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  1. Which of the following statements is CORRECT?

[removed]a. 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.

  

[removed]b. 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.

  

[removed]c. If a bond sells at par, then its current yield will be less than its yield to maturity.

  

[removed]d. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.

  

[removed]e. A discount bond’s price declines each year until it matures, when its value equals its par value.

 2. Problem 5-14

Current Yield with Semiannual Payments

A bond that matures in 9 years sells for $950.The bond has a face value of $1,000 and a yield to maturity of 9.8764%. The bond pays coupons semiannually. What is the bond’s current yield? Round your answer to two decimal places.

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 3. Problem 5-7

Bond Valuation with Semiannual Payments

Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 9 years, have a face value of $1,000, and a yield to maturity of 10%. What is the price of the bonds? Round your answer to the nearest cent.

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 4. Problem 5-19

  1. Maturity Risk Premiums

 

Assume that the real risk-free rate, r*, is 4% and that inflation is expected to be 7% in Year 1, 6% in Year 2, and 4% thereafter. Assume also that all Treasury securities are highly liquid and free of default risk. If 2-year and 5-year Treasury notes both yield 10%, what is the difference in the maturity risk premiums (MRPs) on the two notes; that is, what is MRP5 minus MRP2? Round your answer to two decimal places.

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 5. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

[removed]a. The company’s bonds are downgraded.

  

[removed]b. The company’s financial situation deteriorates significantly.

  

[removed]c. Market interest rates rise sharply.

  

[removed]d. Inflation increases significantly.

  

[removed]e. Market interest rates decline sharply.

 6. You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

[removed]a. The price of Bond B will decrease over time, but the price of Bond A will increase over time.

  

[removed]b. The prices of both bonds will increase by 7% per year.

  

[removed]c. The price of Bond A will decrease over time, but the price of Bond B will increase over time.

  

[removed]d. The prices of both bonds will increase over time, but the price of Bond A will increase by more.

  

[removed]e. The prices of both bonds will remain unchanged.

 7.

 

[removed]a. The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.

  

[removed]b. You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.

  

[removed]c. You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

  

[removed]d. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

  

[removed]e. The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.

 8. Tucker Corporation is planning to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

[removed]a. There is no reason to expect a change in the required rate of return.

  

[removed]b. The required rate of return would decline because the bond would then be less risky to a bondholder.

  

[removed]c. Because of the call premium, the required rate of return would decline.

  

[removed]d. The required rate of return would increase because the bond would then be more risky to a bondholder.

  

[removed]e. It is impossible to say without more information.

 9. Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?

[removed]a. If the yield to maturity for both bonds immediately decreases to 6%, Bond A’s bond will have a larger percentage increase in value.

  

[removed]b. Bond A’s capital gains yield is greater than Bond B’s capital gains yield.

  

[removed]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.

  

[removed]d. Bond A trades at a discount, whereas Bond B trades at a premium.

  

[removed]e. Bond A’s current yield is greater than that of Bond B.

 10. A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

[removed]a. If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

  

[removed]b. The bond’s current yield is greater than 9%.

  

[removed]c. The bond is selling at a discount.

  

[removed]d. If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.

  

[removed]e. The bond is selling below its par value

 11. Problem 5-8

  1. Yield to Maturity and Call with Semiannual Payments

Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5 years at a call price of $1,050. Round your answers to two decimal places.

What is their yield to maturity?
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What is their yield to call?
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 12. Which of the following statements is CORRECT?

[removed]a. Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.

  

[removed]b. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.

  

[removed]c. A sinking fund provision makes a bond more risky to investors at the time of issuance.

  

[removed]d. Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time.

  

[removed]e. If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.

 13. Problem 5-6

Maturity Risk Premium

The real risk-free rate is 3%, and inflation is expected to be 4% for the next 2 years. A 2-year Treasury security yields 8.4%. What is the maturity risk premium for the 2-year security?

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14. Problem 5-4

Determinant of Interest Rates

The real risk-free rate is 2%. Inflation is expected to be 3% this year and 5% during the next 2 years. Assume that the maturity risk premium is zero.

What is the yield on 2-year Treasury securities? Round your answer to two decimal places.
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What is the yield on 3-year Treasury securities? Round your answer to two decimal places.
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 15. Problem 5-2 Yield to Maturity for Annual Payments

Wilson Wonders’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 7%. The bonds sell at a price of $985. What is their yield to maturity? Round your answer to two decimal places.

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16. Problem 5-1

Bond Valuation with Annual Payments

Jackson Corporation’s bonds have 16 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity of 12%. What is the current market price of these bonds? Round your answer to the nearest cent.

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17. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

[removed]a. A 1-year bond with a 15% coupon.

  

[removed]b. An 8-year bond with a 9% coupon.

  

[removed]c. A 10-year zero coupon bond.

  

[removed]d. A 10-year bond with a 10% coupon.

  

[removed]e. A 3-year bond with a 10% coupon.

 

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