Question 14

- Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

AnswerThe present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate. If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

2 points

### Question 15

- A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

AnswerThe periodic interest rate is greater than 3%. The periodic rate is less than 3%. The present value would be greater if the lump sum were discounted back for more periods. The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.

2 points

### Question 16

- An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

AnswerBond B has a higher price than Bond A today, but one year from now the bonds will have the same price. One year from now, Bond A’s price will be higher than it is today. Bond A’s current yield is greater than 8%. Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

2 points

### Question 17

- Which of the following statements is CORRECT?

AnswerIf a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss. On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest. If a coupon bond is selling at par, its current yield equals its yield to maturity. The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.

2 points

### Question 18

- A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

AnswerThe bond’s current yield is less than 8%. If the yield to maturity remains at 8%, then the bond’s price will decline over the next year. The bond’s coupon rate is less than 8%. If the yield to maturity increases, then the bond’s price will increase. If the yield to maturity remains at 8%, then the bond’s price will remain constant over the next year.

2 points

### Question 19

- Which of the following statements is CORRECT?

AnswerIf a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where r _{d}= YTM = 5%, the bond would sell at a premium over its $1,000 par value.If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where r _{d}

= YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. Reinvestment rate risk is worse from an investor’s standpoint than interest rate price risk if the investor has a short investment time horizon.

2 points

### Question 20

- Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

AnswerThe company’s bonds are downgraded. Market interest rates rise sharply. Market interest rates decline sharply. The company’s financial situation deteriorates significantly. Inflation increases significantly.