Question Details

Bonds A, B, and C all have a maturity of 10 years 



1.	Which of the following statements is CORRECT?

a.	If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
b.	The total yield on a bond is derived from dividends plus changes in the price of the bond.
c.	Bonds are generally regarded as being riskier than common stocks, and therefore bonds have higher required returns.
d.	Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
e.	The market price of a bond will always approach its par value as its maturity date approaches, provided the bond- required return remains constant.

2.	Which of the following statements is CORRECT?

a.	If a coupon bond is selling at par, its current yield equals its yield to maturity.
b.	If rates fall after its issue, a zero coupon bond could trade at a price above its maturity (or par) value.
c.	If rates fall rapidly, a zero coupon bond- expected appreciation could become negative.
d.	If a firm moves from a position of strength toward financial distress, its bonds’ yield to maturity would probably decline.
e.	If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
	
3.	Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.  Each of the bonds is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%.  Which of the following statements is CORRECT?

a.	If the bonds' market interest rate remains at 10%, Bond Z- price will be lower one year from now than it is today.
b.	Bond X has the greatest reinvestment rate risk.
c.	If market interest rates decline, the prices of all three bonds will increase, but Z's price will have the largest percentage increase.
d.	If market interest rates remain at 10%, Bond Z- price will be 10% higher one year from today.
e.	If market interest rates increase, Bond X- price will increase, Bond Z- price will decline, and Bond Y- price will remain the same.
	
4.	Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%.  Bond A- price exceeds its par value, Bond B- price equals its par value, and Bond C- price is less than its par value.  None of the bonds can be called.  Which of the following statements is CORRECT?

a.	If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
b.	Bond A has the most interest rate risk.
c.	If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
d.	If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
e.	Bond C sells at a premium over its par value.
	5.	Which of the following statements is CORRECT?

a.	10-year, zero coupon bonds have more reinvestment rate risk than 10-year, 10% coupon bonds.
b.	A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal).
c.	The total (rate of) return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year, divided by the bond's price at the beginning of the year.
d.	The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.
e.	A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.




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