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5 Cards in this Set
- Front
- Back
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A corporation calls in its debt when interest rates are:
A:rising B:declining C:volatile D:stable |
Correct Answer: B
Rationale: A corporation generally calls in its debt when interest rates are declining. It can then replace old, higher interest rate debt with new, lower interest rate issues. Choice A is incorrect because when interest rates are rising the corporation would have to pay higher rates to finance new debt or to refinance old debt. Choice C is incorrect because the volatility of interest rates does not trigger a call but the level of interest rates and the price of the debt. If the debt is trading above the call price the corporation will benefit from calling in the debt at the below market call price. Choice D is incorrect because stability of interests is not what triggers a call. The price of the bonds and the level of interests determine whether a corporation calls in a debt instrument. |
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One of your clients owns two different 9% corporate bonds maturing in 15 years. The first bond is callable in five years; the second has 10 years of call protection, but is callable from then until it matures. If interest rates on bonds of this type begin to fall, which bond is likely to show a greater increase in price?:
A:Bond with the 5-year call B:Bond with the 10-year call C:Both will increase by the same amount. D:Both will decrease by the same amount. |
Correct Answer: B
Rationale: As interest rates fall the investor benefits from having the highest interest rate for as long as possible. Choice A is incorrect because the 5-year call feature will limit the rise in the price of the bonds to the call price for five years. Choice C is incorrect because both bonds will not increase in price by the same amount. Choice D is incorrect because both bonds will not decrease but increase in price if interest rates fall. The price change will not be the same for both bonds. |
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The price of which of the following will fluctuate most with a change in interest rates?:
A:Common stock B:Money-market instruments C:Short-term bonds D:Long-term bonds |
Correct Answer: D
Rationale: Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall. Choice A is incorrect because common stocks may fluctuate indirectly due to interest rates. Choice B is incorrect because the price of money-market funds are not volatile. Choice C is incorrect because short-term bonds will fluctuate less than long-term bonds. |
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How do you calculate the current yield on a bond?:
A:Yield to maturity/ Par value B:Yield to maturity/ Dollar market price C:Annual interest payment/ Par value D:Annual interest payment/ Dollar market price |
Correct Answer: D
Rationale: The current yield on a bond is calculated by dividing the coupon by the market price of the bond. Choice A is incorrect because the current yield is calculated by dividing the coupon by the market price of the bond. Choice B is incorrect because the current yield is calculated by dividing the coupon by the market price of the bond. Choice C is incorrect because dividing the annual interest payment by the par value does not give the current yield. It gives the nominal yield. |
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The current yield on a bond priced at $950 with a coupon of 6 percent equals:
A:the nominal yield B:yield to maturity C:6 percent D:6.3 percent |
Correct Answer: D
Rationale: The current yield is determined by dividing the coupon ($60) by the current price ($950) which equals 6.3%. Because the bond is priced at a discount, the current yield is greater than the coupon yield. Choice A is incorrect because the nominal yield is not the current yield but simply the coupon rate. Choice B is incorrect because the yield to maturity is not equal to the current yield when the bond trades at a discount. When trading at a discount, the yield to maturity is higher. Choice C is incorrect because 6% is the nominal |
