Question 1

Which ONE of the following statements is true?

Accepted Answer

A)  The largest investors in corporate bonds are life insurance companies and pension funds. 
B)  The market for corporate bonds is thin. 
C)  Prices in the corporate bond market also tend to be more volatile. 
D)  All of the above are true. 
A)  The largest investors in corporate bonds are life insurance companies and pension funds. 
B)  The market for corporate bonds is thin. 
C)  Prices in the corporate bond market also tend to be more volatile. 
D)  All of the above are true.

Question 2

Which one of the following statements is NOT true?

Accepted Answer

A)  The relationship between yield and marketability is known as the term structure of interest rates. 
B)  The shape of the yield curve is not constant over time. 
C)  As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes. 
D)  Yield curves show graphically how market yields vary as term to maturity changes. 
A)  The relationship between yield and marketability is known as the term structure of interest rates. 
B)  The shape of the yield curve is not constant over time. 
C)  As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes. 
D)  Yield curves show graphically how market yields vary as term to maturity changes.

Question 3

Under what economic conditions would investors demand floating rate bonds?

Accepted Answer

As interest rates increase, the coupons

Question 4

If market prices reflect all relevant information about securities at a particular point in time, it is called informational efficiency.

Accepted Answer

A) True 
 B)False

Question 5

The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

Accepted Answer

A) True 
 B)False

Question 6

Which one of the following statements about zero coupon bonds is NOT true?

Accepted Answer

A)  Zero coupon bonds have no coupon payments but promise a single payment at maturity. 
B)  Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. 
C)  Zero coupon bonds make coupon payments but no principal payment at maturity. 
D)  All of the above statements are true. 
A)  Zero coupon bonds have no coupon payments but promise a single payment at maturity. 
B)  Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. 
C)  Zero coupon bonds make coupon payments but no principal payment at maturity. 
D)  All of the above statements are true.

Question 7

Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)

Accepted Answer

A)  $1,037 
B)  $1,085 
C)  $861 
D)  $923 
A)  $1,037 
B)  $1,085 
C)  $861 
D)  $923

Question 8

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 9

Which one of the following statements is NOT true?

Accepted Answer

A)  Weak-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. 
B)  Semistrong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. 
C)  Strong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. 
D)  None of the above. 
A)  Weak-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. 
B)  Semistrong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. 
C)  Strong-form market efficiency implies that investors who have access to inside or private information will be able to earn abnormal returns. 
D)  None of the above.

Question 10

Which of the following statements is true?

Accepted Answer

A)  For a given change in market interest rates, the prices of higher-coupon bonds change more that the prices of lower-coupon bonds. 
B)  If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. 
C)  If interest rates rise, bond prices will rise. 
D)  If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond. 
A)  For a given change in market interest rates, the prices of higher-coupon bonds change more that the prices of lower-coupon bonds. 
B)  If market interest rates rise, a 1-year bond will fall in value more than a 10-year bond. 
C)  If interest rates rise, bond prices will rise. 
D)  If market interest rates rise, a 10-year bond will fall in value more than a 1-year bond.

Question 11

Realized yield: Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.92. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

Accepted Answer

A)  17% 
B)  18% 
C)  9% 
D)  10% 
A)  17% 
B)  18% 
C)  9% 
D)  10%

Question 12

Which of the following statements is true?

Accepted Answer

A)  Downward sloping yield curves typically appear in the early to mid-period of a business expansion. 
B)  Interest rate risk always provides an upward bias to the slope of the yield curve. 
C)  If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping. 
D)  Downward or inverted yield curves are the type most commonly observed. 
A)  Downward sloping yield curves typically appear in the early to mid-period of a business expansion. 
B)  Interest rate risk always provides an upward bias to the slope of the yield curve. 
C)  If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping. 
D)  Downward or inverted yield curves are the type most commonly observed.

Question 13

Which ONE of the following statements is true?

Accepted Answer

A)  To secure the conversion option on a bond, bondholders would be willing to pay a premium. 
B)  The conversion ratio is set so that the firm's stock price must appreciate 15 to 20 percent before it is profitable to convert bonds into equity. 
C)  Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. 
D)  All of the above are true. 
A)  To secure the conversion option on a bond, bondholders would be willing to pay a premium. 
B)  The conversion ratio is set so that the firm's stock price must appreciate 15 to 20 percent before it is profitable to convert bonds into equity. 
C)  Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder. 
D)  All of the above are true.

Question 14

Yield to maturity: Jenny LePlaz is looking to invest in some five-year bonds that pay annual coupons of 6.25 percent and are currently selling at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

Accepted Answer

A)  9.5% 
B)  8.5% 
C)  6.5% 
D)  7.5% 
A)  9.5% 
B)  8.5% 
C)  6.5% 
D)  7.5%

Question 15

The three economic factors that determine the shape of the yield curve are

Accepted Answer

A)  the real rate of interest, the expected rate of inflation, and marketability. 
B)  the real rate of interest, the expected rate of inflation, and interest rate risk. 
C)  the nominal rate of interest, the expected rate of inflation, and interest rate risk. 
D)  the real rate of interest, the nominal rate of interest, and interest rate risk. 
A)  the real rate of interest, the expected rate of inflation, and marketability. 
B)  the real rate of interest, the expected rate of inflation, and interest rate risk. 
C)  the nominal rate of interest, the expected rate of inflation, and interest rate risk. 
D)  the real rate of interest, the nominal rate of interest, and interest rate risk.

Question 16

Yield to maturity: 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?

Accepted Answer

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

Question 17

If a market is strong-form market efficient, one would be able to beat the market with inside information.

Accepted Answer

A) True 
 B)False

Question 18

Which one of the following statements is NOT true?

Accepted Answer

A)  The realized yield is the return earned on a bond given the cash flows actually received by the investor. 
B)  The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity. 
C)  It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond. 
D)  All of the above are true. 
A)  The realized yield is the return earned on a bond given the cash flows actually received by the investor. 
B)  The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity. 
C)  It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond. 
D)  All of the above are true.

Question 19

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

Accepted Answer

A) True 
 B)False

Question 20

Bond price: 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? (Round 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.

Which ONE of the following statements is true?

Which one of the following statements is NOT true?

Under what economic conditions would investors demand floating rate bonds?

If market prices reflect all relevant information about securities at a particular point in time, it is called informational efficiency.

The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

Which one of the following statements about zero coupon bonds is NOT true?

Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)

Which of the following statements is true?

Which one of the following statements is NOT true?

Which of the following statements is true?

Realized yield: Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.92. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

Which of the following statements is true?

Which ONE of the following statements is true?

Yield to maturity: Jenny LePlaz is looking to invest in some five-year bonds that pay annual coupons of 6.25 percent and are currently selling at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

The three economic factors that determine the shape of the yield curve are

Yield to maturity: 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?

If a market is strong-form market efficient, one would be able to beat the market with inside information.

Which one of the following statements is NOT true?

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

The Financial Manager and the Company

The Financial System and the Level of Interest Rates

Financial Statements, Cash Flows and Tax

Analysing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Share Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics and Capital Rationing

The Cost of Capital

Working Capital Management

How Companies Raise Capital

Capital Structure Policy

Dividends and Dividend Policy

Business Formation, Growth and Valuation

Strategic Financial Planning and Forecasting

Options and Corporate Finance

International Financial Management

Filters

Exam 8: Bond Valuation and the Structure of Interest Rates

Which ONE of the following statements is true?

Which one of the following statements is NOT true?

Under what economic conditions would investors demand floating rate bonds?

If market prices reflect all relevant information about securities at a particular point in time, it is called informational efficiency.

The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

Which one of the following statements about zero coupon bonds is NOT true?

Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)

Which of the following statements is true?

Which one of the following statements is NOT true?

Which of the following statements is true?

Realized yield: Rachel McGovern bought a 10-year bond for $921.77 seven years ago. The bond pays a coupon of 15 percent semiannually. Today, the bond is priced at $961.92. If she sold the bond today, what would be her realized yield? (Round to the nearest percent.)

Which of the following statements is true?

Which ONE of the following statements is true?

Yield to maturity: Jenny LePlaz is looking to invest in some five-year bonds that pay annual coupons of 6.25 percent and are currently selling at $912.34. What is the current market yield on such bonds? (Round to the closest answer.)

The three economic factors that determine the shape of the yield curve are

Yield to maturity: 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?

If a market is strong-form market efficient, one would be able to beat the market with inside information.

Which one of the following statements is NOT true?

Convertible bonds can be converted into shares of common stock at some predetermined ratio at the discretion of the bondholder.

The Financial Manager and the Company

The Financial System and the Level of Interest Rates

Financial Statements, Cash Flows and Tax

Analysing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Share Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics and Capital Rationing

The Cost of Capital

Working Capital Management

How Companies Raise Capital

Capital Structure Policy

Dividends and Dividend Policy

Business Formation, Growth and Valuation

Strategic Financial Planning and Forecasting

Options and Corporate Finance

International Financial Management

Filters