Upgrade to remove ads
Only $35.99/year

FIN 221 Ch 7 Practice Quiz

Terms in this set (10)

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?
Market interest rates decline sharply.
The company's bonds are downgraded.
Market interest rates rise sharply.
Inflation increases significantly.
The company's financial situation deteriorates significantly.
Market interest rates decline sharply.
A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yields to maturity of both bonds increase by the same amount, which of the following statements is CORRECT?
The prices of both bonds will increase by the same amount.
The prices of both bonds will decrease by the same amount.
The prices of the two bonds will remain the same.
Both bonds will decline in price, but the 10-year bond will have a greater percentage decline in price than the 8-year bond.
One bond's price will increase, while the other bond's price decreases.
Both bonds will decline in price, but the 10-year bond will have a greater percentage decline in price than the 8-year bond.
Which of the following statements is CORRECT?
All else equal, if a bond's yield to maturity increases, its price will fall.
All else equal, if a bond's yield to maturity increases, its current yield will fall.
If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.
If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.
If a bond's required rate of return exceeds its coupon rate, the bond will sell at a premium.
All else equal, if a bond's yield to maturity increases, its price will fall.
Which of the following statements is CORRECT?
Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.
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.
If interest rates have increased since a company issues 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.
A sinking fund provision makes a bond issue more risky to investors at the time of issuance.
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.
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.
The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds?
$935.82
$941.51
$958.15
$964.41
$979.53
$935.82
A 14-year, $1,000 face value corporate bond has an 8% semiannual coupon and sells for $1,075. The bond may be called in five years at a call price of $1,050. What are the bond's yields to maturity and call?
YTM = 14.29%; YTC = 14.09%
YTM = 3.57%; YTC = 3.52%
YTM = 7.14%; YTC = 7.34%
YTM = 6.64%; YTC = 4.78%
YTM = 7.14%; YTC = 7.05%
YTM = 7.14%; YTC = 7.05%
A 15-year, $1,000 face value bond with a 10% semiannual coupon has a nominal yield to maturity of 7.5%. The bond, which may be called after five years, has a nominal yield to call of 5.54%. What is the bond's call price?
$ 564
$1,110
$1,100
$1,173
$1,040
$1,040
A 10-year, $1,000 face value bond has an 8% annual coupon and a yield to maturity of 10%. If market interest rates remain at 10%, what will be the bond's price two years from today?
$ 877.11
$ 893.30
$1,061.30
$ 912.55
$1,023.06
$ 893.30
A 12-year, $1,000 face value corporate pays a 9% semiannual coupon. The bond has a nominal yield to maturity of 7%, and can be called in three years at a price of $1,045. What is the bond's nominal yield to call?
4.62%
10.32%
17.22%
5.16%
2.31%
4.62%
Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and an annual coupon rate of 10%. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred interest. If the required annual return is 20%, what should the bonds sell for in the market today?
$362.44
Other sets by this creator