Question Details

Which of the following bonds would have the greatest percentage increase 



1.	Which of the following statements is correct?			
a.	You hold two bonds, a 10-year, zero-coupon bond and a 10-year bond that pays a 6% annual coupon.  The same market rate, 6%, applies to both bonds.  If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.
b.	The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
c.	You hold two bonds.  One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon.  The same market rate, 6%, applies to both bonds.  If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
d.	The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant.
e.	The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.

2.	Which of the following events would make it more likely that a company would call its outstanding callable bonds?					
a.	The company- bonds are downgraded.
b.	Market interest rates rise sharply.
c.	Market interest rates decline sharply.
d.	The company's financial situation deteriorates significantly.
e.	Inflation increases significantly.

3.	Three $1,000 face value, 10-year to maturity, non-callable bonds have the same amount of risk, hence their YTMs are equal.  Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon.  Bond 10 sells at par.  Assuming that interest rates remain constant for the next 10 years, which of the following statements is correct?				a.	Bond 8- current yield will increase each year.
b.	Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
c.	Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year.
d.	Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year.
e.	Over the next year, Bond 8- price is expected to decrease, Bond 10- price is expected to stay the same, and Bond 12- price is expected to increase.

4.	A 12-year bond has an annual coupon of 9%.  The coupon rate will remain fixed until the bond matures.  The bond has a yield to maturity of 7%.  Which of the following statements is correct?					
a.	If market interest rates decline, the price of the bond will also decline.
b.	The bond is currently selling at a price below its par value.
c.	If market interest rates remain unchanged, the bond- price one year from now will be lower than it is today.
d.	The bond should currently be selling at its par value.
e.	If market interest rates remain unchanged, the bond- price one year from now will be higher than it is today.

5.	Which of the following bonds would have the greatest percentage increase in value if all interest rates in the economy fall by 1%?			
a.	10-year, zero coupon bond.
b.	20-year, 10% coupon bond.
c.	20-year, 5% coupon bond.
d.	1-year, 10% coupon bond.
e.	20-year, zero coupon bond.



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