Test Bank For Fundamentals of Corporate Finance 9th Edition Richard Brealey Stewart Myers Alan Marcus

Test Bank for Fundamentals of Corporate Finance, 9th Edition, Richard Brealey, Stewart Myers
Test Bank for Fundamentals of Corporate Finance,

9th Edition, Richard Brealey, Stewart Myers Alan
Marcus
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Chapter 06 Test Bank - Static
Student: ___________________________________________________________________________
1. When a bond matures, the issuer repays the bond’s face value.
True False
2. When the market interest rate exceeds the coupon rate, bonds sell for less than face value.
True False
3. Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the
life of the bond.
True False
4. A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.
True False
5. A bond's bid price will be lower than the ask price.
True False
6. A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.
True False
7. Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds.
True False
8. Speculative-grade bonds have default risk; investment grade bonds do not.
True False
9. TIPS are unlike most bonds in that their cash flows increase when the national rate of gross domestic product increases.
True False
10. The return to bondholders is guaranteed to equal the yield to maturity only if the bond is held until maturity.
True False
11. It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.
True False
12. Indexed bonds in the United States are known as Treasury Interest-Paid Securities, or TIPS.
True False
13. The current yield measures the bond's total rate of return.
True False
14. When a financial calculator or spreadsheet program finds a bond's yield to maturity, it uses a trial-and-error process.
True False
15. Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds.
True False
16. Bonds with a rating of Ba or below by Moody's are referred to as speculative grade, high-yield, or junk bonds.
True False
17. Bonds rated BB or above by Standard & Poor's are called investment grade.
True False
18. Bonds rated Ba by Moody's have the same safety rating as the bonds rated BB by Standard & Poor's.
True False
19. Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the
purchase price and the payment of face value at maturity.
True False
20. Issuers compensate investors for default risk by putting a high face value on their bonds.
True False
21. Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.
True False
22. Bond ratings measure a bond's credit risk.
True False
23. The coupon rate of a bond equals:
A. its yield to maturity.

B. a defined percentage of its face value.
C. the yield to maturity when the bond sells at a discount.
D. the annual interest divided by the current market price.
24. Periodic receipts of interest by the bondholder are known as:
A. the coupon rate.

B. principal payments.
C. coupon payments.
D. the default premium.
25. As the coupon rate of a bond increases, the bond's:
A. face value increases.

B. current price decreases.
C. interest payments increase.
D. maturity date is extended.
26. Assume a bond is currently selling at par value. What will happen in the future if the yield on the bond is lower than the coupon
rate?
A. The price of the bond will increase.

B. The coupon rate of the bond will increase.
C. The par value of the bond will decrease.
D. The coupon payments will be adjusted to the new discount rate.
27. If a bond’s asked price is 97.162, the investor:
A. receives 97.162% of the stated coupon payments.

B. receives $971.62 upon the maturity date of the bond.
C. pays 97.162% of face value for the bond.
D. pays $10,971.62 for a $10,000 face value bond.
28. 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 appropriate discount
rate is 6%?
A. $209.91
B. $260.00
C. $760.00
D. $792.09
29. What happens to a discount bond as the time to maturity decreases?
A. The coupon rate increases.

B. The bond price increases.
C. The coupon rate decreases.
D. The bond price decreases.
30. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is
12%?
A. $927.90
B. $981.40
C. $1,000.00
D. $1,075.82
31. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the
interest rate is 7%?
A. $696.74
B. $1,075.82
C. $1,082.00
D. $1,123.01
32. Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?
A. The face value of the bond has decreased.

B. The bond's maturity value exceeds the bond's price.
C. The bond's internal rate of return is 7%.
D. The bond's market value is higher than its face value.
33. If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:
A. decline over time, reaching par value at maturity.

B. increase over time, reaching par value at maturity.
C. be less than the face value at maturity.
D. exceed the face value at maturity.
34. The current yield of a bond can be calculated by:
A. multiplying the price by the coupon rate.

B. dividing the price by the annual coupon payments.
C. dividing the price by the par value.
D. dividing the annual coupon payments by the price.
35. What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?
A. 6.00%
B. 7.14%
C. 5.04%
D. 6.38%
36. A bond's par value can also be called its:
A. coupon payment.
B. present value.
C. market value.
D. face value.
37. A bond's yield to maturity takes into consideration:
A. current yield but not any price changes.

B. price changes but not the current yield.
C. both the current yield and any price changes.
D. neither the current yield nor any price changes.
38. The discount rate that makes the present value of a bond's payments equal to its price is termed the:
A. dividend yield.
B. yield to maturity.
C. current yield.
D. coupon rate.
39. What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%? Interest is
paid annually.
A. 6%
B. 8%
C. 10%
D. 11%
40. What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?
A. 6.0%
B. 8.5%
C. 10.0%
D. 12.5%
41. Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's
price will:
A. increase by $51.54.
B. decrease by $51.54.
C. increase by $53.46.
D. decrease by $53.46.
42. Which one of the following bond values will change when interest rates change?
A. The expected cash flows

B. The present value
C. The coupon payment
D. The maturity value
43. What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change
from 9% to 10%?
A. The coupon rate increases to 10%.

B. The coupon rate remains at 9%.
C. The coupon rate remains at 8%.
D. The coupon rate decreases to 8%.
44. Which one of the following is fixed for the life of a given bond?
A. Current price
B. Current yield
C. Yield to maturity
D. Coupon rate
45. What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with an annual coupon payment of 6.5% and sells
the bond 1 year later for $1,037.19?
A. 4.53%
B. 5.33%
C. 5.16%
D. 4.92%
46. If a bond investor's yield for a particular period does not change, then during that period, the bond's return :
A. is zero.
B. increases.
C. equals the yield.
D. is indeterminate.
47. What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until
it matures?
A. The rate of return will be lower than the yield to maturity.

B. The rate of return will be higher than the yield to maturity.
C. The rate of return will equal the yield to maturity.
D. It could be higher or lower.
48. If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be:
A. lower than current interest rates.

B. equal to the coupon rate.
C. higher than the coupon rate.
D. lower than the coupon rate.
49. If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year
from now if interest rates are constant?
A. $904.90
B. $925.39
C. $947.93
D. $1,000.00
50. What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?
A. $100,135.41
B. $135,000.41
C. $136,269.38
D. $135,406.20
51. You purchased a 6% annual coupon bond at face value and sold it one year later for $1,015.16. What was your rate of return on
this investment if the face value at maturity was $1,000?
A. 4.48%
B. 6.15%
C. 7.52%
D. 6.07%
52. How does a bond dealer generate profits when trading bonds?
A. By maintaining bid prices lower than ask prices

B. By maintaining bid prices higher than ask prices
C. By retaining the bond’s next coupon payment
D. By lowering the bond’s coupon rate upon resale
53. A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount
of the next interest payment?
A. $50
B. $55
C. $100
D. $110
54. The yield curve depicts the current relationship between:
A. bond yields and default risk.

B. bond maturity and bond ratings.
C. bond yields and maturity.
D. promised yields and default premiums.
55. When the yield curve is upward-sloping, then:
A. short-maturity bonds offer the highest coupon rates.

B. long-maturity bonds are priced above par value.
C. short-maturity bonds yield less than long-maturity bonds.
D. long-maturity bonds increase in price when interest rates increase.
56. Nominal U.S. Treasury bond yields:
A. are constant over time.

B. are equal to the real yields.
C. include a default premium.
D. include an inflation premium.
57. Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield?
Assume both bonds are selling at a premium.
A. Real rate of return

B. Inflation premium
C. Default premium
D. Loss of premium
58. The purpose of a floating-rate bond is to:
A. save interest expense for corporate issuers.

B. avoid making interest payments until maturity.
C. shift the yield curve.
D. offer rates that adjust to current market conditions.
59. Which of the following would not be associated with a zero-coupon bond?
A. Yield to maturity
B. Discount bond
C. Current yield
D. Interest-rate risk
60. Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?
A. A zero-coupon bond with 20 years until maturity

B. A coupon-paying bond with 20 years until maturity
C. A floating-rate bond with 20 years until maturity
D. A zero-coupon bond with 30 years until maturity
61. A "convertible bond" provides the option to convert:
A. a bond into shares of common stock.

B. fixed-rate coupon payments into variable-rate payments.
C. a zero-coupon bond to a coupon-paying bond.
D. a junk bond to a zero-coupon investment-grade bond.
62. Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments. She sold the bond after 6 months and
earned a total return of 4.8% on this investment. At what price, did she sell the bond?
A. $1,001.47
B. $974.28
C. $981.06
D. $1,003.18
63. A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years is called a:
A. TIPS.
B. Treasury bill.
C. Treasury bond.
D. Treasury note.
64. Which one of the following must be correct for a bond currently selling at a premium?
A. Its coupon rate is variable.

B. Its current yield is lower than its coupon rate.
C. Its yield to maturity is higher than its coupon rate.
D. Its coupon rate is lower than the current market rate on similar bonds.
65. A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3 years. What is its yield to maturity?
A. 4.78%
B. 5.48%
C. 9.57%
D. 12.17%
66. Which type of bond is certain to provide a capital loss if held to maturity?
A. Discount bond
B. Premium bond
C. Zero-coupon bond
D. Junk bond
67. Investors who purchase bonds having lower credit ratings should expect:
A. lower yields to maturity.

B. higher default possibilities.
C. lower coupon payments.
D. higher purchase prices.
68. A bond has a face value of $1,000, has 5 years until maturity, and an annual coupon rate of 7%? It yields 5% currently. By how
much will the price change over the next year if the yield remains constant?
A. zero
B. decline by $86.59
C. decline by $15.67
D. rise by $15.67
69. If a bond is priced at par value, then:
A. it has a very low level of default risk.

B. its coupon rate equals its yield to maturity.
C. it must be a zero-coupon bond.
D. the bond is quite close to maturity.
70. The existence of an upward-sloping yield curve suggests that:
A. bonds should be selling at a discount to par value.

B. bonds will not return as much as common stocks.
C. interest rates may be increasing in the future.
D. real interest rates will be increasing soon.
71. What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to
maturity of 9.37%?
A. $98.64
B. $95.27
C. $101.38
D. $104.97
72. This morning, you purchased a TIPS. Which one of these should you expect to occur if you hold this bond during an inflationary
period?
A. The coupon payment will increase in real terms.

B. The maturity value will increase in nominal terms.
C. The market price will remain constant at par.
D. The market price will decrease.
73. Many investors may be drawn to municipal bonds because of the bonds':
A. speculative grade ratings.

B. high coupon payments.
C. long periods until maturity.
D. income exemption from federal taxes.
74. Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon. If interest rates for that grade of
bond are currently 8.25%, what will be the market price of these bonds?
A. $917.06
B. $928.84
C. $987.50
D. $1,000.00
75. If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:
A. bond is selling at a discount.

B. bond has a high default premium.
C. promised yield is not likely to materialize.
D. bond must be a Treasury Inflation-Protected Security.
76. What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% annual coupon and 5 years until
maturity, then sells the bond after 1 year for $1,085?
A. 6.82%
B. 6.91%
C. 7.64%
D. 9.00%
77. How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10%
yield to maturity, only to see market interest rates increase to 12% one year later?
A. $19.93
B. $20.00
C. $23.93
D. $25.66
78. Assume a bond has been owned by four different investors during its 20-year history. Which one of the following is most likely
to have been different for each of these owners?
A. Coupon rate
B. Coupon frequency
C. Par value
D. Yield to maturity
79. If an investor purchases a 3%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years,
what will be the real value of the principal at maturity?
A. $1,000.00
B. $1,030.00
C. $1,060.90
D. $1,061.36
80. Which one of the following is correct concerning real interest rates?
A. Real interest rates are constant.

B. Real interest rates must be positive.
C. Real interest rates must be less than nominal interest rates.
D. Real interest rates, if positive, increase purchasing power over time.
81. An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following
is more likely if interest rates suddenly increase by 2%?
A. The 5-year bond will decrease more in price.

B. The 20-year bond will decrease more in price.
C. Both bonds will decrease in price by the same proportion.
D. Neither bond will decrease in price, but their yields will increase.
82. How much should you be prepared to pay for a 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?
A. $411.84
B. $897.04
C. $985.00
D. $1,000.00
83. How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually
compounded yield of 7.5%?
A. $895.78
B. $897.04
C. $938.40
D. $1,312.66
84. The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of
these may have caused this price increase?
A. The bond's rating was downgraded.

B. The issuing firm announced the next interest payment.
C. The issuing firm announced that its annual earnings met investor expectations.
D. Market interest rates decreased.
85. An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985. What was the
investor's rate of return?
A. 9.00%
B. 9.23%
C. 9.65%
D. 10.26%
86. An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the investor's
rate of return?
A. 5.71%
B. 6.00%
C. 6.67%
D. 7.00%
87. An investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. The investor sold the bond
prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond?
A. The bond's current yield increased above the bond's coupon rate.
B. The inflation rate increased.
C. Market interest rates declined.
D. Market interest rates increased.
88. A bond has an ask quote of 99.5625 and a bid quote of 99.5475. How much will the bond dealer make on the purchase and resale
of a $100,000 bond?
A. $150
B. $1,500
C. $15
D. $1.50
89. What are the conditions imposed on a debt issuer that are designed to protect bondholders ?
A. Collateral agreements
B. Vanilla wrappers
C. Protective covenants
D. Default provisions
90. The holder of which one of these securities has first claim on the assets of a firm?
A. Senior debt
B. Common stock
C. Subordinated debt
D. Preferred stock
91. When market interest rates exceed a bond's coupon rate, the bond will:
A. sell for less than par value.

B. sell for more than par value.
C. decrease its coupon rate.
D. increase its coupon rate.
92. Which one of the following is most likely for a CCC-rated bond, compared to a BBB-rated bond?
A. The CCC bond will have a variable-coupon rate.

B. The CCC bond will have a shorter term.
C. The CCC bond will offer a higher promised yield to maturity.
D. The CCC bond will have a higher price for the same term.
93. Which of these bond ratings is the lowest of Moody's investment-grade ratings?
A. A
B. Ba
C. Aa
D. Baa
94. If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%, then the investor's real
return is:
A. 6.73%.
B. 6.31%.
C. 15.44%.
D. 10.56%.
95. What nominal return would an investor need to receive if he desires a real return of 4% and the rate of inflation is 5%?
A. 4.20%
B. 8.64%
C. 9.00%
D. 9.20%
96. If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have
remained stable?
A. $848.12
B. $923.50
C. $862.92
D. $911.15
97. An investor buys a 10-year annual coupon bond at a yield of 8.7% and sells it 2 years later when it still yields 8.7%. What is his
rate of return over this period?
A. zero.
B. 8.7%.
C. Can’t say without knowing the coupon.
D. 17.4%.
98. What causes bonds to sell for a premium?
A. Investment-quality ratings
B. Long periods until maturity
C. Coupon rates that exceed market rates
D. Speculative-grade ratings
99. The current yield tends to overstate a bond's total return when the bond sells for a premium because:
A. the bond's price will decline each year.

B. coupon payments can change at any time.
C. bonds selling for a premium have low default risk.
D. taxes must be paid on the current yield.
100. The current yield tends to understate a bond's total return when the bond sells for a discount because:
A. increases in interest rates will increase the current yield.

B. the bond's price will increase each year.
C. current yields show only nominal returns.
D. the bond may have a higher face value.
101. When comparing a highly liquid bond with a comparable but less liquid bond, the highly liquid bond is most apt to have:
A. a lower yield.
B. a shorter maturity.
C. a higher yield.
D. a longer maturity.
102. Which one of these statements is not correct?
A. When a foreign government borrows dollars, investors worry that in some future crisis the government will not have
sufficient dollars to repay the debt.
B. When the Japanese government borrows yen, investors worry that in some future crisis the government will not have
sufficient yen to repay the debt.
C. When a Eurozone government borrows euros, investors worry that in some future crisis the government will not have
sufficient euros to repay the debt.
D. When the U.S. government issues Treasury bonds, investors never need to worry that they will not be paid back.
Chapter 06 Test Bank - Static Key
1. When a bond matures, the issuer repays the bond’s face value.
TRUE
AACSB: Communication
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity.
Topic: Bond features
2. When the market interest rate exceeds the coupon rate, bonds sell for less than face value.
TRUE
AACSB: Reflective Thinking

Blooms: Understand
Difficulty: 2 Medium
Gradable: automatic
Learning Objective: 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given its price, and demonstrate why prices and yields move in
opposite directions.
Topic: Bond valuation
3. Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over
the life of the bond.
TRUE

Blooms: Understand
Gradable: automatic
Topic: Bond yields and returns
4. A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.
FALSE

Blooms: Understand
Gradable: automatic
5. A bond's bid price will be lower than the ask price.
TRUE

Blooms: Understand
Gradable: automatic
Topic: Bond quotes and trading
6. A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.
FALSE

Blooms: Understand
Gradable: automatic
7. Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds.
TRUE

Blooms: Understand
Gradable: automatic
Learning Objective: 06-05 Understand why investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings.
Topic: Bond ratings and credit risk
8. Speculative-grade bonds have default risk; investment grade bonds do not.
FALSE

Blooms: Understand
Gradable: automatic
9. TIPS are unlike most bonds in that their cash flows increase when the national rate of gross domestic product increases.
FALSE

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Learning Objective: 06-03 Show why bonds exhibit interest rate risk.
Topic: Bond types
10. The return to bondholders is guaranteed to equal the yield to maturity only if the bond is held until maturity.
TRUE
Blooms: Remember
Gradable: automatic
11. It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.
FALSE

Blooms: Understand
Gradable: automatic
12. Indexed bonds in the United States are known as Treasury Interest-Paid Securities, or TIPS.
FALSE
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Bond types
13. The current yield measures the bond's total rate of return.
FALSE

Blooms: Understand
Gradable: automatic
14. When a financial calculator or spreadsheet program finds a bond's yield to maturity, it uses a trial-and-error process.
TRUE
AACSB: Technology
Blooms: Remember
Gradable: automatic
15. Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds.
TRUE

Blooms: Understand
Gradable: automatic
Learning Objective: 06-04 Understand why investors draw a plot of bond yields against maturity.
16. Bonds with a rating of Ba or below by Moody's are referred to as speculative grade, high-yield, or junk bonds.
TRUE
Blooms: Remember
Gradable: automatic
17. Bonds rated BB or above by Standard & Poor's are called investment grade.
FALSE
Blooms: Remember
Gradable: automatic
18. Bonds rated Ba by Moody's have the same safety rating as the bonds rated BB by Standard & Poor's.
TRUE
Blooms: Remember
Gradable: automatic
19. Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the
purchase price and the payment of face value at maturity.
TRUE

Blooms: Understand
Gradable: automatic
20. Issuers compensate investors for default risk by putting a high face value on their bonds.
FALSE
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
21. Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.
TRUE

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
22. Bond ratings measure a bond's credit risk.
TRUE

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
23. The coupon rate of a bond equals:
A. its yield to maturity.

B. a defined percentage of its face value.
C. the yield to maturity when the bond sells at a discount.
D. the annual interest divided by the current market price.

Blooms: Understand
Gradable: automatic
24. Periodic receipts of interest by the bondholder are known as:
A. the coupon rate.

B. principal payments.
C. coupon payments.
D. the default premium.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Bond coupons
25. As the coupon rate of a bond increases, the bond's:
A. face value increases.

B. current price decreases.
C. interest payments increase.
D. maturity date is extended.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Bond coupons
26. Assume a bond is currently selling at par value. What will happen in the future if the yield on the bond is lower than the
coupon rate?
A. The price of the bond will increase.

B. The coupon rate of the bond will increase.
C. The par value of the bond will decrease.
D. The coupon payments will be adjusted to the new discount rate.

Blooms: Understand
Gradable: automatic
Topic: Interest rate risk
27. If a bond’s asked price is 97.162, the investor:
A. receives 97.162% of the stated coupon payments.

B. receives $971.62 upon the maturity date of the bond.
C. pays 97.162% of face value for the bond.
D. pays $10,971.62 for a $10,000 face value bond.

Blooms: Apply
Gradable: automatic
28. 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 appropriate
discount rate is 6%?
A. $209.91
B. $260.00
C. $760.00
D. $792.09
$1,000 / 1.064 = $792.09
AACSB: Analytical Thinking

Blooms: Analyze
Gradable: automatic
29. What happens to a discount bond as the time to maturity decreases?
A. The coupon rate increases.

B. The bond price increases.
C. The coupon rate decreases.
D. The bond price decreases.

Blooms: Understand
Gradable: automatic
30. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate
is 12%?
A. $927.90
B. $981.40
C. $1,000.00
D. $1,075.82
Price = (0.10 × $1,000) {(1 / 0.12) − [1 / 0.12(1.12)5]} + $1,000/1.125
Price = $927.90

Blooms: Analyze
Gradable: automatic
31. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if
the interest rate is 7%?
A. $696.74
B. $1,075.82
C. $1,082.00
D. $1,123.01
Price = (0.09 × $1,000) {(1 / 0.07) − [1 / 0.07(1.07)5]} + $1,000 / 1.075
Price = $1,082.00

Blooms: Analyze
Gradable: automatic
32. Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?
A. The face value of the bond has decreased.

B. The bond's maturity value exceeds the bond's price.
C. The bond's internal rate of return is 7%.
D. The bond's market value is higher than its face value.

Blooms: Understand
Gradable: automatic
33. If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected
to:
A. decline over time, reaching par value at maturity.

B. increase over time, reaching par value at maturity.
C. be less than the face value at maturity.
D. exceed the face value at maturity.

Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
34. The current yield of a bond can be calculated by:
A. multiplying the price by the coupon rate.

B. dividing the price by the annual coupon payments.
C. dividing the price by the par value.
D. dividing the annual coupon payments by the price.

Blooms: Understand
Gradable: automatic
35. What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?
A. 6.00%
B. 7.14%
C. 5.04%
D. 6.38%
Current yield = $60 / (0.84 × $1,000) = 0.0714, or 7.14%

Blooms: Analyze
Gradable: automatic
36. A bond's par value can also be called its:
A. coupon payment.
B. present value.
C. market value.
D. face value.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
37. A bond's yield to maturity takes into consideration:
A. current yield but not any price changes.

B. price changes but not the current yield.
C. both the current yield and any price changes.
D. neither the current yield nor any price changes.

Blooms: Understand
Gradable: automatic
38. The discount rate that makes the present value of a bond's payments equal to its price is termed the:
A. dividend yield.
B. yield to maturity.
C. current yield.
D. coupon rate.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
39. What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%? Interest is
paid annually.
A. 6%
B. 8%
C. 10%
D. 11%
$1,053.46 = PMT {(1 / 0.06) − [1 / 0.06(1.16) 3]} + $1,000 / 1.063
PMT = $80
Coupon rate = $80 / $1,000 = 0.08, or 8%

Blooms: Analyze
Gradable: automatic
Topic: Bond coupons
40. What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?
A. 6.0%
B. 8.5%
C. 10.0%
D. 12.5%
Since the bond is selling at par, the yield to maturity must equal the coupon rate which is:
Coupon rate = $100 / $1,000 = 0.10, or 10%

Blooms: Analyze
Difficulty: 1 Easy
Gradable: automatic
41. Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's
price will:
A. increase by $51.54.
B. decrease by $51.54.
C. increase by $53.46.
D. decrease by $53.46.
Price = (0.08 × $1,000) {(1 / 0.06) − [1 / 0.06(1.06)3]} + $1,000 / 1.063
Price = $1,053.46
This is a price increase of $53.46, since the bond had sold at par.

Blooms: Analyze
Gradable: automatic
42. Which one of the following bond values will change when interest rates change?
A. The expected cash flows

B. The present value
C. The coupon payment
D. The maturity value

Blooms: Understand
Gradable: automatic
43. What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates
change from 9% to 10%?
A. The coupon rate increases to 10%.

B. The coupon rate remains at 9%.
C. The coupon rate remains at 8%.
D. The coupon rate decreases to 8%.

Blooms: Understand
Gradable: automatic
Topic: Bond coupons
44. Which one of the following is fixed for the life of a given bond?
A. Current price
B. Current yield
C. Yield to maturity
D. Coupon rate
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
Topic: Bond coupons
45. What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with an annual coupon payment of 6.5% and
sells the bond 1 year later for $1,037.19?
A. 4.53%
B. 5.33%
C. 5.16%
D. 4.92%
Rate of return = [$1,037.19 + (0.065 × $1,000) − $1,054.47] / $1,054.47 = 0.0453, or 4.53%

Blooms: Analyze
Gradable: automatic
46. If a bond investor's yield for a particular period does not change, then during that period, the bond's return :
A. is zero.
B. increases.
C. equals the yield.
D. is indeterminate.

Blooms: Understand
Gradable: automatic
47. What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond
until it matures?
A. The rate of return will be lower than the yield to maturity.

B. The rate of return will be higher than the yield to maturity.
C. The rate of return will equal the yield to maturity.
D. It could be higher or lower.

Blooms: Apply
Gradable: automatic
48. If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be:
A. lower than current interest rates.

B. equal to the coupon rate.
C. higher than the coupon rate.
D. lower than the coupon rate.

Blooms: Apply
Gradable: automatic
49. If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year
from now if interest rates are constant?
A. $904.90
B. $925.39
C. $947.93
D. $1,000.00
Price = (0.07 × $1,000) {(1 / 0.10) − [1 / 0.10(1.10)3]} + $1,000 / 1.103
Price = $925.39

Blooms: Analyze
Gradable: automatic
50. What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?
A. $100,135.41
B. $135,000.41
C. $136,269.38
D. $135,406.20
Price = 1.354062 × $100,000 = $135,406.20

Blooms: Apply
Gradable: automatic
51. You purchased a 6% annual coupon bond at face value and sold it one year later for $1,015.16. What was your rate of return
on this investment if the face value at maturity was $1,000?
A. 4.48%
B. 6.15%
C. 7.52%
D. 6.07%
Rate of return = [$1,015.16 + (0.06 × $1,000) − $1,000] / $1,000 = 0.0752, or 7.52%

Blooms: Analyze
Gradable: automatic
52. How does a bond dealer generate profits when trading bonds?
A. By maintaining bid prices lower than ask prices

B. By maintaining bid prices higher than ask prices
C. By retaining the bond’s next coupon payment
D. By lowering the bond’s coupon rate upon resale

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
53. A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the
amount of the next interest payment?
A. $50
B. $55
C. $100
D. $110
Coupon payment = (0.10 × $1,000) / 2 = $50

Blooms: Analyze
Gradable: automatic
Topic: Bond coupons
54. The yield curve depicts the current relationship between:
A. bond yields and default risk.

B. bond maturity and bond ratings.
C. bond yields and maturity.
D. promised yields and default premiums.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Treasury yield curve
55. When the yield curve is upward-sloping, then:
A. short-maturity bonds offer the highest coupon rates.

B. long-maturity bonds are priced above par value.
C. short-maturity bonds yield less than long-maturity bonds.
D. long-maturity bonds increase in price when interest rates increase.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
56. Nominal U.S. Treasury bond yields:
A. are constant over time.

B. are equal to the real yields.
C. include a default premium.
D. include an inflation premium.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
57. Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield?
Assume both bonds are selling at a premium.
A. Real rate of return

B. Inflation premium
C. Default premium
D. Loss of premium

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
58. The purpose of a floating-rate bond is to:
A. save interest expense for corporate issuers.

B. avoid making interest payments until maturity.
C. shift the yield curve.
D. offer rates that adjust to current market conditions.

Blooms: Understand
Gradable: automatic
Topic: Bond types
59. Which of the following would not be associated with a zero-coupon bond?
A. Yield to maturity
B. Discount bond
C. Current yield
D. Interest-rate risk

Blooms: Understand
Gradable: automatic
Topic: Bond types
60. Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?
A. A zero-coupon bond with 20 years until maturity

B. A coupon-paying bond with 20 years until maturity
C. A floating-rate bond with 20 years until maturity
D. A zero-coupon bond with 30 years until maturity

Blooms: Understand
Gradable: automatic
61. A "convertible bond" provides the option to convert:
A. a bond into shares of common stock.

B. fixed-rate coupon payments into variable-rate payments.
C. a zero-coupon bond to a coupon-paying bond.
D. a junk bond to a zero-coupon investment-grade bond.
Blooms: Remember
Gradable: automatic
62. Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments. She sold the bond after 6 months
and earned a total return of 4.8% on this investment. At what price, did she sell the bond?
A. $1,001.47
B. $974.28
C. $981.06
D. $1,003.18
0.048 = (Selling price + [(0.07 × $1,000) / 2] − $989) / $989
Selling price = $1,001.47

Blooms: Analyze
Gradable: automatic
63. A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years is called a:
A. TIPS.
B. Treasury bill.
C. Treasury bond.
D. Treasury note.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
64. Which one of the following must be correct for a bond currently selling at a premium?
A. Its coupon rate is variable.

B. Its current yield is lower than its coupon rate.
C. Its yield to maturity is higher than its coupon rate.
D. Its coupon rate is lower than the current market rate on similar bonds.

Blooms: Understand
Gradable: automatic
65. A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3 years. What is its yield to
maturity?
A. 4.78%
B. 5.48%
C. 9.57%
D. 12.17%
Using a financial calculator:
n = 6; PV = −$960; PMT = $40; FV = $1,000, CPT i = 4.7826%
YTM = 2 × 4.7826% = 9.57%
AACSB: Technology
Blooms: Analyze
Gradable: automatic
66. Which type of bond is certain to provide a capital loss if held to maturity?
A. Discount bond
B. Premium bond
C. Zero-coupon bond
D. Junk bond

Blooms: Apply
Gradable: automatic
67. Investors who purchase bonds having lower credit ratings should expect:
A. lower yields to maturity.

B. higher default possibilities.
C. lower coupon payments.
D. higher purchase prices.

Blooms: Understand
Gradable: automatic
68. A bond has a face value of $1,000, has 5 years until maturity, and an annual coupon rate of 7%? It yields 5% currently. By
how much will the price change over the next year if the yield remains constant?
A. zero
B. decline by $86.59
C. decline by $15.67
D. rise by $15.67
Price today = $70(1 / 0.05+1 / (0.05 × 1.054)) + $1,070 / 1.055 = $1,086.59
Price next year = $70(1 / 0.05+1 / (0.05 × 1.053)) + $1,070 / 1.054 = $1,070.92
Price declines by $15.67

Blooms: Analyze
Gradable: automatic
69. If a bond is priced at par value, then:
A. it has a very low level of default risk.

B. its coupon rate equals its yield to maturity.
C. it must be a zero-coupon bond.
D. the bond is quite close to maturity.

Blooms: Understand
Gradable: automatic
70. The existence of an upward-sloping yield curve suggests that:
A. bonds should be selling at a discount to par value.

B. bonds will not return as much as common stocks.
C. interest rates may be increasing in the future.
D. real interest rates will be increasing soon.

Blooms: Understand
Gradable: automatic
71. What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield
to maturity of 9.37%?
A. $98.64
B. $95.27
C. $101.38
D. $104.97
$1,050 = PMT {(1 / 0.0937) − [1 / 0.0937(1.0937)6]} + $1,000 / 1.09376
PMT = $104.97

Blooms: Analyze
Gradable: automatic
Topic: Bond coupons
72. This morning, you purchased a TIPS. Which one of these should you expect to occur if you hold this bond during an
inflationary period?
A. The coupon payment will increase in real terms.

B. The maturity value will increase in nominal terms.
C. The market price will remain constant at par.
D. The market price will decrease.

Blooms: Apply
Gradable: automatic
73. Many investors may be drawn to municipal bonds because of the bonds':
A. speculative grade ratings.

B. high coupon payments.
C. long periods until maturity.
D. income exemption from federal taxes.
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
74. Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon. If interest rates for that grade
of bond are currently 8.25%, what will be the market price of these bonds?
A. $917.06
B. $928.84
C. $987.50
D. $1,000.00
Price = (0.07 × $1,000) {(1 / 0.0825) − [1 / 0.0825(1.0825)10 − 2]} + $1,000 / 1.082510 − 2

Blooms: Analyze
Gradable: automatic
75. If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:
A. bond is selling at a discount.

B. bond has a high default premium.
C. promised yield is not likely to materialize.
D. bond must be a Treasury Inflation-Protected Security.

Blooms: Understand
Gradable: automatic
76. What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% annual coupon and 5 years until
maturity, then sells the bond after 1 year for $1,085?
A. 6.82%
B. 6.91%
C. 7.64%
D. 9.00%
Total return = [$1,085 + (0.09 × $1,000) − $1,100] / $1,100 = 0.0682, or 6.82%

Blooms: Analyze
Gradable: automatic
77. How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a
10% yield to maturity, only to see market interest rates increase to 12% one year later?
A. $19.93
B. $20.00
C. $23.93
D. $25.66
Price = $1,000 / 1.1030 = $57.31
New price = $1,000 / 1.1229 = $37.38
Loss = $57.31 − 37.38 = $19.93

Blooms: Analyze
Difficulty: 3 Hard
Gradable: automatic
78. Assume a bond has been owned by four different investors during its 20-year history. Which one of the following is most
likely to have been different for each of these owners?
A. Coupon rate
B. Coupon frequency
C. Par value
D. Yield to maturity

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
79. If an investor purchases a 3%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years,
what will be the real value of the principal at maturity?
A. $1,000.00
B. $1,030.00
C. $1,060.90
D. $1,061.36
The real value of the principal will remain constant at the par value.

Blooms: Apply
Gradable: automatic
80. Which one of the following is correct concerning real interest rates?
A. Real interest rates are constant.

B. Real interest rates must be positive.
C. Real interest rates must be less than nominal interest rates.
D. Real interest rates, if positive, increase purchasing power over time.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
Topic: Nominal and real rates
81. An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the
following is more likely if interest rates suddenly increase by 2%?
A. The 5-year bond will decrease more in price.

B. The 20-year bond will decrease more in price.
C. Both bonds will decrease in price by the same proportion.
D. Neither bond will decrease in price, but their yields will increase.

Blooms: Understand
Gradable: automatic
82. How much should you be prepared to pay for a 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?
A. $411.84
B. $897.04
C. $985.00
D. $1,000.00
Price = (0.06 × $1,000) {(1 / 0.075) − [1 / 0.075(1.075)10]} + $1,000 / 1.07510
Price = $897.04

Blooms: Analyze
Gradable: automatic
83. How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually
compounded yield of 7.5%?
A. $895.78
B. $897.04
C. $938.40
D. $1,312.66
Semiannual interest rate = 0.075 / 2 = 0.0375
Price = [(0.06 / 2) × $1,000)] {(1 / 0.0375) − [1 / 0.0375(1.0375) 10 × 2]} + $1,000 / 1.037510 × 2
Price = $895.78

Blooms: Analyze
Gradable: automatic
84. The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of
these may have caused this price increase?
A. The bond's rating was downgraded.

B. The issuing firm announced the next interest payment.
C. The issuing firm announced that its annual earnings met investor expectations.
D. Market interest rates decreased.

Blooms: Analyze
Gradable: automatic
85. An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985. What was the
A. 9.00%
B. 9.23%
C. 9.65%
D. 10.26%
Rate of return = [$985 + (0.09 × $1,000) − $975] / $975 = 0.1026, or 10.26%

Blooms: Analyze
Gradable: automatic
86. An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the
A. 5.71%
B. 6.00%
C. 6.67%
D. 7.00%
Rate of return = [$1,040 + (0.07 × $1,000) − $1,050] / $1,050 = 0.0571, or 5.71%

Blooms: Analyze
Gradable: automatic
87. An investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. The investor sold the bond
prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the
bond?
A. The bond's current yield increased above the bond's coupon rate.
B. The inflation rate increased.
C. Market interest rates declined.
D. Market interest rates increased.

Blooms: Understand
Difficulty: 3 Hard
Gradable: automatic
88. A bond has an ask quote of 99.5625 and a bid quote of 99.5475. How much will the bond dealer make on the purchase and
resale of a $100,000 bond?
A. $150
B. $1,500
C. $15
D. $1.50
Dealer profit = (0.995625 − 0.995475) × $100,000 = $15

Blooms: Analyze
Gradable: automatic
89. What are the conditions imposed on a debt issuer that are designed to protect bondholders ?
A. Collateral agreements
B. Vanilla wrappers
C. Protective covenants
D. Default provisions
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
90. The holder of which one of these securities has first claim on the assets of a firm?
A. Senior debt
B. Common stock
C. Subordinated debt
D. Preferred stock
Blooms: Remember
Gradable: automatic
91. When market interest rates exceed a bond's coupon rate, the bond will:
A. sell for less than par value.

B. sell for more than par value.
C. decrease its coupon rate.
D. increase its coupon rate.

Blooms: Understand
Gradable: automatic
92. Which one of the following is most likely for a CCC-rated bond, compared to a BBB-rated bond?
A. The CCC bond will have a variable-coupon rate.

B. The CCC bond will have a shorter term.
C. The CCC bond will offer a higher promised yield to maturity.
D. The CCC bond will have a higher price for the same term.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
93. Which of these bond ratings is the lowest of Moody's investment-grade ratings?
A. A
B. Ba
C. Aa
D. Baa
Blooms: Remember
Difficulty: 1 Easy
Gradable: automatic
94. If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%, then the investor's real
return is:
A. 6.73%.
B. 6.31%.
C. 15.44%.
D. 10.56%.
1 + real return = 1.11 / 1.04 − 1 = 0.0673, or 6.73%

Blooms: Analyze
Gradable: automatic
95. What nominal return would an investor need to receive if he desires a real return of 4% and the rate of inflation is 5%?
A. 4.20%
B. 8.64%
C. 9.00%
D. 9.20%
Nominal return = (1.04 ×1.05) − 1 = 0.0920, or 9.20%

Blooms: Analyze
Gradable: automatic
96. If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have
remained stable?
A. $848.12
B. $923.50
C. $862.92
D. $911.15
$691.72 = $1,000 / (1 + i)5
i = 0.0765
Price = $1,000 / 1.07652
Price = $862.92

Blooms: Analyze
Gradable: automatic
97. An investor buys a 10-year annual coupon bond at a yield of 8.7% and sells it 2 years later when it still yields 8.7%. What is
his rate of return over this period?
A. zero.
B. 8.7%.
C. Can’t say without knowing the coupon.
D. 17.4%.

Blooms: Understand
Gradable: automatic
98. What causes bonds to sell for a premium?
A. Investment-quality ratings
B. Long periods until maturity
C. Coupon rates that exceed market rates
D. Speculative-grade ratings

Blooms: Understand
Gradable: automatic
99. The current yield tends to overstate a bond's total return when the bond sells for a premium because:
A. the bond's price will decline each year.

B. coupon payments can change at any time.
C. bonds selling for a premium have low default risk.
D. taxes must be paid on the current yield.

Blooms: Understand
Gradable: automatic
100. The current yield tends to understate a bond's total return when the bond sells for a discount because:
A. increases in interest rates will increase the current yield.

B. the bond's price will increase each year.
C. current yields show only nominal returns.
D. the bond may have a higher face value.

Blooms: Understand
Gradable: automatic
101. When comparing a highly liquid bond with a comparable but less liquid bond, the highly liquid bond is most apt to have:
A. a lower yield.
B. a shorter maturity.
C. a higher yield.
D. a longer maturity.

Blooms: Understand
Difficulty: 1 Easy
Gradable: automatic
102. Which one of these statements is not correct?
A. When a foreign government borrows dollars, investors worry that in some future crisis the government will not have
sufficient dollars to repay the debt.
B. When the Japanese government borrows yen, investors worry that in some future crisis the government will not have
sufficient yen to repay the debt.
C. When a Eurozone government borrows euros, investors worry that in some future crisis the government will not have
sufficient euros to repay the debt.
D. When the U.S. government issues Treasury bonds, investors never need to worry that they will not be paid back.
Blooms: Understand
Gradable: automatic
Topic: Sovereign debt
Test Bank for Fundamentals of Corporate Finance, 9th Edition, Richard Brealey, Stewart Myers
Chapter 06 Test Bank - Static Summary
Category # of Questions
AACSB: Analytical Thinking 26
AACSB: Communication 18
AACSB: Reflective Thinking 56
AACSB: Technology 2
Accessibility: Keyboard Navigation 102
Blooms: Analyze 27
Blooms: Apply 7
Blooms: Remember 18
Blooms: Understand 50
Difficulty: 1 Easy 25
Difficulty: 2 Medium 74
Difficulty: 3 Hard 3
Gradable: automatic 102
Learning Objective: 06-01 Distinguish among a bond’s coupon rate, current yield, and yield to maturity. 28
Learning Objective: 06-02 Find the market price of a bond given its yield to maturity, find a bond’s yield given 39
its price, and demonstrate why prices and yields move in opposite directions.
Learning Objective: 06-03 Show why bonds exhibit interest rate risk. 16
Learning Objective: 06-04 Understand why investors draw a plot of bond yields against maturity. 3
Learning Objective: 06-05 Understand why investors pay attention to bond ratings and demand a higher 16
interest rate for bonds with low ratings.
Topic: Bond coupons 7
Topic: Bond features 8
Topic: Bond quotes and trading 6
Topic: Bond ratings and credit risk 11
Topic: Bond types 4
Topic: Bond valuation 16
Topic: Bond yields and returns 34
Topic: Interest rate risk 9
Topic: Nominal and real rates 3
Topic: Sovereign debt 1
Topic: Treasury yield curve 3
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Test Bank For Fundamentals of Corporate Finance 9th Edition Richard Brealey Stewart Myers Alan Marcus

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5. A bond's bid price will be lower than the ask price.

8. Speculative-grade bonds have default risk; investment grade bonds do not.

22. Bond ratings measure a bond's credit risk.

23. The coupon rate of a bond equals:

A. its yield to maturity.

24. Periodic receipts of interest by the bondholder are known as:

A. the coupon rate.

A. face value increases.

A. The price of the bond will increase.

27. If a bond’s asked price is 97.162, the investor:

A. receives 97.162% of the stated coupon payments.

29. What happens to a discount bond as the time to maturity decreases?

A. The coupon rate increases.

A. The face value of the bond has decreased.

A. decline over time, reaching par value at maturity.

34. The current yield of a bond can be calculated by:

A. multiplying the price by the coupon rate.

36. A bond's par value can also be called its:

37. A bond's yield to maturity takes into consideration:

A. current yield but not any price changes.

A. The expected cash flows

A. The coupon rate increases to 10%.

A. The rate of return will be lower than the yield to maturity.

A. lower than current interest rates.

A. By maintaining bid prices lower than ask prices

54. The yield curve depicts the current relationship between:

A. bond yields and default risk.

55. When the yield curve is upward-sloping, then:

A. short-maturity bonds offer the highest coupon rates.

56. Nominal U.S. Treasury bond yields:

A. are constant over time.

A. Real rate of return

58. The purpose of a floating-rate bond is to:

A. save interest expense for corporate issuers.

A. A zero-coupon bond with 20 years until maturity

61. A "convertible bond" provides the option to convert:

A. a bond into shares of common stock.

A. Its coupon rate is variable.

A. lower yields to maturity.

69. If a bond is priced at par value, then:

A. it has a very low level of default risk.

70. The existence of an upward-sloping yield curve suggests that:

A. bonds should be selling at a discount to par value.

A. The coupon payment will increase in real terms.

A. speculative grade ratings.

A. bond is selling at a discount.

A. Real interest rates are constant.

A. The 5-year bond will decrease more in price.

A. The bond's rating was downgraded.

A. sell for less than par value.

A. The CCC bond will have a variable-coupon rate.

98. What causes bonds to sell for a premium?

A. the bond's price will decline each year.

A. increases in interest rates will increase the current yield.

102. Which one of these statements is not correct?

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

5. A bond's bid price will be lower than the ask price.