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Bonds and Their Valuation; Features of Preferred Stock

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1. A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT:

a. The bond's current yield is less than 8%.

b. If the yield to maturity remains at 8%, then the bond's price will decline over the next year.

c. The bond's coupon rate is less than 8%.

d. If the yield to maturity increases, then the bond's price will increase.

e. If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.

2. Which of the following statements is correct?

a. Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.

b. The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.

c. Corporations cannot buy the preferred stocks of other corporations.

d. Preferred dividends are not generally cumulative.

e. A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.

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Solution Summary

The solution determines the bond and their valuation and the features of preferred stock with a brief explanation.

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1) b.
a. When a bond is traded at a premium, coupon rate is higher than current yield, which is higher than YTM.
c. Refer to a. coupon rate is higher than YTM.
d. If YTM increases, bond price will ...

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