1. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #35

(Points: 1)

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

1. 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.

2. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.

3. Bond A's current yield will increase each year.

4. 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.

5. Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.

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2. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #30

(Points: 1)

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?

1. A 1-year bond with a 15% coupon.

2. An 8-year bond with a 9% coupon.

3. A 10-year zero coupon bond.

4. A 10-year bond with a 10% coupon.

5. A 3-year bond with a 10% coupon.

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3. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #36

(Points: 1)

A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT CORRECT?

1. The bond's current yield is 9%.

2. The bond's current yield exceeds its capital gains yield.

3. The bond's yield to maturity is 9%.

4. The bond's expected capital gains yield is positive.

5. If the bond's yield to maturity remains constant, the bond will continue to sell at par.

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4. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #29

(Points: 1)

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

1. 1-year, 10% coupon bond.

2. 20-year, zero coupon bond.

3. 20-year, 5% coupon bond.

4. 20-year, 10% coupon bond.

5. 10-year, zero coupon bond.

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5. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #31

(Points: 1)

Which of the following bonds has the greatest interest rate price risk?

1. A 10-year, $1,000 face value, zero coupon bond.

2. A 10-year $100 annuity.

3. A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.

4. All 10-year bonds have the same price risk since they have the same maturity.

5. A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

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6. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #28

(Points: 1)

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?

1. Making the bond a first mortgage bond rather than a debenture.

2. The rating agencies change the bond's rating from Baa to Aaa.

3. Adding additional restrictive covenants that limit management's actions.

4. Adding a call provision.

5. Adding a sinking fund.

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7. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #60

(Points: 1)

Which of the following statements is CORRECT?

1. If the maturity risk premium (MRP) equals zero, the yield curve must be flat.

2. If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.

3. If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope.

4. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.

5. The yield curve can never be downward sloping.

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8. CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES Question MC #45

(Points: 1)

Which of the following statements is CORRECT?

1. All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

2. All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.

3. All else equal, long-term bonds have less interest rate price risk than short-term bonds.

4. All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.

5. All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

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