chapter-07-interest-rates-and-bond-valuation-11

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41. Green Roof Inns is preparing a bond offering with
a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be
repaid in 10 years and will be sold at par. Given this, which one of the
following statements is correct?
A. The bonds will become discount bonds if the market rate of interest
declines.
B. The bonds will pay 10 interest payments of $60 each.
C. The bonds will sell at a premium if the market rate is 5.5 percent.
D. The bonds will initially sell for $1,030 each.
E. The final payment will be in the amount of $1,060.

42. A newly issued bond has a 7 percent coupon with
semiannual interest payments. The bonds are currently priced at par value. The
effective annual rate provided by these bonds must be:
A. 3.5 percent.
B. greater than 3.5 percent but less than 7 percent.
C. 7 percent.
D. greater than 7 percent.
E. Answer cannot be determined from the information provided.

43. Which of the following increase the price
sensitivity of a bond to changes in interest rates?
I. increase in time to maturity
II. decrease in time to maturity
III. increase in coupon rate
IV. decrease in coupon rate
A. II only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

44. Which one of the following bonds is the least
sensitive to interest rate risk?
A. 3-year; 4 percent coupon
B. 3-year; 6 percent coupon
C. 5-year; 6 percent coupon
D. 7-year; 6 percent coupon
E. 7-year; 4 percent coupon

45. As a bond’s time to maturity increases, the bond’s
sensitivity to interest rate risk:
A. increases at an increasing rate.
B. increases at a decreasing rate.
C. increases at a constant rate.
D. decreases at an increasing rate.
E. decreases at a decreasing rate.

46. You own a bond that has a 6 percent annual coupon
and matures 5 years from now. You purchased this 10-year bond at par value when
it was originally issued. Which one of the following statements applies to this
bond if the relevant market interest rate is now 5.8 percent?
A. The current yield-to-maturity is greater than 6 percent.
B. The current yield is 6 percent.
C. The next interest payment will be $30.
D. The bond is currently valued at one-half of its issue price.
E. You will realize a capital gain on the bond if you sell it today.

47. You expect interest rates to decline in the near
future even though the bond market is not indicating any sign of this change.
Which one of the following bonds should you purchase now to maximize your gains
if the rate decline does occur?
A. short-term; low coupon
B. short-term; high coupon
C. long-term; zero coupon
D. long-term; low coupon
E. long-term; high coupon

48. A 6 percent, annual coupon bond is currently
selling at a premium and matures in 7 years. The bond was originally issued 3
years ago at par. Which one of the following statements is accurate in respect
to this bond today?
A. The face value of the bond today is greater than it was when the bond
was issued.
B. The bond is worth less today than when it was issued.
C. The yield-to-maturity is less than the coupon rate.
D. The coupon rate is greater than the current yield.
E. The yield-to-maturity equals the current yield.

49. Which of the following statements concerning bonds
are correct?
I. Bonds provide tax benefits to issuers.
II. The risk of a firm financially failing increases when the firm issues
bonds.
III. Most long-term bond issues are referred to as unfunded debt.
IV. All bonds are treated equally in a bankruptcy proceeding.
A. II and III only
B. I and II only
C. III and IV only
D. II and IV only
E. I, II, and III only

50. Texas Foods has a 6 percent bond issue outstanding
that pays $30 in interest every March and September. The bonds are investment
grade and sell at par. The bonds are callable at a price equal to the present
value of all future interest and principal payments discounted at a rate equal
to the comparable Treasury rate plus 0.50 percent. Which of the following
correctly describe the features of this bond?
I. bond rating of B
II. “make whole” call price
III. $1,000 face value
IV. offer price of $1,000
A. I and III only
B. III and IV only
C. I, III, and IV only
D. II, III, and IV only
E. I, II, III, and IV

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