 7.8 year zero coupon bond.
percent, then at what rate should Rollincoast expect to c. If a coupon bond is selling at par, its current yield
issue new bonds? equals its
a. 7.8% yield to maturity.
b. 8.7% d. Both a and c are correct.
c. 9.2% e. None of the answers above is correct.
d. 10.2%
24. Which of the following statements is most correct? E
e. 12.9%
a. Junk bonds typically have a lower yield to maturity
20. Which of the following events would make it more likely A relative to
that a company investment grade bonds.
would choose to call its outstanding callable bonds? b. A debenture is a secured bond which is backed by
a. A reduction in market interest rates. some or all of the
b. The company's bonds are downgraded. firm's fixed assets.
c. An increase in the call premium. c. Subordinated debt has less default risk than senior
d. Answers a and b are correct. debt.
e. Answers a, b, and c are correct. d. All of the statements above are correct.
e. None of the statements above is correct.
21. Which of the following statements is most correct? A
a. All else equal, if a bond's yield to maturity increases, 25. Which of the following statements is most correct? D
its price a. Retiring bonds under a sinking fund provision is
will fall. similar to calling
b. All else equal, if a bond's yield to maturity increases, bonds under a call provision in the sense that bonds are
its current repurchased
yield will fall. by the issuer prior to maturity.
c. If a bond's yield to maturity exceeds the coupon rate, b. Under a sinking fund, bonds will be purchased on the
the bond will open market by
sell at a premium over par. the issuer when the bonds are selling at a premium and
d. All of the answers above are correct. bonds will be
e. None of the answers above is correct. 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.
26. Which of the following statements is most correct? E.
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.
27. You intend to purchase a 10-year, $1,000 face value bond that pays E
interest of $60 every 6 months. If your nominal annual required rate
of return is 10 percent with semiannual compounding, how much should
you be willing to pay for this bond?

a. $ 826.31
b. $1,086.15
c. $ 957.50
d. $1,431.49
e. $1,124.62