Question Details

Bond A has a 9% annual coupon, while Bond B has a 7% 



1.	Which of the following statements is CORRECT?
a.	The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.
b.	The most likely explanation for an inverted yield curve is that investors expect inflation to increase.
c.	The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.
d.	If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.
e.	Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.
	
2.	Short Corp. just issued bonds that will mature in 10 years, and Long Corp. issued bonds that will mature in 20 years.  Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid.  Further, assume that the Treasury yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for T-bonds but not necessarily for corporate bonds.  Under these conditions, which of the following statements is correct?

a.	If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short- bonds must under all conditions have the lower yield.
b.	If the Treasury yield curve is downward sloping, Long- bonds must under all conditions have the lower yield.
c.	If the yield curve for Treasury securities is upward sloping, Long- bonds must under all conditions have a higher yield than Short- bonds.
d.	If the yield curve for Treasury securities is flat, Short- bond must under all conditions have the same yield as Long- bonds.
e.	If Long- and Short- bonds have the same default risk, their yields must under all conditions be equal.
	
3.	Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon.  Both bonds have the same maturity, a face value of $1,000, an 8% yield to maturity, and are noncallable.  Which of the following statements is CORRECT?

a.	Bond A- capital gains yield is greater than Bond B- capital gains yield.
b.	Bond A trades at a discount, whereas Bond B trades at a premium.
c.	If the yield to maturity for both bonds remains at 8%, Bond A- price one year from now will be higher than it is today, but Bond B- price one year from now will be lower than it is today.
d.	If the yield to maturity for both bonds immediately decreases to 6%, Bond A- bond will have a larger percentage increase in value.
e.	Bond A- current yield is greater than that of Bond B.
	
4.	Which of the following statements is CORRECT?

a.	Two bonds have the same maturity and the same coupon rate.  However, one is callable and the other is not.  The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.
b.	A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.
c.	Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.
d.	Two bonds have the same maturity and the same coupon rate.  However, one is callable and the other is not.  The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.
e.	The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity.  Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
	
5.	Which of the following statements is CORRECT?

a.	Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
b.	A company's subordinated debt has less default risk than its senior debt.
c.	Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.
d.	Junk bonds typically provide a lower yield to maturity than investment-grade bonds.
e.	A debenture is a secured bond that is backed by some or all of the firm- fixed assets.




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