Question Details

Assume that the current corporate bond yield curve is upward sloping 



1.	Which of the following statements is CORRECT?

a.	The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield. 
b.	The market value of a bond will always approach its par value as its maturity date approaches.  This holds true even if the firm has filed for bankruptcy.
c.	Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
d.	The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
e.	The expected capital gains yield on a bond will always be zero or positive because no investor would purchase a bond with an expected capital loss.
	
2.	Which of the following statements is CORRECT?

a.	If a coupon bond is selling at a premium, then the bond's current yield is zero.
b.	If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.
c.	If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.
d.	The current yield on Bond A exceeds the current yield on Bond B.  Therefore, Bond A must have a higher yield to maturity than Bond B.
e.	If a coupon bond is selling at par, its current yield equals its yield to maturity.
	
3.	Which of the following statements is CORRECT?
a.	If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of their coupon rates.
b.	All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.
c.	All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
d.	If a bond- yield to maturity exceeds its coupon rate, the bond- price must be less than its maturity value.
e.	If a bond- yield to maturity exceeds its coupon rate, the bond- current yield must be less than its coupon rate.
	4. Which of the following statements is CORRECT?
a.	If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the Treasury yield curve will have an upward slope.
b.	If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.
c.	Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.
d.	If the maturity risk premium (MRP) equals zero, the yield curve must be flat.
e.	The yield curve can never be downward sloping.
	
5.	Assume that the current corporate bond yield curve is upward sloping .  Under this condition, then we could be sure that
a.	Inflation is expected to decline in the future.
b.	The economy is not in a recession.
c.	Long-term bonds are a better buy than short-term bonds.
d.	Maturity risk premiums could help to explain the yield curve- upward slope.
e.	Long-term interest rates are more volatile than short-term rates.




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