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Unformatted text preview: 1. A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%. A) True B) False 2. You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%. A) True B) False 3. If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.) A) True B) False 4. "Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures. A) True B) False 5. The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low- coupon bonds, other things held constant. A) True B) False 6. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? A) The company's bonds are downgraded. B) Market interest rates rise sharply. C) Market interest rates decline sharply. D) The company's financial situation deteriorates significantly. E) Inflation increases significantly. 7. Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par? A) Adding additional restrictive covenants that limit management's actions. B) Adding a call provision....
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