QUESTION 1
1. Which of the following statements is most correct?
Junk bonds typically carry a lower yield to maturity than investment
grade bonds.
A debenture is a secured bond which is backed by some or all of the
firm's fixed assets.
All else equal, subordinated bonds typically carry lower yields than
mortgage bonds.
All else equal, convertible bonds are less valuable than straight
bonds
None of the above statements is correct.
1 points
QUESTION 2
1. Which of the following events would make it more likely that a firm call its
outstanding callable bonds?
A reduction in market interest
rates.
The company's bonds are
downgraded.
An increase in the call
premium.
An increase in market interest
rates.
1 points
QUESTION 3
1. Assume that all interest rates in the economy decline from 10 percent to 9 percent.
Which of the following bonds will have the HIGHEST PERCENTAGE INCREASE in price?
A 10-year bond with a 10 percent
coupon.
An 8-year bond with a 9 percent
coupon.
A 10-year zero coupon bond.
A 1-year bond with a 15 percent
coupon.
A 3-year bond with a 10 percent
coupon.
1 points
QUESTION 4
1. Assume you wish to purchase a bond with a 30-year maturity, a coupon rate of 10
percent, a face value of $1,000, and semiannual interest payments. If you require a 9% yield
to maturity, what is the present value of the bond?
$905.3
5
$1,102.
74
$1,103.
19
$1,106.
76
$1,149.
63
1 points
QUESTION 5
1. A bond has a coupon rate of 8%, a maturity of 10 years, a face value of $1,000, and
makes semiannual payments. If the price is $934.96, what is the annual nominal yield to
maturity on the bond?
8.39%
9.64%
4.41%
8.98%
None of the
above
1 points
QUESTION 6
1. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 EVERY 3
MONTHS. If you require a nominal annual rate of return of 12 percent with QUARTERLY
COMPOUNDING, calculate the present value of the bond.
$ 821.92
$1,207.57
$ 986.43
$868.10
$1,358.24
None of the
above
1 points
QUESTION 7
1. A corporate bond matures in 14 years. The bond has a coupon rate of 8% and a par
value of $1,000. Coupons are paid SEMIANNUALLY. The bond is callable in 5 years at a call
price of $1,050. The price of the bond today is $1,075. What are the bond's annual yield to
maturity and yield to call?
YTM = 3.52%; YTC =
3.57%
YTM = 3.57%; YTC =
7.05%
YTM = 7.14%; YTC =
7.34%
YTM = 6.64%; YTC =
3.52%
YTM = 7.14%; YTC =
7.05%
None of the above
1 points
QUESTION 8
1. Call provisions typically require bond issuers to pay investors an amount greater than
the par value, called
call premium
sinking fund
refunding
operations
call protection
1 points
QUESTION 9
1. If a warrant is attached to a bond,
the bondholder has a right, not an obligation, to sell the bonds back to the issuer at a
stated price
the bondholder has a right, not an obligation, to buy the issuing firm's stock at a
predefined price
the issuer has a right to convert the bonds to a predefined number of shares of its stock
at a pre-determined date
the bond holder has a right, not an obligation, to convert his/her bonds into shares of
the issuing firm's common stock at a fixed price
none of the above
1 points
QUESTION 10
1. A convertible bond gives:
the bondholder the right, not an obligation, to sell the bonds back to the issuer at a
stated price
the bond holder has a right, not an obligation, to buy the issuing firm's stock at a
predefined price
the issuer has a right to convert the bonds to a predefined number of shares of its stock
at a pre-determined date
the bond holder has a right, not an obligation, to convert his/her bonds into shares of
the issuing firm's common stock at a fixed price
none of the above
1 points
QUESTION 11
1. [CONCEPT PROBLEM] Suppose a company issued 30-year bonds 4 years ago, when
the yield curve was downward sloping. Since then, long-term rates (10 years or longer) have
remained constant although the yield curve has resumed its normal upward slope. Under
such conditions, a bond refunding would be ____.
Be profitable
Be unprofitable
Be very expensive to the firm although ultimately profitable
It does not matter, under this condition, whether or not the
firm calls the bonds
1 points
QUESTION 12
1. [CONCEPT PROBLEM] Assume that all interest rates in the economy decline from 10
percent to 6 percent. Which of the following bonds will experience the HIGHEST
PERCENTAGE INCREASE in price?
A 10-year bond with a 10 percent
coupon.
An 8-year bond with a 9 percent
coupon.
A 10-year zero coupon bond.
A 1-year bond with a 15 percent
coupon.
A 3-year bond with a 10 percent
coupon.
1 points
QUESTION 13
1. The appropriate discount rate to use when analyzing a bond refunding decision is:
Cost of debt
After-tax cost of debt
Cost of equity
Weighted average cost of
capital
None of the above
1 points
QUESTION 14
1. For this and the next 2 questions. The City of Kiel issued $3,000,000 of 8% coupon,
30-year, semiannual payment, tax-exempt municipal bonds 10 years ago. The bonds had 10
years of call protection, but now the bonds can be called if the city chooses to do so. The call
premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds
can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds
sold. Note that the combined costs associated with calling the existing bonds and paying for
the flotation cost of the new issue represent the total initial outlay for the refinancing.
Calculate this initial cost.
$453,443
$476,115
$499,921
$240,000
$551,163
None of the
above
1 points
QUESTION 15
1. Calculate the total semi-annual savings associated with the refinancing.
$120,000
$90,000
$30,000
None of the
above
1 points
QUESTION 16
1. What is the net present value of the refunding? Note that cities pay no income taxes.
Hence, taxes are not relevant in this analysis.
$453,443
$476,115
$499,921
$240,000
$551,163
None of the
above
1 points
QUESTION 17
1. For this and the next 3 question. New York Waste (NYW) is considering refunding a
$50,000,000, annual payment, 14.5% coupon, 30-year bond issue that was issued 5 years
ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year
life. The company could sell a new issue of 25-year bonds at an annual interest rate of
11.67% in today's market. A call premium of 14% would be required to retire the old bonds,
and flotation costs on the new issue would be $3 million. The company's marginal tax rate is
40%. The new bonds would be issued when the old bonds are called. Calculate the initial
cost of the refunding?
$5,049,939
$5,315,725
$5,595,500
$5,890,000
$6,200,000
None of the
above
1 points
QUESTION 18
1. Calculate the after-tax annual INTEREST SAVINGS if the refunding takes place.
$664,050
$699,000
$768,900
$849,000
$930,369
None of the
above
1 points
QUESTION 19
1. The amortization of flotation costs reduces taxes and thus provides an annual cash
flow. Calculate the net increase or decrease in the annual flotation cost tax savings if
refunding takes place.
$8,000
$6,480
$7,200
$8,800
$9,680
None of the
above
1 points
QUESTION 20
1. What is the NPV if the bonds are refunded today?
$1,746,987
$1,838,933
$1,935,719
$2,037,599
$3,785,322
None of the
above
1 points
QUESTION 21
1. A callable bond with an original maturity of 20 years now has 15 years to mature. The
bond was originally issued at par with a coupon rate of 12% and semiannual interest
payments. The bond can be called 7 years from now at a 20 percent call premium. Calculate
this bond's yield-to-call and yield-to-maturity if current price is $860.
YTC = 14.29%; YTM =
17.09%
YTC = 17.09%; YTM =
14.29%
YTC = 7.14%; YTM =
8.55%
None of the above
1 points
QUESTION 22
1. [BOND VALUATION] A bond has a coupon rate of 8.125%, a maturity of 12.5 years, a
face value of $1,000, and makes semiannual payments. If the price is $934, what is the
ANNUAL yield to maturity on the bond?
8.125%
9.016%
4.518%
8.98%
None of the
above
Question 1
0 out of 1 points
Which of the following statements is most correct?
Selected None of
Answer: above
Question 2
1 out of 1 points
Which of the following events would make it more likely that a firm call its
outstanding callable bonds?
Selected A reduction in market
Answer: interest rates.
Question 3
1 out of 1 points
Assume that all interest rates in the economy decline from 10 percent to 9 percent.
Which of the following bonds will have the HIGHEST PERCENTAGE INCREASE in
price?
Selected A 10-year zero coupon
Answer: bond.
Question 4
1 out of 1 points
Assume you wish to purchase a bond with a 30-year maturity, a coupon rate of 10
percent, a face value of $1,000, and semiannual interest payments. If you require a
9% yield to maturity, what is the present value of the bond?
Selected $1,103.
Answer: 19
Question 5
0 out of 1 points
A bond has a coupon rate of 8%, a maturity of 10 years, a face value of $1,000, and
makes semiannual payments. If the price is $934.96, what is the annual nominal
yield to maturity on the bond?
Selected 8.98
Answer: %
Question 6
1 out of 1 points
Assume that a 15-year, $1,000 face value bond pays interest of $37.50 EVERY 3
MONTHS. If you require a nominal annual rate of return of 12 percent with
QUARTERLY COMPOUNDING, calculate the present value of the bond.
Selected $1,207.
Answer: 57
Question 7
1 out of 1 points
A corporate bond matures in 14 years. The bond has a coupon rate of 8% and a par
value of $1,000. Coupons are paid SEMIANNUALLY. The bond is callable in 5 years at
a call price of $1,050. The price of the bond today is $1,075. What are the bond's
annual yield to maturity and yield to call?
Selected YTM = 7.14%; YTC =
Answer: 7.05%
Question 8
1 out of 1 points
Call provisions typically require bond issuers to pay investors an amount greater
than the par value, called
Selected call
Answer: premium
Question 9
1 out of 1 points
If a warrant is attached to a bond,
Selected the bondholder has a right, not an obligation, to buy the issuing
Answer: firm's stock at a predefined price
Question 10
1 out of 1 points
A convertible bond gives:
Selected the bond holder has a right, not an obligation, to convert his/her bonds
Answer: into shares of the issuing firm's common stock at a fixed price
Question 11
1 out of 1 points
[CONCEPT PROBLEM] Suppose a company issued 30-year bonds 4 years ago, when
the yield curve was downward sloping. Since then, long-term rates (10 years or
longer) have remained constant although the yield curve has resumed its normal
upward slope. Under such conditions, a bond refunding would be ____.
Selected Be
Answer: unprofitable
Question 12
1 out of 1 points
[CONCEPT PROBLEM] Assume that all interest rates in the economy decline from 10
percent to 6 percent. Which of the following bonds will experience the HIGHEST
PERCENTAGE INCREASE in price?
Selected A 10-year zero coupon
Answer: bond.
Question 13
1 out of 1 points
The appropriate discount rate to use when analyzing a bond refunding decision is:
Selected After-tax cost of
Answer: debt
Question 14
1 out of 1 points
For this and the next 2 questions. The City of Kiel issued $3,000,000 of 8% coupon,
30-year, semiannual payment, tax-exempt municipal bonds 10 years ago. The bonds
had 10 years of call protection, but now the bonds can be called if the city chooses
to do so. The call premium would be 6% of the face amount. New 20-year, 6%,
semiannual payment bonds can be sold at par, but flotation costs on this issue
would be 2% of the amount of bonds sold. Note that the combined costs associated
with calling the existing bonds and paying for the flotation cost of the new issue
represent the total initial outlay for the refinancing. Calculate this initial cost.
Selected $240,0
Answer: 00
Question 15
1 out of 1 points
Calculate the total semi-annual savings associated with the refinancing.
Selected $30,0
Answer: 00
Question 16
1 out of 1 points
What is the net present value of the refunding? Note that cities pay no income
taxes. Hence, taxes are not relevant in this analysis.
Selected $453,4
Answer: 43
Question 17
1 out of 1 points
For this and the next 3 question. New York Waste (NYW) is considering refunding a
$50,000,000, annual payment, 14.5% coupon, 30-year bond issue that was issued 5
years ago. It has been amortizing $3 million of flotation costs on these bonds over
their 30-year life. The company could sell a new issue of 25-year bonds at an annual
interest rate of 11.67% in today's market. A call premium of 14% would be required
to retire the old bonds, and flotation costs on the new issue would be $3 million. The
company's marginal tax rate is 40%. The new bonds would be issued when the old
bonds are called. Calculate the initial cost of the refunding?
Selected $6,200,0
Answer: 00
Question 18
1 out of 1 points
Calculate the after-tax annual INTEREST SAVINGS if the refunding takes place.
Selected $849,0
Answer: 00
Question 19
1 out of 1 points
The amortization of flotation costs reduces taxes and thus provides an annual cash
flow. Calculate the net increase or decrease in the annual flotation cost tax savings
if refunding takes place.
Selected $8,0
Answer: 00
Question 20
0 out of 1 points
What is the NPV if the bonds are refunded today?
Selected $2,037,5
Answer: 99
Question 21
1 out of 1 points
A callable bond with an original maturity of 20 years now has 15 years to mature.
The bond was originally issued at par with a coupon rate of 12% and semiannual
interest payments. The bond can be called 7 years from now at a 20 percent call
premium. Calculate this bond's yield-to-call and yield-to-maturity if current price is
$860.
Selected YTC = 17.09%; YTM =
Answer: 14.29%
Question 22
1 out of 1 points
[BOND VALUATION] A bond has a coupon rate of 8.125%, a maturity of 12.5 years, a
face value of $1,000, and makes semiannual payments. If the price is $934, what is
the ANNUAL yield to maturity on the bond?
Selected 9.016
Answer: %
