c. If a coupon bond is selling at pa

29 Jun c. If a coupon bond is selling at pa

Question

[i]. One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the the time to maturity, the the change in price.

a. longer; smaller.

b. shorter; larger.

c. longer; greater.

d. shorter; smaller.

e. Answers c and d are correct.

[ii]. Which of the following statements is most correct?

a. All else equal, long-term bonds have more interest rate risk than short term bonds.

b. All else equal, higher coupon bonds have more reinvestment risk than low coupon bonds.

c. All else equal, short-term bonds have more reinvestment risk than do long-term bonds.

d. Statements a and c are correct.

e. All of the statements above are correct.

[iii]. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

a. A reduction in market interest rates.

b. The company’s bonds are downgraded.

c. An increase in the call premium.

d. Answers a and b are correct.

e. Answers a, b, and c are correct.

[iv]. Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be _________________ the YTM with it.

a. higher than

b. lower than

c. the same as

d. either higher or lower, depending on the level of call premium, than

e. unrelated to

[v]. 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 answers above (all may reduce the required coupon rate).

[vi]. 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 answers above are correct.

e. None of the answers above is correct.

[vii]. 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. Both a and c are correct.

e. None of the answers above is correct.

[viii]. 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. Both answers a and c are correct.

e. All of the answers above are correct.

[ix]. Which of the following statements is most correct?

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.