1. Assuming all else is constant, which of the following statements is CORRECT?
a. Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
b. Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
c. Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
d. For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
e. From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
2. Keys Printing plans to issue a $1,000 par value, 20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The company's marginal tax rate is 40.00%, but Congress is considering a change in the corporate tax rate to 45.00%. By how much would the component cost of debt used to calculate the WACC change if the new tax rate was adopted?
a. –0.42%
b. –0.44%
c. –0.30%
d. –0.36%
e. –0.35%