Which of the following observations is the most accurate? 48. a. A 1-year bond would have a higher (that is, better) bond ranking than a 20-year bond if all other factors are similar. b. The price danger (interest rate risk) of a 20-year bond with semiannual interest payments is greater than that of a 5-year bond with semiannual interest payments. c. Reinvestment rate danger is greater for 10-year zero coupon bonds than for 10-year 10% coupon bonds. d. You would hope to gain the yield to maturity if a callable bond was trading at a premium. e. Both a and b are right statements.

Which of the following observations is the most accurate? 48. a. A 1-year bond would have a higher (that is, better) bond ranking than a 20-year bond if all other factors are similar. b. The price danger (interest rate risk) of a 20-year bond with semiannual interest payments is greater than that of a 5-year bond with semiannual interest payments. c. Reinvestment rate danger is greater for 10-year zero coupon bonds than for 10-year 10% coupon bonds. d. You would hope to gain the yield to maturity if a callable bond was trading at a premium. e. Both a and b are right statements.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 5MC: What would be the value of the bond described in Part d if, just after it had been issued, the...

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Which of the following statements is the most accurate? 43. a. Long-term cash flows are riskier than short-term cash flows.Furthermore, a 20-year bond that is callable after 5 years would have a shorter projected duration, if not none at all, than a noncallable 20-year bond with equal maturity. As a result, if all other features are equal, investors can demand a lower rate of return on the callable bond than on the noncallable bond. b. A noncallable 20-year bond would have an average life that is equivalent to or better than a callable 20-year bond with otherwise similar characteristics. Furthermore, the longer a bond's lifespan, the higher the interest rate danger it poses to buyers. As a result, while all other factors remain stable, callable bonds subject borrowers to fewer interest rate risk than noncallable bonds. c. Both a and b are right statements. d. None of the above claims are true.
Consider an A-rated bond and a B-rated bond. Assume that the one-year probabilities of default for the A- and B-rated bonds are 1% and 3%, respectively, and that default correlation between the two bonds is 20%. What is the joint probability of default of the two bonds?
Everything else being equal, the price of which of the following bonds is most sensitive to interest rate changes? A 15-year zero-coupon bond B) A 15-year 4% coupon bond C) A 15-year 8% coupon bond D) A 20-year zero-coupon bond E) A 20-year 8% coupon bond
Which of the following observations is the most accurate? 34.A callable bond will have a lower required rate of return than a noncallable bond, assuming all other factors remain stable.b. If all other factors were equal, a company would choose to issue noncallable bonds over callable bonds.c. From the perspective of a traditional investor, reinvestment rate risk is higher than interest rate risk.d. If a 10-year, $1,000 par, zero coupon bond was sold at a price that offered buyers a 10% rate of return, and interest rates fell to the point where kd = YTM = 5%, we might be certain that the bond would sell for more than its $1,000 par value.e. If a 10-year, $1,000 par, zero coupon bond was sold at a price that provided borrowers with a 10% rate of return, and interest rates subsequently fell to the point where kd = YTM = 5%, we might be certain that the bond would sell at a discount below its $1,000 par value.
Which of the following statements is CORRECT? a. 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, other things held constant. b. 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. c. You hold two bonds, a 10-year, zero coupon, issue and 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 its current level, the zero coupon bond will experience the larger percentage decline. d. 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. e. The time to maturity does not affect…
An analyst estimates that the probability of default on a seven-year AA-rated bond is 0.06, while that on a seven-year A-rated bond is 0.13. The probability that they will both default is 0.04.a. What is the probability that at least one of the bonds defaults? (Round your answer to 2 decimal places.) b. What is the probability that neither the seven-year AA-rated bond nor the seven-year A-rated bond defaults? (Round your answer to 2 decimal places.) c. Given that the seven-year AA-rated bond defaults, what is the probability that the seven-year A-rated bond also defaults? (Round your answer to 2 decimal places.)
Which of the following statements is right? Group of answer choices a)Ignoring the liquidity risk, the 10-treasry bond should have the same interest rate as the 10-year corporate bond. b)Ignoring the default risk, the 10-treasry bond should have the same interest rate as the 10-year corporate bond. c)The return of the 10-year treasury bond must be less than that of the 10-year corporate bond d)The return of the 10-year treasury bond must be greater than that of the 10-year corporate bond
48. Which of the following statements is most correct?a. All else equal, a 1-year bond will have a higher (that is, better)bond rating than a 20-year bond.b. A 20-year bond with semiannual interest payments has higher pricerisk (that is, interest rate risk) than a 5-year bond with semiannualinterest payments.c. 10-year zero coupon bonds have higher reinvestment rate risk than 10-year, 10 percent coupon bonds.d. If a callable bond were trading at a premium, then you would expectto earn the yield to maturity.e. Statements a and b are correct.
59. Which of the following statements is most correct?a. A 10-year bond would have more interest rate risk than a 5-year bond,but all 10-year bonds have the same interest rate risk.b. A 10-year bond would have more reinvestment rate risk than a 5-yearbond, but all 10-year bonds have the same reinvestment rate risk.c. If their maturities were the same, a 5 percent coupon bond would havemore interest rate risk than a 10 percent coupon bond.d. If their maturities were the same, a 5 percent coupon bond would haveless interest rate risk than a 10 percent coupon bond.e. Zero coupon bonds have more interest rate risk than any other typebond, even perpetuities.
Which of the comments below is the most accurate?a. Long-term bonds have a higher interest rate price danger than short-term bonds, but they have a lower reinvestment rate risk.b. Bonds with higher coupons have higher interest rate price danger, but lower reinvestment rate risk.c. If interest rates stay unchanged for the next five years, the price of a discount bond would still remain unchanged.d. Both b and c are valid statements.e. All of the above claims are true.
A 20-year bond has a coupon rate of 8 percent, and another bond of the same maturity has a coupon rate of 15 percent. If the bonds are alike in all other respects, which will have the greater relative market price decline if interest rates increase sharply? Why?
Based on the graph, which of the following statements is true? Neither bond has any interest rate risk. The 1-year bond has more interest rate risk. Both bonds have equal interest rate risk. The 10-year bond has more interest rate risk. Which type of bonds offer a higher yield, noncallable bonds or callable bonds? Answer the following question based on your understanding of interest rate risk and reinvestment risk. True or False: Assuming all else is equal, short-term securities are exposed to higher reinvestment risk than long-term securities.