1. Menninger Corp's bonds currently sell for $875 and have a par value of $1,000. They pay a $65 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What is their YTC?
a. 7.75%
b. 8.32%
c. 9.41%
d. 10.66%
2. We can be sure that the interest and principal on Treasury bonds will be paid. Therefore, an investment in 20-year T-bonds is riskless. True or false?
a. True
b. False
3. Bankston Oil's bonds have a sinking fund that requires it to retire $1 million (par value) of its bonds each year. Under the bond's indenture, Bankston can either call $1 million of the bonds at par or else purchase the required bonds on the open market. Interest rates have declined sharply since the bonds were issued. In this case, Bankston should buy bonds on the open market rather than call them. True or false?
a. True
b. False
4. Which of the following statements best describes Walker's bond?
a. This bond is a premium bond since its price is greater than its par value of $1,000.
b. This bond is a par value bond since its price is equal to its par value of $1,000.
c. This bond is a discount bond since its price is less than its par value of $1,000.
5. Menninger Corp's bonds currently sell for $875 and have a par value of $1,000. They pay a $65 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What return would an investor in these bonds most likely earn, if interest rates remain at current levels for the foreseeable future?
a. 7.75%
b. 8.32%
c. 9.41%
d. 10.66%
e. 11.59%
6. Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What is their YTM?
a. 5.95%
b. 6.49%
c. 6.71%
d. 7.08%
e. 7.34%
7. Lei Corporation's bonds have a 30-year maturity, a 10% semiannual coupon ($50 coupon payments are made every six months), a face value of $1,000, and cannot be called. The going nominal annual interest rate (rd) for similar semiannual payment bonds of equivalent risk is 7%. What is the bond's price?
a. $957.49
b. $1,000.00
c. $1,146.33
d. $1,374.17
e. $1,454.06
8. Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What return would an investor most likely earn, if interest rates remain at current levels for the foreseeable future?
a. 5.95%
b. 6.49%
c. 6.71%
d. 7.08%
e. 7.34%
9. Assume Lei's bonds paid interest annually rather than semiannually. You could find the value of these bonds, in a market where the going nominal annual rate on semiannual payment bonds is 7%, by finding the effective annual rate, which is 7.1225%, and then discounting the annual bond's cash flows by this effective rate. The annual payment bonds would have a value of $1,352.72 versus $1,374.17. True or false?
a. True
b. False
10. Wald Inc.'s bonds currently sell for $1,120 and have a par value of $1,000. They pay an $85 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What is their YTC?
a. 5.95%
b. 6.49%
c. 6.71%
d. 7.08%
e. 7.34%
11. One year ago, Teall Inc. issued a 20-year, 6% annual coupon bond at a par value of $1,000. Suppose, that one year after Teall's bonds were issued, the going interest rate had risen to 10%. At what price would the bonds now sell?
a. $665.40
b. $719.23
c. $845.98
d. $1,000.00
e. $1,188.75
12. Foreign bonds are issued by a foreign government or a foreign corporation. An additional risk exists when bonds are denominated in a currency other than that of the investor's home currency. True or false?
a. True
b. False
13. A 30-year, zero-coupon Treasury bond has more reinvestment risk than a 30-year Treasury coupon bond, but the zero-coupon bond has less price risk. True or false?
a. True
b. False
14. Suppose someone is planning to invest in bonds and thinks that inflation and consequently interest rates are likely to decline in the near future. The investor should buy either short-term, fixed-rate bonds or else floating-rate bonds rather than long-term, fixed-rate bonds. True or false?
a. True
b. False
15. Menninger Corp's bonds currently sell for $875 and have a par value of $1,000. They pay a $65 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,050. What is their YTM?
a. 7.75%
b. 8.32%
c. 9.41%
d. 10.66%
e. 11.59%
16. The spread, or differential, between very safe U.S. Treasury bonds and riskier BBB corporate bonds varies over time. If investors are highly risk averse at a particular point in time, then the spread will be narrow, while if they are less risk averse, the spread between these bonds will be wide. True or false?
a. True
b. False
17. The price of these bonds would remain at $665.40 so long as both Teall's credit rating and the going interest rate remained constant. True or false?
a. True
b. False
18. Two key sections of the Bankruptcy Act are Chapter 7, which relates to liquidating firms and allocating the proceeds among its creditors, and Chapter 11, which deals with reorganizing businesses that are thought to be worth more as operating enterprises than they would bring in from liquidation of firms' assets. Troubled firms' managements generally try to reorganize, but if no feasible reorganization plan can be developed, then the bankruptcy judge will order liquidation. True or false?
a. True
b. False
19. Once a bond has been issued, its coupon interest payments are fixed (unless the bond has a floating interest rate). However, someone who purchases the bond after it was issued could earn a return that is higher or lower than the return the initial owner earned because interest rates fluctuate. True or false?
a. True
b. False
20. Mark Walker Inc. has a bond issue that matures in 12 years, has a par value of $1,000, and makes an annual coupon payment of $90. If the bond issue's market yield is 7%, what is the price of each bond in the issue?
a. $876.78
b. $936.57
c. $1,000.00
d. $1,158.85
e. $1,204.11
21. Which of the following statements is correct?
a. Other things held constant, a 10-year bond has more reinvestment risk than a 30-year bond.
b. If you need a specific amount of money at a specific future date, you should be concerned about price risk, but you do not need to be concerned about reinvestment risk.
c. If you need a specific amount of money at a specific future date, you could invest in a number of different kinds of bonds, but the one type of bond that you should avoid is a zero coupon bond, because such bonds do not pay any interest.