Question 1

What economic factors affect the level and the shape of the yield curve? Explain.

Accepted Answer

Three economic factors affect the shape

Question 2

Downward-slopping yield curves are observed

Accepted Answer

A)  when the economy is growing. 
B)  when the economy is stagnant. 
C)  before the beginning of a recession. 
D)  None of the above. 
A)  when the economy is growing. 
B)  when the economy is stagnant. 
C)  before the beginning of a recession. 
D)  None of the above.

Question 3

Which one of the following statements is NOT true?

Accepted Answer

A)  Interest rate risk is the risk that bond prices will change as interest rates change. 
B)  Interest rate changes and bond prices are inversely related. 
C)  As interest rates increase, bond prices increase. 
D)  Long-term bonds are more price volatile than short-term bonds of similar risk. 
A)  Interest rate risk is the risk that bond prices will change as interest rates change. 
B)  Interest rate changes and bond prices are inversely related. 
C)  As interest rates increase, bond prices increase. 
D)  Long-term bonds are more price volatile than short-term bonds of similar risk.

Question 4

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

Accepted Answer

A) True 
 B)False

Question 5

All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is true?

Accepted Answer

A)  Investment grade bonds are those rated single B and higher. 
B)  Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. 
C)  Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk. 
D)  All else equal, the higher a bond's rating the higher the coupon rate. 
A)  Investment grade bonds are those rated single B and higher. 
B)  Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. 
C)  Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk. 
D)  All else equal, the higher a bond's rating the higher the coupon rate.

Question 7

Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)

Accepted Answer

A)  11% 
B)  12% 
C)  13% 
D)  14% 
A)  11% 
B)  12% 
C)  13% 
D)  14%

Question 8

Which of the following statements is true?

Accepted Answer

A)  Long-term bonds have lower price volatility than short-term bonds of similar risk. 
B)  As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline. 
C)  All other things being equal, short-term bonds are riskier than long-term bonds. 
D)  Interest rate risk decreases as maturity increases. 
A)  Long-term bonds have lower price volatility than short-term bonds of similar risk. 
B)  As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline. 
C)  All other things being equal, short-term bonds are riskier than long-term bonds. 
D)  Interest rate risk decreases as maturity increases.

Question 9

Kevin Oh is planning to sell a bond that he owns. This bond has four years to maturity and pays a coupon of 10 percent on a semiannual basis. Similar bonds in the current market will yield 12 percent. What will be the price that he will get for his bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $1,044 
B)  $938 
C)  $970 
D)  $1,102 
A)  $1,044 
B)  $938 
C)  $970 
D)  $1,102

Question 10

Which of the following statements is true?

Accepted Answer

A)  The lower the transaction costs are, the greater a security's marketability. 
B)  The interest rate, or yield, on a security varies with its degree of marketability. 
C)  U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities. 
D)  All of the above are true. 
A)  The lower the transaction costs are, the greater a security's marketability. 
B)  The interest rate, or yield, on a security varies with its degree of marketability. 
C)  U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities. 
D)  All of the above are true.

Question 11

Which of the following statements is true of convertible bonds?

Accepted Answer

A)  The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. 
B)  The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. 
C)  Firms that issue convertible bonds can do so at a lower interest rate. 
D)  The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock. 
A)  The most significant disadvantage to a corporation of issuing convertible bonds is that they increase the cash that the firm must use to make interest payments. 
B)  The typical conversion ratio is set so that the firm's stock price must appreciate 5% or less before it is profitable for the holder to convert the bond to stock. 
C)  Firms that issue convertible bonds can do so at a lower interest rate. 
D)  The typical issue of convertible bonds allows the holder of the bond to convert it to preferred stock.

Question 12

Upward-sloping yield curves often occur before the beginning of recession.

Accepted Answer

A) True 
 B)False

Question 13

Which one of the following statements is NOT true?

Accepted Answer

A)  Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. 
B)  Corporate bonds are more marketable than the securities that have higher daily trading volumes. 
C)  The market for corporate bonds is thin compared to the market for corporate stocks. 
D)  The largest investors in corporate bonds are life insurance companies and pension funds. 
A)  Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. 
B)  Corporate bonds are more marketable than the securities that have higher daily trading volumes. 
C)  The market for corporate bonds is thin compared to the market for corporate stocks. 
D)  The largest investors in corporate bonds are life insurance companies and pension funds.

Question 14

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:

Accepted Answer

A)  at a price equal to its face value. 
B)  at a price greater than its face value. 
C)  at a price less than its face value. 
D)  None of the above is true. 
A)  at a price equal to its face value. 
B)  at a price greater than its face value. 
C)  at a price less than its face value. 
D)  None of the above is true.

Question 15

Which of the following statements is true?

Accepted Answer

A)  The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. 
B)  The market for corporate bonds is thin compared to the market for corporate stocks. 
C)  Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes. 
D)  All of the above are true. 
A)  The largest investors in corporate bonds are institutional investors such as life insurance companies and pension funds. 
B)  The market for corporate bonds is thin compared to the market for corporate stocks. 
C)  Prices in the corporate bond market tend to be more volatile than prices of securities sold in markets with greater trading volumes. 
D)  All of the above are true.

Question 16

Jeremy Kohn is planning to invest in a 10-year bond that pays a 12 percent coupon. The current market rate for similar bonds is 9 percent. Assume semiannual coupon payments. What is the maximum price that should be paid for this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $951 
B)  $882 
C)  $1,033 
D)  $1,195 
A)  $951 
B)  $882 
C)  $1,033 
D)  $1,195

Question 17

Jane Thorpe has been offered a seven-year bond issued by Barone, Inc., at a price of $943.22. The bond has a coupon rate of 9 percent and pays the coupon semiannually. Similar bonds in the market will yield 10 percent today. Should she buy the bonds at the offered price? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  Yes, the bond is worth more at $1,015. 
B)  No, the bond is only worth $921. 
C)  Yes, the bond is worth more at $951. 
D)  No, the bond is only worth $912. 
A)  Yes, the bond is worth more at $1,015. 
B)  No, the bond is only worth $921. 
C)  Yes, the bond is worth more at $951. 
D)  No, the bond is only worth $912.

Question 18

Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)

Accepted Answer

A)  13.4% 
B)  6.81% 
C)  6.70% 
D)  None of the above 
A)  13.4% 
B)  6.81% 
C)  6.70% 
D)  None of the above

Question 19

Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Round your percentage answer to two decimal places.)

Accepted Answer

A)  7.60% 
B)  8.68% 
C)  9.66% 
D)  10.67% 
A)  7.60% 
B)  8.68% 
C)  9.66% 
D)  10.67%

What economic factors affect the level and the shape of the yield curve? Explain.

Downward-slopping yield curves are observed

Which one of the following statements is NOT true?

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

Which of the following statements is true?

Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true of convertible bonds?

Upward-sloping yield curves often occur before the beginning of recession.

Which one of the following statements is NOT true?

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:

Which of the following statements is true?

Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)

Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Round your percentage answer to two decimal places.)

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

Analyzing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

Filters

Exam 8: Bond Valuation and the Structure of Interest Rates

What economic factors affect the level and the shape of the yield curve? Explain.

Downward-slopping yield curves are observed

Which one of the following statements is NOT true?

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

Which of the following statements is true?

Alice Trang is planning to buy a six-year bond that pays a coupon of 10 percent semiannually. Given the current price of $878.21, what is the yield to maturity on these bonds? (Round to the closest answer.)

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true of convertible bonds?

Upward-sloping yield curves often occur before the beginning of recession.

Which one of the following statements is NOT true?

If a bond's coupon rate is equal to the market rate of interest, then the bond will sell:

Which of the following statements is true?

Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)

Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond? (Round your percentage answer to two decimal places.)

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

Analyzing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

Filters