Which of the following statements is CORRECT?

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Question 27

  1. Which of the following statements is CORRECT?
    Answer

    If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
    The total yield on a bond is derived from dividends plus changes in the price of the bond.
    Bonds are riskier than common stocks and therefore have higher required returns.
    Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
    The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

2 points

Question 28

  1. Which of the following statements is CORRECT?
    Answer

    All else equal, senior debt generally has a lower yield to maturity than subordinated debt.
    An indenture is a bond that is less risky than a mortgage bond.
    The expected return on a corporate bond will generally exceed the bond’s yield to maturity.
    If a bond’s coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.
    Under our bankruptcy laws, any firmthatis in financial distress will be forced to declare bankruptcy and then be liquidated.

2 points

Question 29

  1. Which of the following bonds has the greatest interest rate price risk?
    Answer

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

2 points

Question 30

  1. Which of the following statements is CORRECT?
    Answer

    You hold two bonds.  One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon.  The same market rate, 6%, applies to both bonds.  If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.
    The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.
    You hold two bonds.  One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon.  The same market rate, 6%, applies to both bonds.  If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.
    The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.
    The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.
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