A) 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.
B) 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.
C) A sinking fund provision makes a bond more risky to investors at the time of issuance.
D) Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
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.
G) A) and D)
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A) If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.
B) The bond is selling below its par value.
C) The bond is selling at a discount.
D) If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.
E) The bond's current yield is greater than 9%.
G) A) and E)
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A) 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.
B) The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
C) 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.
D) 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.
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.
G) None of the above
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A) If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.
B) Bond A has the most interest rate risk.
C) If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.
D) If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.
E) Bond C sells at a premium over its par value.
G) B) and E)
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B) False
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A) 4,228
B) 4,337
C) 4,448
D) 4,562
E) 4,676
G) A) and E)
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A) 6.20%
B) 6.53%
C) 6.87%
D) 7.24%
E) 7.62%
G) A) and C)
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B) False
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A) The bond's current yield is less than 8%.
B) If the yield to maturity remains at 8%, then the bond's price will decline over the next year.
C) The bond's coupon rate is less than 8%.
D) If the yield to maturity increases, then the bond's price will increase.
E) If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.
G) A) and E)
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A) 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.
B) 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.
C) If two tiers of debt are used (with one senior and one subordinated debt class) , the subordinated debt will carry a lower interest rate.
D) 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.
E) 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.
G) B) and E)
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A) If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.
B) 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.
C) On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.
D) If a coupon bond is selling at par, its current yield equals its yield to maturity.
E) 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.
G) B) and C)
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B) False
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A) 6.27%
B) 6.60%
C) 6.95%
D) 7.32%
E) 7.70%
G) A) and D)
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A) If market interest rates decline, the price of the bond will also decline.
B) The bond is currently selling at a price below its par value.
C) If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
D) The bond should currently be selling at its par value.
E) If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.
G) A) and B)
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A) An 8-year bond with a 9% coupon.
B) A 1-year bond with a 15% coupon.
C) A 3-year bond with a 10% coupon.
D) A 10-year zero coupon bond.
E) A 10-year bond with a 10% coupon.
G) D) and E)
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A) The prices of both bonds will decrease by the same amount.
B) Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.
C) The prices of both bonds would increase by the same amount.
D) One bond's price would increase, while the other bond's price would decrease.
E) The prices of the two bonds would remain constant.
G) A) and C)
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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) A) and C)
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A) A zero coupon bond's current yield is equal to its yield to maturity.
B) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
C) All else equal, if a bond's yield to maturity increases, its price will fall.
D) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
E) All else equal, if a bond's yield to maturity increases, its current yield will fall.
G) B) and D)
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A) 1, 3, 4, 6
B) 1, 4, 6
C) 1, 2, 3, 4, 6
D) 1, 2, 3, 4, 5, 6
E) 1, 3, 4, 5, 6
G) All of the above
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A) One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
B) Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.
C) If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.
D) Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.
E) Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.
G) None of the above
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