A) The total yield on a bond is derived from dividends plus changes in the price of the bond.
B) Bonds are riskier than common stocks and therefore have higher required returns.
C) Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
D) The market value 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) liquidity risk
B) default risk
C) maturity risk
D) all of the above
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A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.
B) Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
C) Once a firm declares bankruptcy, it must then be liquidated by the trustee, which uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
D) Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
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A) All else being equal, senior debt generally has a lower yield to maturity than subordinated debt.
B) The expected return on a corporate bond will generally exceed the bond's yield to maturity.
C) If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
D) Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.
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A) adding additional restrictive covenants that limit management's actions
B) adding a call provision
C) the rating agencies changing the bond's rating from Baa to Aaa
D) adding a sinking fund
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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 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 of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result 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.
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A) $829.21
B) $850.47
C) $872.28
D) $894.65
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A) 5.01%
B) 5.27%
C) 5.54%
D) 5.81%
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A) As interest rates (yield to maturity) rises, the price of bonds with similar risks will also rise.
B) If the market interest equals the coupon rate of a bond the price of the bond will be equal to its par value
C) Assuming no bankruptcy, as the maturity date of a bond approaches, a bond's price will approach its par value.
D) A bond that is trading at a price above its par value is often referred to as a premium bond.
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A) 14.25%
B) 12%
C) 7.125%
D) 18.50%
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A) 6.27%
B) 6.60%
C) 6.95%
D) 7.70%
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A) I, II, and IV only
B) I, II, and III only
C) II, III, and IV only
D) I, III, and IV only
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A) It could be less than, equal to, or greater than 6%.
B) It is greater than 6%.
C) It is exactly equal to 6%.
D) It is less than 6%.
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A) $891.00
B) $913.27
C) $936.10
D) $959.51
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A) real risk-free rate differences
B) default risk differences
C) maturity risk differences
D) inflation differences
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A) a 10-year $100 annuity
B) a 10-year, $1,000 face value, zero coupon bond
C) a 10-year, $1,000 face value, 10% coupon bond with annual interest payments
D) All 10-year bonds have the same price risk since they have the same maturity.
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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.
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A) 10%
B) 12.50%
C) 13.81%
D) 8%
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A) $1,065.15
B) $1,000.00
C) $937.53
D) $936.70
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A) 0.99%
B) 1.10%
C) 1.21%
D) 1.33%
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