Question

Because bond prices are sensitive to changes in interest rates:

	a.	bonds hardly ever sell in the secondary market at their face value.
	b.	bond prices are constantly changing.
	c.	interest rates in excess of the coupon rate cause the bond to sell at a discount, while interest rates below the coupon rate cause the bond to sell at a premium.
	d.	All of the above

How is preferred stock similar to bonds?

	a.	Constant payment
	b.	Pays both principal and interest to investor
	c.	Fixed maturity date
	d.	Both a & c
	e.	All of the above

A call provision:

	a.	is exercised when interest rates are falling.
	b.	increases risk to the bondholder.
	c.	can be exercised any time after a bond is issued.
	d.	Both a & b
	e.	All of the above

Which of the following statements is correct?

	a.	The market value of a bond will always approach the bond's maturity price as maturity approaches, even if the firm is insolvent.
	b.	Bond prices and interest rates always move in the same direction.
	c.	The yield to maturity will always be the coupon yield.
	d.	None of the above

Holding all other variables constant, which of the following will DECREASE the risk of a bond to the investor?

	a.	Increase in restrictive covenants
	b.	Change in bond rating from B to BBB
	c.	Secured with specific assets of the firm
	d.	Both a & c
	e.	All of the above

Answer 1

Question 1) ans: D) All of the above

Since there is an inverse relationship between bond prices and interest rate changes, hence with a fall in interest rate, bond price goes up and with a rise in interest rate, bond price falls.

a) due to this sensitivity of a bond's price to interest rates, bonds hardly ever sell at par value in secondary market as the price keeps fluctuating with interest rate changes. Coupon rate is the return that the bond provides to the investor, while interest rate is the minimum return expected by bond holders on their investment. If coupon rate>interest rate, then the bond will be priced at a premium, whereas if coupon rate<interest rate, then the bond will be priced at a discount.

b) thus, from the above context, it is clear that bond prices are constantly changing with a change in interest rates.

c) Coupon rate is the return that the bond provides to the investor, while interest rate is the minimum return expected by bond holders on their investment. If coupon rate>interest rate, then the bond will be priced at a premium, whereas if coupon rate<interest rate, then the bond will be priced at a discount.