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Chapter7

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Chapter 5 Questions – January 31

1. Which of the following bonds has the greatest interest rate price risk?
|a. |A 10-year $100 annuity. |
|b. |A 10-year, $1,000 face value, zero coupon bond. |
|c. |A 10-year, $1,000 face value, 10% coupon bond with annual interest payments. |
|d. |All 10-year bonds have the same price risk since they have the same maturity. |
|e. |A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments. |

2. Amram Inc. can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Amram could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Amram would have to pay on the convertible, callable bond?
|a. |Exactly equal to 6%. |
|b. |It could be less than, equal to, or greater than 6%. |
|c. |Greater than 6%. |
|d. |Exactly equal to 8%. |
|e. |Less than 6%. |

4. Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of

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