Deck 21: Bond Analysis

Question 1

Most corporate bonds have a call provision that enables the issuer to ___ the bond before maturity.

A) redeem
B) default on
C) sell
D) reissue

Answer 1

A

Question 2

______ is the set of yields-to-maturity among bonds that possess different degrees of default risk but are similar with respect to other attributes.

A) Yield spread
B) The reinvestment rate
C) The risk structure
D) Promised yield-to-maturity

Answer 2

C

Question 3

A high coupon bond is likely to be called by the issuing firm if

A) required yields rise.
B) it has a high call premium.
C) it has a low rating.
D) required yields fall.

Answer 3

D

Question 4

The differential between the yields of two bonds is usually called the

A) coupon rate.
B) call and put provisions.
C) term structure.
D) yield spread.

Question 5

______ bonds have a tax advantage because the tax is deferred until the bond is sold or matures if the bonds were originally sold at par.

A) Junk bonds
B) Market discount
C) Fallen angel
D) Speculative-grade

Question 6

If a bond's yield-to-maturity is greater than the appropriate yield-to-maturity, the bond

A) could have a positive or negative NPV.
B) will have a positive NPV.
C) will have an intrinsic value less than its market price.
D) will have an intrinsic value equal to its market price.

Question 7

The set of yields of bonds of different maturities is known as the

A) coupon rate
B) call and put provisions
C) term structure
D) marketability

Question 8

High-yield bonds are most often referred to as

A) junk bonds.
B) fallen angels.
C) long-term securities.
D) fixed-income securities.

Question 9

The ______ is the difference in the promised yield-to-maturity of two bonds.

A) yield margin
B) unrestricted yield
C) bid-ask spread
D) yield spread

Question 10

Bond ratings by ______ are often interpreted as an indication of the likelihood of default by the issuer.

A) Standard & Poor's Corporation
B) Moody's Investors Service, Inc.
C) Standard & Poor's and Moody's
D) Dow Jones Inc.

Question 11

The _______ method of bond valuation states that the intrinsic value of the bond is based on the discounted value of the cash flows that is expected to be received in the future from owning the bond.

A) capitalization of income
B) weighted-average
C) moving-average
D) price-earnings

Question 12

The bond analysis method by which an analyst compares the intrinsic value to the current market price is

A) internal rate of return.
B) average rate of return.
C) net present value.
D) profitability index.

Question 13

Investment-grade bonds are bonds that have been

A) called fallen angels in previous periods.
B) rated as highly marketable.
C) ranked just below speculative-grade bonds.
D) assigned one of the top four ratings by S&P and Moody's.

Question 14

An actively traded corporate bond will likely

A) have a large bid-ask spread.
B) be rated lower by Moody's.
C) pose a large risk for the dealer.
D) have a lower yield-to-maturity than a less liquid bond.

Question 15

The rate that equates a noncallable bond's future cash flows with the current price is the

A) current yield.
B) yield to call.
C) actual yield-to-maturity.
D) coupon yield.

Question 16

Bond A has a yield-to-maturity of 8%; Bond B at 6.5%. The yield spread in basis points is

A) 1500.
B) 15.
C) .15.
D) 150.

Question 17

For corporate bonds, better ratings are generally associated with ____ financial leverage.

A) higher
B) lower
C) risk-neutral
D) zero

Question 18

A $1,000 bond has a coupon rate of 7%, a market price of $960, and a call price of $1,080. Its call premium is

A) $0.
B) $80.
C) $70.
D) $10.

Question 19

One of two large organizations that rate corporate bonds is

A) Wall Street Journal.
B) Standard and Poor's.
C) Securities and Exchange Commission.
D) Federal Reserve.

Question 20

Intrinsic bond value refers to the bond's

A) net present value.
B) "true" value.
C) internal rate of return.
D) promised yield to maturity.

Question 21

The price movements of low rated preferred stocks are most closely related to the price movements of

A) common stock.
B) treasury bills.
C) speculative corporate bonds.
D) investment grade corporate bonds.

Question 22

Beaver's study found that the ratio of net cash flow to total debt can be useful to forecast a bond's default for up to

A) 2 years before.
B) 6 months before.
C) 5 years before.
D) 1 year before.

Question 23

Suppose and investor wishes to buy a 30-year Suppose and investor wishes to buy a 30-year bond for one year. The current price is $1,000 and a coupon of $80 is paid at the end of each year. The yield to maturity is 8%. Immediately after he buys the bond, the yield to maturity rises to 9%. The profit or loss in percent of the bond is

A) 9.82%
B) -10.27%
C) -8.53%
D) -9.91%

Question 24

Altman's Z score to forecast bond defaults does not include the ratio of

A) sales/total assets.
B) earnings before interest and taxes/total assets.
C) retained earnings/total assets.
D) sales/working capital.

Question 25

Highly rated corporate bonds tend to have

A) subordination to other debt issues.
B) large financial leverage.
C) smaller asset base.
D) low debt/total assets.

Question 26

When the degree of uncertainty about the economy increases, the spread in the promised yield-to-maturity between high and low-rated bonds tends to

A) decrease.
B) increase or decrease depending on the coupon.
C) widen.
D) reverse the sign of the spread.

Question 27

Fisher's study of 366 bond issues found that a larger yield spread was associated with a

A) shorter time with the company having defaulted.
B) smaller market value of debt.
C) smaller amount of historic earnings.
D) larger coefficient of variation of earnings.

Question 28

What is the yield to maturity of a corporate bond with a coupon rate of 6%, a par of $1,000, a term of 10 years, and a current price of $929.72?

A) 6%
B) 6.52%
C) 7%
D) 7.25%

Question 29

Altman's study of bond mortality found

A) most defaults occur within 2 years of issuance.
B) in general, the lower the rating at the time of issue, the higher the default rate.
C) that no AAA rated bonds have defaulted.
D) AA bonds are the best investment based on lack of defaults.

Question 30

A bond that was issued with a rating of AA and is now rated at B is referred to as a

A) dying diva.
B) sure thing.
C) fallen angel.
D) Boesky special.

Question 31

Among similar corporate bonds, the one with the highest market price would be the one with a rating of

A) A.
B) CCC.
C) B.
D) BBB.

Question 32

Consider a twenty-year bond with a 9% coupon that has a yield to maturity of 8.5%. If interest rates remain constant, one year from now the price of this bond will be

A) the same
B) higher
C) lower
D) cannot be determined

Question 33

Bond rating systems

A) report levels of risk relative to other bonds.
B) have little relationship to the actual risk.
C) reclassify all bonds when the economy changes.
D) maintain a fixed yield spread between rating levels.

Question 34

The yield on a one-year corporate bond is 8.6% and the yield on a one-year municipal bond is 5.75%. If the bonds have the same default risk and the marginal tax rate is 33%, which bond is preferable?

A) the corporate bond because it after-tax yield is higher
B) the municipal bond because its interest is not taxable
C) the corporate bond because its before-tax yield is higher
D) the municipal bond because its effective yield is higher

Question 35

The coupon rate on a municipal bond is 6.7%, and the rate on a corporate bond is 10%. Both bonds sell at par. The marginal tax rate at which an investor would be indifferent between the two bonds is

A) 30%
B) 28%
C) 40%
D) 33%

Question 36

Related to a bond rating change, substantive price changes tend to occur

A) from eighteen to seven months before.
B) from six months before to six months after.
C) within three months after the announcement.
D) one week before.

Question 37

An example of an investment grade corporate bond would be one rated

A) B.
B) D.
C) BBB.
D) BB.

Question 38

The major factor resulting in a decrease in a bond's rating is

A) decrease in marketability.
B) increase in default risk.
C) the call provision.
D) an increase in its coupon rate.

Question 39

The yield-to-maturity on a default-free, similar bond is 6%. If there is a risk premium of 3% and a default premium of 2% on the bond, the promised yield-to-maturity is

A) 11%.
B) 8%.
C) 4%.
D) 9%.

Question 40

An attempt to relate bond yields from 1968-1991 to the Standard and Poor's 500 found

A) no relationship.
B) investment grade bonds had the largest beta.
C) bond yields were more volatile than stock yields.
D) lowest rated bonds had the largest beta.

Question 41

A widening of the yield spread between the yield-to-maturity on a BBB-rate bond and that on a AAA-rated bond indicates

A) an increase in the default premiums of the BBB class.
B) an increase in the default premiums of two bond classes.
C) a decrease in the level of market risk aversion.
D) the economic climate has turned more favorable.

Question 42

Why are the bonds with investment grade ratings generally not directly tied to the financial success of the issuing firm?

A) the ability of the firm to make full and timely interest payments is more tenuous
B) the returns are immediately not related to the resources of the firm
C) the firms have the resources to weather possible financial problems
D) the returns are not insulated from the near-term financial performance of the issuer.

Question 43

A bond is currently selling for $910 and has a remaining life of three years. It makes an annual coupon payment of $60 and has a par of $1,000. If the yield to maturity is 9%, what is the net present value of the bond?

A) $24.06
B) $14.06
C) $9.83
D) $18.57

Question 44

A bond has a promised yield-to-maturity of 10% with a default premium of 4% and a risk premium of 2%. Its expected yield-to-maturity is

A) 6%.
B) 4%.
C) 12%.
D) 16%.

Question 45

A bond which pays a 12% coupon annually with a par of $1,000 matures in five years with a yield to maturity of 10%. If the bond currently sells for $1,085, what is its net present value?

A) $5.82
B) $17.20
C) $9.18
D) $14.18

Question 46

A bond has an expected yield-to-maturity of 12% and a 5% probability of default. If the bond defaults, the bondholder should receive 75% of the market value. The bond would be fairly priced if its default premium were

A) 1.9%.
B) 2.1%.
C) 2.7%.
D) 3.6%.

Question 47

A bond will pay $40 of interest at the end of each of the next five years, plus the principal of $1,000 at the end of year five. If the required yield-to-maturity is 5% and the present market price is $935, the NPV is

A) -$22.
B) $41.
C) +$ 8.
D) +$22.

Question 48

A bond will pay $75 in interest at the end of each of the next four years plus the $1,000 principal at the end of four years. If the yield-to-maturity should be 6%, the bond's intrinsic value is

A) $1,052.
B) $1,123.
C) $ 848.
D) $1,014.

Question 49

A bond will pay $50 in interest at the end of each of the next four years, plus the principal of $1,000 at the end of the fourth year. If the required yield-to-maturity is 6% and the present price is $980, the bond's NPV is

A) -$41.
B) +$41.
C) -$15.
D) -$33.

Question 50

A bond will pay $80 in interest at the end of each of the next six years, plus the $1,000 principal at the end of the sixth year. If the required yield-to-maturity is 10%, the intrinsic value is

A) $847.
B) $913.
C) $952.
D) $988.

Question 51

A bond will pay $75 in interest at the end of each of the next four years plus the $1,000 principal at the end of four years. If the yield-to-maturity should be 6%, the bond's intrinsic value is

A) treasury issue rates.
B) the investor's personal return requirement.
C) S and P's 500 dividend yield rates.
D) spot rates.

Question 52

Bonds with _____ default risk and ________ marketability have higher yield spreads.

A) higher, less
B) lower, more
C) slightly higher, more
D) higher, slightly less

Question 53

Fundamental bond analysis would lead an investor to

A) buy a bond before a rating upgrade.
B) use a passive policy since the market is efficient.
C) buy a bond before a rating downgrade.
D) ignore bond ratings.

Question 54

A bond has an expected yield-to-maturity of 8% and a 10% probability of default. If the bond defaults, the bondholder should receive 80% of the market value. The bond would be fairly priced if its default premium were

A) 2.4%.
B) 6.2%.
C) 3.1%
D) 5.4%.

Question 55

It has been said that agency ratings indicate relative levels of risk instead of absolute levels. Which of the following statements explains this position?

A) Bonds are reclassified as economic conditions change.
B) The probability of default does not change as economic conditions change.
C) One would expect that yield spreads between classes of bonds would not adjust during times of economic change.
D) Bond ratings do not change with economic conditions, but the probability of default changes across rating classes does.

Question 56

A bond's expected return should be related to its

A) unique risk.
B) total company assets.
C) systematic risk.
D) unsystematic risk.

Question 57

A bond has an expected yield-to-maturity of 10% and a 5% probability of default. If the bond defaults, the bondholder should receive 90% of the market value. If fairly priced, the bond should have a promised yield-to-maturity of

A) 11.1%.
B) 10%.
C) 9.4%.
D) 10.3%.

Question 58

A 1% decline in the yield to maturity will have the greatest effect on the price of the bond with a

A) 15-year maturity, selling at $900
B) 15-year maturity, selling at $1,000
C) 20-year maturity, selling at $900
D) 20-year maturity, selling at $1,000

Question 59

A nine-year bond has a yield to maturity of 10% and a modified duration of 6.54 years. If the market yield changes by 50 basis points, the bond’s expected price change is

A) 3.27%
B) 3.66%
C) 5.00%
D) 6.54%

Question 60

A bond has an expected yield-to-maturity of 6% and an 8% probability of default. If the bond defaults, the bondholder should receive 80%of the market value. If fairly priced, the bond should have a promised yield-to-maturity of

A) 3.7%.
B) 9.2%.
C) 5.8%.
D) 8.3%.

Question 61

A bond will pay $80 in interest at the end of each of the next three years, plus $1,000 at the end of the third year. If it has a present market price of $950, its yield-to-maturity is

A) 8.5%.
B) 9.4%.
C) 10%.
D) 10.5%.

Question 62

A bond will pay $70 of interest at the end of each of the next three years, plus $1,000 at the end of year three. If its present market price is $1,040, its yield-to-maturity is

A) 5.5%.
B) 4.9%.
C) 6.4%.
D) 6.8%.