A) If the maturity risk premium were zero and interest rates were expected to decrease in the future,then the yield curve for U.S.Treasury securities would,other things held constant,have an upward slope.
B) Liquidity premiums are generally higher on Treasury than corporate bonds.
C) The maturity premiums embedded in the interest rates on U.S.Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.
D) Default risk premiums are generally lower on corporate than on Treasury bonds.
E) Reinvestment risk is lower,other things held constant,on long-term than on short-term bonds.
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A) 7.34%
B) 9.66%
C) 8.60%
D) 9.95%
E) 11.21%
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A) Bond B has a higher price than Bond A today,but one year from now the bonds will have the same price.
B) One year from now,Bond A's price will be higher than it is today.
C) Bond A's current yield is greater than 8%.
D) Bond A has a higher price than Bond B today,but one year from now the bonds will have the same price.
E) Both bonds have the same price today,and the price of each bond is expected to remain constant until the bonds mature.
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A) Bond A's capital gains yield is greater than Bond B's 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's price one year from now will be higher than it is today,but Bond B's 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's bond will have a larger percentage increase in value.
E) Bond A's current yield is greater than that of Bond B.
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A) The higher the percentage of debt represented by mortgage bonds,the riskier both types of bonds will be and,consequently,the higher the firm's total dollar interest charges will be.
B) If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.
C) In this situation,we cannot tell for sure how,or even whether,the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds.The interest rate on each type of bond would increase as the percentage of mortgage bonds used was increased,but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two.
D) The higher the percentage of debentures,the greater the risk borne by each debenture,and thus the higher the required rate of return on the debentures.
E) If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds,we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.
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A) All else equal,high-coupon bonds have less reinvestment risk than low-coupon bonds.
B) All else equal,long-term bonds have less price risk than short-term bonds.
C) All else equal,low-coupon bonds have less price risk than high-coupon bonds.
D) All else equal,short-term bonds have less reinvestment risk than long-term bonds.
E) All else equal,long-term bonds have less reinvestment risk than short-term bonds.
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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's 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's price one year from now will be higher than it is today.
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A) 1,3,4,6
B) 1,4,6
C) 1,2,3,4,6
D) 1,2,3,4,5,6
E) 1,3,4,5,6
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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,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.
C) From a corporate borrower's point of view,interest paid on bonds is not tax-deductible.
D) 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.
E) 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.
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A) If a 10-year,$1,000 par,zero coupon bond were issued at a price that gave investors a 10% yield to maturity,and if interest rates then dropped to the point where rd = YTM = 5%,the bond would sell at a premium over its $1,000 par value.
B) If a 10-year,$1,000 par,10% coupon bond were issued at par,and if interest rates then dropped to the point where rd = YTM = 5%,we could be sure that the bond would sell at a premium above its $1,000 par value.
C) Other things held constant,including the coupon rate,a corporation would rather issue noncallable bonds than callable bonds.
D) Other things held constant,a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life.
E) Bonds are exposed to both reinvestment risk and price risk.Longer-term low-coupon bonds,relative to shorter-term high-coupon bonds,are generally more exposed to reinvestment risk than price risk.
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A) Because of the call premium,the required rate of return would decline.
B) There is no reason to expect a change in the required rate of return.
C) The required rate of return would decline because the bond would then be less risky to a bondholder.
D) The required rate of return would increase because the bond would then be more risky to a bondholder.
E) It is impossible to say without more information.
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A) If the Federal Reserve unexpectedly announces that it expects inflation to increase,then we would probably observe an immediate increase in bond prices.
B) The total yield on a bond is derived from dividends plus changes in the price of the bond.
C) Bonds are generally regarded as being riskier than common stocks,and therefore bonds have higher required returns.
D) Bonds issued by larger companies always have lower yields to maturity (due to less risk) than bonds issued by smaller companies.
E) The market price of a bond will always approach its par value as its maturity date approaches,provided the bond's required return remains constant.
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A) The price of Bond B will decrease over time,but the price of Bond A will increase over time.
B) The prices of both bonds will remain unchanged.
C) The price of Bond A will decrease over time,but the price of Bond B will increase over time.
D) The prices of both bonds will increase by 7% per year.
E) The prices of both bonds will increase over time,but the price of Bond A will increase at a faster rate.
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A) $1,235.47
B) $976.02
C) $1,457.85
D) $1,050.15
E) $1,359.01
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