1.

One of the basic relationships in interest rate theory is that, other things held
constant, for a given change in the required rate of return, the
the time
to maturity, the
the change in price.
a. longer; smaller.
b. shorter; larger.
c. longer; greater.
d. shorter; smaller.
e. Statements c and d are correct.
2. Assume that a 10-year Treasury bond has a 12 percent annual coupon, while a 15-year
Treasury bond has an 8 percent annual coupon. The yield curve is flat; all Treasury
securities have a 10 percent yield to maturity. Which of the following statements
is most correct?
a. The 10-year bond is selling at a discount, while the 15-year bond is selling
at a premium.
b. The 10-year bond is selling at a premium, while the 15-year bond is selling at
par.
c. If interest rates decline, the price of both bonds will increase, but the 15year bond will have a larger percentage increase in price.
d. If the yield to maturity on both bonds remains at 10 percent over the next
year, the price of the 10-year bond will increase, but the price of the 15year bond will fall.
e. Statements c and d are correct.
3. A 10-year Treasury bond has an 8 percent coupon. An 8-year Treasury bond has a 10
percent coupon.
Both bonds have the same yield to maturity.
If the yields to
maturity of both bonds increase by the same amount, which of the following
statements is most correct?
a. The prices of both bonds will increase by the same amount.
b. The prices of both bonds will decrease by the same amount.
c. The prices of the two bonds will remain the same.
d. Both bonds will decline in price, but the 10-year bond will have a greater
percentage decline in price than the 8-year bond.
e. Both bonds will decline in price, but the 8-year bond will have a greater
percentage decline in price than the 10-year bond.
4. Which of the following bonds will have the greatest percentage increase in value if
all interest rates decrease by 1 percent?
a. 20-year, zero coupon bond.
b. 10-year, zero coupon bond.
c. 20-year, 10 percent coupon bond.
d. 20-year, 5 percent coupon bond.
5. All of the following may serve to reduce the coupon rate that would otherwise be
required on a bond issued at par, except a
a. Sinking fund.
b. Restrictive covenant.
c. Call provision.
d. Change in rating from Aa to Aaa.
e. None of the statements above. (All may reduce the required coupon rate.)
6. Which of the following statements is most correct?
a. All else equal, if a bonds yield to maturity increases, its price will fall.
b. All else equal, if a bonds yield to maturity increases, its current yield
will fall.
c. If a bonds yield to maturity exceeds the coupon rate, the bond will sell at a
premium over par.
d. All of the statements above are correct.
e. None of the statements above is correct.
7. A 10-year corporate bond has an annual coupon payment of 9 percent.
The bond is
currently selling at par ($1,000).
Which of the following statements is most
correct?
a. The bonds yield to maturity is 9 percent.
b. The bonds current yield is 9 percent.
c. If the bonds yield to maturity remains constant, the bonds price will remain
at par.
d. Statements a and c are correct.
e. All of the statements above are correct.
8. You are considering two Treasury bonds.
Bond B has a 6 percent annual coupon.

Bond A has a 9 percent annual coupon, and

Both bonds have a yield to maturity of 7

percent.
Assume that the yield to maturity is expected to remain at 7 percent.
Which of the following statements is most correct?
a. If the yield to maturity remains at 7 percent, the price of both bonds will
increase by 7 percent per year.
b. If the yield to maturity remains at 7 percent, the price of both bonds will
increase over time, but the price of Bond A will increase by more.
c. If the yield to maturity remains at 7 percent, the price of both bonds will
remain unchanged.
d. If the yield to maturity remains at 7 percent, the price of Bond A will
decrease over time, but the price of Bond B will increase over time.
e. If the yield to maturity remains at 7 percent, the price of Bond B will
decrease over time, but the price of Bond A will increase over time.
9. Assume that all interest rates in the economy decline from 10 percent to 9 percent.
Which of the following bonds will have the largest percentage increase in price?
a. A 10-year bond with a 10 percent coupon.
b. An 8-year bond with a 9 percent coupon.
c. A 10-year zero coupon bond.
d. A 1-year bond with a 15 percent coupon.
e. A 3-year bond with a 10 percent coupon.
10.

A company is planning to raise $1,000,000 to finance a new plant. Which of the

following statements is most correct?
a. If debt is used to raise the million dollars, the cost of the debt would be
lower if the debt is in the form of a fixed rate bond rather than a floating
rate bond.
b. If debt is used to raise the million dollars, the cost of the debt would be
lower if the debt is in the form of a bond rather than a term loan.
c. If debt is used to raise the million dollars, but $500,000 is raised as a
first mortgage bond on the new plant and $500,000 as debentures, the interest
rate on the first mortgage bonds would be lower than it would be if the entire
$1 million were raised by selling first mortgage bonds.
d. The company would be especially anxious to have a call provision included in
the indenture if its management thinks that interest rates are almost certain
to rise in the foreseeable future.
e. None of the statements above is correct.

11.

A 12-year bond has a 9 percent annual coupon, a yield to maturity of

8 percent, and a face value of $1,000. What is the price of the bond?
a. $1,469
c. $ 928
e. $1,957
b. $1,000
d. $1,075

12.

Assume that you wish to purchase a 20-year bond that has a maturity value of
$1,000 and makes semiannual interest payments of $40. If you require a 10 percent
nominal yield to maturity on this investment, what is the maximum price you should
be willing to pay for the bond?
a. $619
c. $761
e. $902
b. $674
d. $828

13.

Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds
have a par value of $1,000 and a price of $865. The bonds will mature in 11 years.
What is the yield to maturity on the bonds?
a. 10.09%
c. 9.25%
e. 9.89%
b. 11.13%
d. 8.00%

14.

Kennedy Gas Works has bonds that mature in 10 years, and have a face value of
$1,000. The bonds have a 10 percent quarterly coupon (that is, the nominal coupon
rate is 10 percent).
The bonds may be called in five years.
The bonds have a
nominal yield to maturity of 8 percent and a yield to call of 7.5 percent. What is
the bonds call price?
a.
$
b. $1,025.00
d. $1,036.77
379.27
c. $1,048.34
e. $1,136.78

15.