Question

1.

The major benefit of a bond’s call provision is to __________.

let the bondholders to vote

allow the company to delay coupon payments

let bondholders sell the bond at the call price

let the company refinance at a lower coupon rate

2. Other things being equal, how would the price of a discount bond change one year from now if there is no change in the market interest rates?

Decline.

Increase.

No change.

Not enough information to determine.

3. Other things being equal, which of the following types of bonds should have a lower yield to maturity?

All bonds should have the same yield to maturity.

A bond is a debenture.

A bond has no collateral.

4. Other things being equal, what happens to the current price of a bond if the bond has a larger par value?

Decrease.

No change.

Cannot be determined without knowing the market interest rate.

Increase.

A bond is secured by land.

Answer 1

1. The major benefit of a bond’s call provision is to let the company refinance at a lower coupon rate

Since the firm in this case will be able to call the bond if the coupon rate being paid is higher than the current market rates

2. Other things being equal, the price of a discount bond will increase one year from now if there is no change in the market interest rates, since the time to maturity will decrease one year from now resulting in a price increase