Chapter_4 - CHAPTER 6 BONDS AND THEIR VALUATION...

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CHAPTER 6 BONDS AND THEIR VALUATION (Difficulty: E = Easy, M = Medium, and T = Tough) Multiple Choice: Conceptual Callable bond Answer: a Diff: E 1 . Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? a. A reduction in market interest rates. b. The company's bonds are downgraded. c. An increase in the call premium. d. Answers a and b are correct. e. Answers a, b, and c are correct. Call provision Answer: b Diff: E 2 . Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be _________________ the YTM with it. a. higher than b. lower than c. the same as d. either higher or lower, depending on the level of call premium, than e. unrelated to Bond coupon rate Answer: c Diff: E 3 . All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issued at par, except a a. Sinking fund. b. Restrictive covenant. c. Call provision. d. Change in rating from Aa to Aaa. e. None of the answers above (all may reduce the required coupon rate). Bond concepts Answer: c Diff: E 4 . Which of the following statements is most correct? a. If a bond’s yield to maturity exceeds its annual coupon, then the bond will be trading at a premium. b. If interest rates increase, the relative price change of a 10-year coupon bond will be greater than the relative price change of a 10- year zero coupon bond. c. If a coupon bond is selling at par, its current yield equals its yield to maturity. d. Both a and c are correct. e. None of the answers above is correct. Chapter 6 - Page 1
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Medium: Bond yield Answer: c Diff: M 5 . Which of the following statements is most correct? a. The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B. b. If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. c. If a coupon bond is selling at par, its current yield equals its yield to maturity. d. Both a and b are correct. e. Both b and c are correct. Price risk Answer: c Diff: M 6 . Which of the following has the greatest price risk? a. A 10-year, $1,000 face value, 10 percent coupon bond with semiannual interest payments. b. A 10-year, $1,000 face value, 10 percent coupon bond with annual interest payments. c. A 10-year, $1,000 face value, zero coupon bond. d. A 10-year $100 annuity. e. All of the above have the same price risk since they all mature in 10 years. Price risk Answer: a Diff: M 7 . If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value? a. A 10-year zero coupon bond.
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This note was uploaded on 05/12/2010 for the course BUSINESS BS525 taught by Professor Matthews during the Spring '10 term at Drexel.

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Chapter_4 - CHAPTER 6 BONDS AND THEIR VALUATION...

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