Question

Serial bonds are attractive to investors because

1)

A. All bonds in the issue mature on the same date.

B. The yield to maturity is the same for all bonds in the issue.
C. Investors can choose the maturity that suits their financial needs.
D. The coupon rate on these bonds is adjusted to the maturity date.

Question
Short-term interest rates are
2)

A. Usually lower than long-term rates.

B. Usually higher than long-term rates.
C. Lower than long-term rates during periods of high inflation only.
D. Not significantly related to long-term rates.

Question
All of the following may reduce the coupon rate on a bond issued at par except a
3)

A. Sinking fund.
B. Call provision.
C. Change in rating from AA to AAA.
D. Conversion option.

Question
Which one of the following characteristics distinguishes income bonds from other bonds?
4)

A. The bondholder is guaranteed an income over the life of the security.

B. By promising a return to the bondholder, an income bond is junior to preferred and common stock.
C. Income bonds are junior to subordinated debt but senior to preferred and common stock.
 D. Income bonds pay interest only if the issuing company has earned the interest.

Question If a corporation’s bonds are currently yielding 8% in the marketplace, why is the firm’s
5) cost of debt lower?

A. Market interest rates have increased.

B. Additional debt can be issued more cheaply than the original debt.
C. There should be no difference; cost of debt is the same as the bonds’ market yield.
D. Interest is deductible for tax purposes.

Question
Debentures are
6)

A. Income bonds that require interest payments only when earnings permit.
B. Subordinated debt and rank behind convertible bonds.
C. Bonds secured by the full faith and credit of the issuing firm.
D. A form of lease financing similar to equipment trust certificates.

Question Young Co. issues $800,000 of 10% bonds dated January 1, Year 1. Interest is payable
7) semiannually on June 30 and December 31. The bonds mature in 5 years. The current
market rate for similar bonds is 8%. The entire issue is sold on the date of issue. The
following values are given:

Present Value of Ordinary Annuity Present Value

of $1

N=10; i=0.04 8.11090 0.67556

 N=10; i=0.05 7.72173 0.61391
What amount of proceeds on the sale of bonds should Young report?

A. $799,997
B. $815,564
C. $849,317
D. $864,884

Question If a $1,000 bond sells for $1,125, which of the following statements are true?
8)
I. The market rate of interest is greater than the coupon rate on the bond.
II. The coupon rate on the bond is greater than the market rate of interest.
III. The coupon rate and market rate are equal.
IV. The bond sells at a premium.
V. The bond sells at a discount.

A. I and IV.
B. I and V.
C. II and IV.
D. II and V.

Question Which of the following scenarios would encourage a company to use short-term loans to
9) retire its 10-year bonds that have 5 years until maturity?

A. The company expects interest rates to increase over the next 5 years.
B. Interest rates have increased over the last 5 years.
C. Interest rates have declined over the last 5 years.
D. The company is experiencing cash flow problems.
Question
From an investor’s viewpoint, the least risky type of bond in which to invest is a(n)
10)

A. Debenture bond.
B. Deep discount bond.
C. Income bond.
D. Secured bond.

11) The best advantage of a zero-coupon bond to the issuer is that the

A. Bond requires a low issuance cost.

B. Bond requires no interest income calculation to the holder or issuer until maturity.
C. Interest can be amortized annually by the APR method and need not be shown as an interest expense to the
issuer.
D. Interest can be amortized annually on a straight-line basis but is a noncash outlay.

12) Junk bonds are

A. Securities rated at less than investment grade.

B. Worthless securities.
C. Securities that are highly risky but offer only low yields.
D. Considered illegal since the collapse of the Drexel Burnham Lambert firm.

13) Which one of the following statements is true when comparing bond financing alternatives?

A. A bond with a call provision typically has a lower yield to maturity than a similar bond without a call
provision.
B. A convertible bond must be converted to common stock prior to its maturity.
C. A call provision is generally considered detrimental to the investor.
 D. A call premium requires the investor to pay an amount greater than par at the time of purchase.

14) If a bond sells at a premium, the

A. Stated coupon rate must be less than the required market rate.
B. Nominal rate must be less than the yield rate.
C. Bond purchase price must be more than the fair market value of the bond.
D. Stated coupon rate must be more than the required market rate.

15) A company issued a 15-year, $1,000 par value bond. The coupon rate on this bond is 9%
annually, with interest being paid each 6 months. The investor who purchased the bond
expects to earn a 12% nominal rate of return. The cash proceeds received by the company
from the investor totaled

A. $619.43
B. $793.43
C. $875.38
D. $950.75

16) What is the price of a 10-year, 10% coupon bond with a $1,000 face value if investors require a
12% return? Assume annual coupon payments.

A. $565.00
B. $322.00
C. $604.50
D. $887.00

17) In calculating the total value of a bond, how much does the $1,000 to be received upon a
 bond’s maturity in 4 years add to the bond’s price if the discount rate is 6%?

A. $208.00
B. $747.00
C. $763.00
D. $792.00

18) Which one of the following is a debt instrument that generally has a maturity of 10 years or
more?

A. A bond.
B. A note.
C. A chattel mortgage.
D. A financial lease.

19) The call provision in some bond indentures allows

A. The issuer to exercise an option to redeem the bonds.

B. The bondholder to exchange the bond, at no additional cost, for common shares.
C. The bondholder to redeem the bond early by paying a call premium.
D. The issuer to pay a premium in order to prevent bondholders from redeeming bonds.

20) Protective clauses set forth in an indenture are known as

A. Provisions.
B. Requirements.
C. Addenda.
D. Covenants.

21) A requirement specified in an indenture agreement that states that a company cannot acquire
or sell major assets without prior creditor approval is known as a
 A. Protective covenant.
B. Call provision.
C. Warrant.
D. Put option.

22) A firm plans to issue mortgage bonds subject to an indenture. Which of the following
restrictions or requirements are likely to be contained in the indenture?

I. Receiving the trustee’s permission prior to selling the property.

II. Maintain the property in good operating condition.
III. Insuring plant and equipment at certain minimum levels.
IV. Including a negative pledge clause.

A. I and IV only.
B. II and III only.
C. I, III, and IV only.
D. I, II, III and IV.

23) Which one of the following statements concerning debt instruments is correct?

A. The coupon rate and yield of an outstanding long-term bond will change over time as economic factors
change.
B. A 25-year bond with a coupon rate of 9% and 1 year to maturity has more interest rate risk than a 10-year
bond with a 9% coupon issued by the same firm with 1 year to maturity.
C. For long-term bonds, price sensitivity to a given change in interest rates is greater the longer the maturity of
the bond.
D. A bond with 1 year to maturity would have more interest rate risk than a bond with 15 years to maturity.
Question Which one of the following provides the best measure of interest rate risk for a corporate
24) bond?

A. Duration.
B. Yield to maturity.
C. Bond rating.
D. Maturity.

25) What variable is measured on the horizontal axis of the yield curve?

A. Years to maturity of the bonds.

B. Yield of the bonds.
C. Duration of the bonds.
D. Par value of the bonds.

26) An analyst is comparing two bonds, each with a 2-year maturity and a face amount of
$100,000. Although both bonds have a yield to maturity of 7.0%, Bond A has a coupon of 6%
and Bond B has a coupon of 8%. Assuming that both bonds have annual interest payments,
the prices of both Bond A and Bond B are closest to

A. Bond A = $97,817, Bond B = $101,310.

B. Bond A = $98,148, Bond B = $101,764.
C. Bond A = $104,673, Bond B = $108,411.
D. Bond A = $110,848, Bond B = $114,464.

27) If the interest rate on newly issued bonds increases due to expected inflation, which one of the
following will most likely occur?

A. The price of common stocks will fall.

B. The price of preferred shares will likely increase.
C. The price of existing bonds will likely increase.
D. The required return on common stocks will decrease.
28) What variable is measured on the vertical axis of the yield curve?

A. The years to maturity of the bonds.

B. The yield of the bonds.
C. The credit rating of the bonds.
D. The par value of the bonds.

29) A corporation issued convertible bonds with a par value of $1,000. The corporation’s stock is
selling at $38.00 per share, and the current market price of the convertible bonds is $1,050. If
the conversion ratio is 25, what will be the conversion price?

A. $27.63
B. $38.00
C. $40.00
D. $42.00

30) A company plans to issue new bonds. Which one of the following characteristics of the bond
would cause it to have a higher coupon rate?

A. A call provision.
B. A conversion feature.
C. Attaching of warrants.
D. More restrictive debt covenants.

Question If the term structure of interest rates has an inverted slope, what does this imply about
31) long-term interest rates compared to short-term interest rates?

A. Long-term rates are lower than short-term rates.

B. Long-term rates are the same as short-term rates.
C. The intermediate-term interest rate is lower than the T-bill interest rate.
 D. Bank borrowing rates will rise.

32) All of the following statements are correct with respect to the yield curve except that the curve
will be upward sloping

A. When investors expect short-term rates to rise in the future.

B. Because investors perceive short-term investments to be less liquid and more risky.
C. If there is greater supply of short-term loans than of long-term loans relative to demand.
D. Because borrowers are willing to pay higher long-term interest rates since long-term debt reduces uncertainty
about future borrowing costs.

33) If the term structure of interest rates has a flat slope, which one of the following statements is
correct?

A. Long-term rates are higher than short-term rates.

B. Long-term rates are the same as short-term rates.
C. The intermediate-term interest rate is lower than the T-bill interest rate.
D. Bank borrowing rates will rise.

34) Which one of the following would be the most appropriate discount rate for an investment
deemed to have moderate risk?

A. Yield on U.S. Treasury obligations.

B. Yield on investment grade bonds.
C. Projected return on S&P 500 equities.
D. Projected return on global equities.
35) Four zero-coupon bonds each will pay $1,000 at maturity. The bonds mature in either 10 or 20
years and have a current price of either $300 or $500. Which of the following bonds has
the largest yield to maturity?

A. $300 price; matures in 10 years.

B. $500 price; matures in 10 years.
C. $300 price; matures in 20 years.
D. $500 price; matures in 20 years.

36) A yield curve shows the relationship between bond yields that differ by the

A. Credit risk of the issuer of the bonds.

B. Dividend yield of the issuer of the bonds.
C. Par value of the bonds.
D. Years to maturity of the bonds.