Bond a Has a 9% Annual Coupon,while Bond B Has

Question 62

Multiple Choice

Bond A has a 9% annual coupon,while Bond B has a 7% annual coupon.Both bonds have the same maturity,a face value of $1,000,an 8% yield to maturity,and are noncallable.Which of the following statements is CORRECT? A) Bond A's capital gains yield is greater than Bond B's capital gains yield. B) Bond A trades at a discount,whereas Bond B trades at a premium. C) If the yield to maturity for both bonds remains at 8%,Bond A's price one year from now will be higher than it is today,but Bond B's price one year from now will be lower than it is today. D) If the yield to maturity for both bonds immediately decreases to 6%,Bond A's bond will have a larger percentage increase in value. E) Bond A's current yield is greater than that of Bond B.

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Q 63

Which of the following statements is CORRECT? A) Two bonds have the same maturity and the same coupon rate.However,one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate. B) A callable 10-year,10% bond should sell at a higher price than an otherwise similar noncallable bond. C) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used. D) Two bonds have the same maturity and the same coupon rate.However,one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate. E) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity.Therefore,if the yield curve is upward sloping,the required rate of return will be lower on the callable bond.

Q 64

Which of the following statements is CORRECT? A) Senior debt is debt that has been more recently issued,and in bankruptcy it is paid off after junior debt because the junior debt was issued first. B) A company's subordinated debt has less default risk than its senior debt. C) Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. D) Junk bonds typically provide a lower yield to maturity than investment-grade bonds. E) A debenture is a secured bond that is backed by some or all of the firm's fixed assets.

Q 65

Which of the following statements is CORRECT? A) One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. B) Other things held constant,a callable bond should have a lower yield to maturity than a noncallable bond. C) Once a firm declares bankruptcy,it must be liquidated by the trustee,who uses the proceeds to pay bondholders,unpaid wages,taxes,and legal fees. D) Income bonds must pay interest only if the company earns the interest.Thus,these securities cannot bankrupt a company prior to their maturity,and this makes them safer to the issuing corporation than "regular" bonds. E) A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.