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The desire for floating-rate bonds,and consequently their increased usage,arose out of the experience of the early 1980s,when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

A) True
B) False

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Which of the following bonds has the greatest price risk?


A) A 10-year $100 annuity.
B) A 10-year,$1,000 face value,zero coupon bond.
C) A 10-year,$1,000 face value,10% coupon bond with annual interest payments.
D) All 10-year bonds have the same price risk since they have the same maturity.
E) A 10-year,$1,000 face value,10% coupon bond with semiannual interest payments.

F) A) and B)
G) B) and D)

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Which of the following statements is CORRECT?


A) If a coupon bond is selling at par,its current yield equals its yield to maturity.
B) If rates fall after its issue,a zero coupon bond could trade at a price above its maturity (or par) value.
C) If rates fall rapidly,a zero coupon bond's expected appreciation could become negative.
D) If a firm moves from a position of strength toward financial distress,its bonds' yield to maturity would probably decline.
E) If a bond is selling at a premium,this implies that its yield to maturity exceeds its coupon rate.

F) C) and D)
G) B) and E)

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Taussig Corp.'s bonds currently sell for $1,150.They have a 6.35% annual coupon rate and a 20-year maturity,but they can be called in 5 years at $1,067.50.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels on into the future.Under these conditions,what rate of return should an investor expect to earn if he or she purchases these bonds?


A) 3.40%
B) 4.20%
C) 3.99%
D) 3.57%
E) 5.04%

F) A) and C)
G) B) and C)

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Bonds A,B,and C all have a maturity of 10 years and a yield to maturity of 7%.Bond A's price exceeds its par value,Bond B's price equals its par value,and Bond C's price is less than its par value.None of the bonds can be called.Which of the following statements is CORRECT?


A) If the yield to maturity on each bond decreases to 6%,Bond A will have the largest percentage increase in its price.
B) Bond A has the most price risk.
C) If the yield to maturity on the three bonds remains constant,the prices of the three bonds will remain the same over the next year.
D) If the yield to maturity on each bond increases to 8%,the prices of all three bonds will decline.
E) Bond C sells at a premium over its par value.

F) A) and B)
G) D) and E)

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The price sensitivity of a bond to a given change in interest rates is generally greater the longer the bond's remaining maturity.

A) True
B) False

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Which of the following statements is CORRECT?


A) One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.
B) Long-term bonds have less price risk but more reinvestment risk than short-term bonds.
C) If interest rates increase,all bond prices will increase,but the increase will be greater for bonds that have less price risk.
D) Relative to a coupon-bearing bond with the same maturity,a zero coupon bond has more price risk but less reinvestment risk.
E) Long-term bonds have less price risk and also less reinvestment risk than short-term bonds.

F) B) and C)
G) C) and E)

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Amram Inc.can issue a 20-year bond with a 6% annual coupon at par.This bond is not convertible,not callable,and has no sinking fund.Alternatively,Amram could issue a 20-year bond that is convertible into common equity,may be called,and has a sinking fund.Which of the following most accurately describes the coupon rate that Amram would have to pay on the second bond,the convertible,callable bond with the sinking fund,to have it sell initially at par?


A) The coupon rate should be exactly equal to 6%.
B) The coupon rate could be less than,equal to,or greater than 6%,depending on the specific terms set,but in the real world the convertible feature would probably cause the coupon rate to be less than 6%.
C) The rate should be slightly greater than 6%.
D) The rate should be over 7%.
E) The rate should be over 8%.

F) B) and E)
G) All of the above

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Assume that interest rates on 20-year Treasury and corporate bonds with different ratings,all of which are noncallable,are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:


A) Real risk-free rate differences.
B) Tax effects.
C) Default risk and liquidity differences.
D) Maturity risk differences.
E) Inflation differences.

F) A) and D)
G) D) and E)

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The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things held constant.

A) True
B) False

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O'Brien Ltd.'s outstanding bonds have a $1,000 par value,and they mature in 25 years.Their nominal annual,not semiannual yield to maturity is 9.25%,they pay interest semiannually,and they sell at a price of $700.What is the bond's nominal coupon interest rate?


A) 4.86%
B) 7.01%
C) 6.15%
D) 5.72%
E) 6.58%

F) B) and E)
G) A) and E)

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The market value of any real or financial asset,including stocks,bonds,or art work purchased in hope of selling it at a profit,may be estimated by determining future cash flows and then discounting them back to the present.

A) True
B) False

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