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| 1 | |
The current yield on a bond is equal to ________. |
| | A) | annual interest payment divided by the current market price |
| | B) | the yield to maturity |
| | C) | annual interest divided by the par value |
| | D) | the internal rate of return |
| | E) | none of the above |
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| 2 | |
To earn a high rating from the bond rating agencies, a firm should have |
| | A) | a low times interest earned ratio. |
| | B) | a low debt to equity ratio. |
| | C) | a high quick ratio. |
| | D) | B and C |
| | E) | A and C |
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| 3 | |
Ceteris paribus, the price and yield on a bond are |
| | A) | negatively related. |
| | B) | positively related. |
| | C) | sometimes positively and sometimes negatively related. |
| | D) | not related. |
| | E) | indefinitely related. |
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| 4 | |
A coupon bond is a bond that |
| | A) | does not pay interest on a regular basis but pays a lump sum at maturity. |
| | B) | pays interest on a regular basis (typically every six months). |
| | C) | can always be converted into a specific number of shares of common stock in the issuing company. |
| | D) | always sells at par. |
| | E) | none of the above |
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| 5 | |
Consider two bonds, X and Y. Both bonds presently are selling at their par value of $1,000. Each pays interest of $150 annually. Bond X will mature in 6 years while bond Y will mature in 7 years. If the yields to maturity on the two bonds decrease from 15% to 12% |
| | A) | both bonds will increase in value, but bond X will increase more than bond Y. |
| | B) | both bonds will decrease in value, but bond X will decrease more than bond Y. |
| | C) | both bonds will increase in value, but bond Y will increase more than bond X. |
| | D) | both bonds will decrease in value, but bond Y will decrease more than bond X. |
| | E) | none of the above |
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| 6 | |
Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be |
| | A) | $1,000. |
| | B) | higher. |
| | C) | lower. |
| | D) | the same. |
| | E) | cannot be determined. |
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| 7 | |
Which one of the following statements about convertibles is true? |
| | A) | The longer the call protection on a convertible, the less the security is worth. |
| | B) | Convertibles are never callable. |
| | C) | The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. |
| | D) | The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. |
| | E) | The more volatile the underlying stock, the greater the value of the conversion feature. |
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| 8 | |
When a bond indenture includes a sinking fund provision |
| | A) | firms must establish a cash fund for future bond redemption. |
| | B) | bondholders always benefit, because principal repayment on the scheduled maturity date is guaranteed. |
| | C) | bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. |
| | D) | both A and B are true. |
| | E) | none of the above are true. |
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| 9 | |
One year ago, you purchased a newly issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive and what is the current face value of the bond? |
| | A) | $60.00, $1,000 |
| | B) | $42.00, $1,042 |
| | C) | $60.00, $1,042 |
| | D) | $62.52, $1,042 |
| | E) | $102.00, $1,000 |
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| 10 | |
Bond analysts might be more interested in a bond's yield to call if |
| | A) | the bond's yield to maturity is insufficient. |
| | B) | the firm has called some of its bonds in the past. |
| | C) | the investor only plans to hold the bond until its first call date. |
| | D) | interest rates are expected to rise. |
| | E) | interest rates are expected to fall. |
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