Question

Call Provision gives issuing corporations the right to call the bonds for redemption. Generally it occurs when interest rate increases substantially. The company should pay additional amount above the par value to the called bondholders, which is call premium.

True/False

At maturity, the value of any bond must equal its par value. The value of a premium bond would decrease to $1,000. The value of a discount bond would increase to $1,000.

True/False

If we expect that Federal Reserve Bank will boost interest rate soon, it is a good strategy for investors to invest in the bond market because bond price is expected to increase.

True/False

Nothing is riskless. Long-term bonds have higher interest rate risk and lower reinvestment rate risk than short-term bonds.

True/False

Corporate yield curves are higher than that of the Treasury bond. However, corporate yield curves are not necessarily parallel to the Treasury curve. The spread between a corporate yield curve and the Treasury curve widens as the corporate bond rating increases.

True/False

For a non-constant dividend growth stock, the capital gain yield of the stock is not always equal to the dividend growth rate g.

True/False

Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

True/False

The dividends of tracking stock are tied to a particular division, rather than the company as a whole. Tracking stock usually has no voting rights, and the financial disclosure for the division is not as regulated as for the company.

True/False

Answer 1

1). False - Corporations will call the bonds when interest rates fall so that they can reissue bonds at the lower interest rates and save on interest payments.

2). True - If par value of a bond is $1,000 then at maturity, the bond value will be equal to the par value. For premium bonds (issued at a price > par value), it will decrease to $1,000 and for a discount bond (issued at a price < par value), it will increase to $1,000.

3). False - If interest rates are expected to increase then bond prices will be expected to fall, not rise.

4). False - Long-term bonds have both higher interest rate risk and higher reinvestment risk because if interest rates fall then periodic payments would have to be reinvested at the lower rate.

5). False - The spread between treasury and corporate bond yields will increase as corporate bond rating decreases because the corporate bond will become riskier and so, risk premium will increase.

6). True - For a non-constant dividend growth stock, the capital gain yield of the stock will not equal the growth rate during the non-constant growth period.

7). True - Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will be more volatile than an average stock, and its beta will be greater than 1.0.

8). False - Tracking stock usually has voting rights.