A) If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.
B) If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interest rate.
C) If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.
D) If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.
E) The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.
G) B) and D)
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A) 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.
B) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
C) 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.
D) 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.
E) A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.
G) B) and E)
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A) $5,276,731
B) $5,412,032
C) $5,547,332
D) $7,706,000
E) $7,898,650
G) C) and E)
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A) If rates fall after its issue, a zero coupon bond could trade at a price above its par value.
B) If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.
C) If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.
D) If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.
G) A) and B)
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B) False
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B) False
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A) One year from now, Bond A's price will be higher than it is today.
B) Bond A's current yield is greater than 8%.
C) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.
D) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.
E) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.
G) A) and D)
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A) It could be less than, equal to, or greater than 6%.
B) Greater than 6%.
C) Exactly equal to 8%.
D) Less than 6%.
E) Exactly equal to 6%.
G) A) and B)
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B) False
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A) If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.
B) If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.
C) If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.
D) If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.
E) If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.
G) None of the above
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A) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.
B) If a bond sells at par, then its current yield will be less than its yield to maturity.
C) If a bond sells for less than par, then its yield to maturity is less than its coupon rate.
D) A discount bond's price declines each year until it matures, when its value equals its par value.
E) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par.The premium bond must have a lower current yield and a higher capital gains yield than the par bond.
G) A) and B)
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A) If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond.
B) A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk.
C) A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk.
D) If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond.
E) A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity.
G) B) and C)
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A) The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm has filed for bankruptcy.
B) Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.
C) The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.
D) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
E) The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.
G) B) and E)
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A) 8.56%
B) 9.01%
C) 9.46%
D) 9.93%
E) 10.43%
G) A) and D)
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A) Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
B) Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.
C) 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.
D) A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
E) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.
G) A) and E)
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B) False
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A) 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.
B) Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.
C) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.
D) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.
E) 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.
G) A) and E)
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A) Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.
B) Bond C sells at a premium (its price is greater than par) , and its price is expected to increase over the next year.
C) Bond A sells at a discount (its price is less than par) , and its price is expected to increase over the next year.
D) Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.
E) Bond A's current yield will increase each year.
G) B) and E)
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A) The economy is not in a recession.
B) Long-term bonds are a better buy than short-term bonds.
C) Maturity risk premiums could help to explain the yield curve's upward slope.
D) Long-term interest rates are more volatile than short-term rates.
E) Inflation is expected to decline in the future.
G) All of the above
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A) The bond's yield to maturity is 9%.
B) The bond's current yield is 9%.
C) If the bond's yield to maturity remains constant, the bond will continue to sell at par.
D) The bond's current yield exceeds its capital gains yield.
E) The bond's expected capital gains yield is positive.
G) A) and D)
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