Question Multiple Choice Identify the choice that best completes the statement or answers the question.

29 Jun Question Multiple Choice Identify the choice that best completes the statement or answers the question.

Question
Multiple Choice

Identify the choice that best completes the statement or answers the question.

1) Ken Williams Ventures’ recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell?

A.

$801.80

B.

$814.74

C.

$828.81

D.

$830.53

E.

$847.86

2) Brown Enterprises’ bonds currently sell for $1,025. They have a 9-year maturity, an annual coupon of $80, and a par value of $1,000. What is their yield to maturity?

A.

6.87%

B.

7.03%

C.

7.21%

D.

7.45%

E.

7.61%

3) Kholdy Inc’s bonds currently sell for $1,275. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. 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 the bond’s YTM and its YTC?

A.

1.48%

B.

1.54%

C.

1.68%

D.

1.82%

E.

1.91%

4) A 20-year, $1,000 par value bond has a 9% annual coupon. The bond currently sells for $925. If the yield to maturity remains at its current rate, what will the price be 5 years from now?

A.

$933.09

B.

$941.86

C.

$951.87

D.

$965.84

E.

$978.40

5) Which of the following statements is CORRECT?

A.

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.

B.

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.

C.

The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

D.

You hold a 10-year, zero coupon, bond and a 10-year bond that has 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 larger percentage decline.

E.

You hold a 10-year, zero coupon, bond and a 10-year bond that has 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.

6) Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

A.

Market interest rates decline sharply.

B.

The company’s bonds are downgraded.

C.

Market interest rates rise sharply.

D.

Inflation increases significantly.

E.

The company’s financial situation deteriorates significantly.

7) Which of the following would be most likely to increase the coupon rate that is required to enable a bond to be issued at par?

A.

Adding a call provision.

B.

Adding additional restrictive covenants that limit management’s actions.

C.

Adding a sinking fund.

D.

The rating agencies change the bond’s rating from Baa to Aaa.

E.

Making the bond a first mortgage bond rather than a debenture.

8) A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?

A.

The bond is currently selling at a price below its par value.

B.

If market interest rates decline, the price of the bond will also decline.

C.

If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today.

D.

If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today.

E.

The bond should currently be selling at its par value.

9) Which of the following statements is 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 its coupon rate, the bond will sell at a premium over par.

D.

If a bond’s yield to maturity exceeds its coupon rate, the bond will sell at par.

E.

If a bond’s required rate of return exceeds its coupon rate, the bond will sell at a premium.

10) A bond that matures in 12 years has a 9% semiannual coupon and a face value of $1,000. The bond has a