Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
a. The bond's current yield exceeds its yield to maturity.
b. If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.
c. The bond's yield to maturity is greater than its coupon rate.
d. The bond's coupon rate exceeds its current yield.
e. The bond's current yield is equal to its coupon rate.
Perry Inc.'s bonds currently sell for $1,250. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000 . What is their current yield?
Select the correct answer.
7.97%
8.36%
6.80%
7.19%
7.58%
Which of the following statements is CORRECT?
a. All else equal, if a bond's yield to maturity increases, its price will fall.
b. All else equal, if a bond's yield to maturity increases, its current yield will fall.
c. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
d. A zero coupon bond's current yield is equal to its yield to maturity.
e. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
Which of the following statements is CORRECT?
a. The expected return on a corporate bond will generally exceed the bond's yield to maturity.
b. An indenture is a bond that is less risky than a mortgage bond.
c. All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
d. If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
e. Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000 . The going interest rate (rd) is 6.75%, based on semiannual compounding. What is the bond's price?
Select the correct answer.
$964.06
$974.10
$971.59
$966.57
$969.08
Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.
a. True
b. False
Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
Select the correct answer.
$880.76
$883.32
$888.44
$885.88
$891.00
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
a. Market interest rates rise sharply.
b. The company's financial situation deteriorates significantly.
c. Inflation increases significantly.
d. Market interest rates decline sharply.
e. The company's bonds are downgraded.
5-year Treasury bonds yield 5.2%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?
Select the correct answer.
3.28%
2.90%
2.52%
3.66%
4.04%
One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 5.5% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?
Select the correct answer.
$1,000.00
$995.04
$997.52
$992.56
$1,002.48
If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.4%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?
Select the correct answer.
1.80%
1.46%
1.97%
1.29%
1.63%
Meacham Enterprises' bonds currently sell for $880 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?
Select the correct answer.
17.84%
18.04%
18.24%
17.44%
17.64%
There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.
a. True
b. False
Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows:
T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:
a. Tax effects.
b. Default risk differences.
c. Inflation differences.
d. Real risk-free rate differences.
e. Maturity risk differences.