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if the yield curve is upward sloping, the required rate of return will be
lower on the callable bond.
3. Which of the following statements is CORRECT?
a. Assume that two bonds have equal maturities and are of equal risk,
but one bond sells at par while the other sells at a premium above par.
The premium bond must have a lower current yield and a higher capital
gains yield than the par bond.
b. A bond’s current yield must always be either equal to its yield to
maturity or between its yield to maturity and its coupon rate.
c. If a bond sells at par, then its current yield will be less than its yield to
maturity.
d. If a bond sells for less than par, then its yield to maturity is less than
its coupon rate.
e. A discount bond’s price declines each year until it matures, when its
value equals its par value.
4. Suppose a new company decides to raise a total of $200 million, with
$100 million as common equity and $100 million as long-term debt. The
debt can be mortgage bonds or debentures, but by an iron-clad provision
in its charter, the company can never raise any additional debt beyond
the original $100 million. Given these conditions, which of the
following statements is CORRECT?
a. The higher the percentage of debt represented by mortgage bonds, the
riskier both types of bonds will be and, consequently, the higher the
firm’s total dollar interest charges will be.
b. If the debt were raised by issuing $50 million of debentures and $50
million of first mortgage bonds, we could be certain that the firm’s total
interest expense would be lower than if the debt were raised by issuing
$100 million of debentures.