Chap 007

Chapter 07 - Interest Rates and Bond Valuation
Chapter 07 Interest Rates and Bond Valuation

Multiple Choice Questions
1. Mary just purchased a bond which pays $ 0 a year in interest. !hat is this $ 0 called" #. coupon B. $ace %alue C. discount &. call pre'iu' (. yield
). Bert owns a bond that will pay hi' $7* each year in interest plus a $1+000 principal pay'ent at 'aturity. !hat is the $1+000 called" #. coupon B. $ace %alue C. discount &. yield (. dirty price
,. # bond-s coupon rate is e.ual to the annual interest di%ided by which one o$ the $ollowin/" #. call price B. current price C. $ace %alue &. clean price (. dirty price
0. 1he speci$ied date on which the principal a'ount o$ a bond is payable is re$erred to as which one o$ the $ollowin/" #. coupon date B. yield date C. 'aturity &. dirty date (. clean date
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*. Currently+ the bond 'ar2et re.uires a return o$ 11. percent on the 10-year bonds issued by !inston Industries. 1he 11. percent is re$erred to as which one o$ the $ollowin/" #. coupon rate B. $ace rate C. call rate &. yield to 'aturity (. interest rate
. 1he current yield is de$ined as the annual interest on a bond di%ided by which one o$ the $ollowin/" #. coupon B. $ace %alue C. 'ar2et price &. call price (. dirty price
7. #n indenture is3 #. another na'e $or a bond-s coupon. B. the written record o$ all the holders o$ a bond issue. C. a bond that is past its 'aturity date but has yet to be repaid. &. a bond that is secured by the in%entory held by the bond-s issuer. (. the le/al a/ree'ent between the bond issuer and the bondholders.
4. #tlas (ntertain'ent has 1*-year bonds outstandin/. 1he interest pay'ents on these bonds are sent directly to each o$ the indi%idual bondholders. 1hese direct pay'ents are a clear indication that the bonds can accurately be de$ined as bein/ issued3 #. at par. B. in re/istered $or'. C. in street $or'. &. as debentures. (. as callable.
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5. # bond that is payable to who'e%er has physical possession o$ the bond is said to be in3 #. new-issue condition. B. re/istered $or'. C. bearer $or'. &. debenture status. (. collateral status.
10. 1he 6eeward Co'pany just issued 1*-year+ 4 percent+ unsecured bonds at par. 1hese bonds $it the de$inition o$ which one o$ the $ollowin/ ter's" #. note B. discounted C. 7ero-coupon &. callable (. debenture
11. !hich o$ the $ollowin/ de$ines a note" I. secured II. unsecured III. 'aturity less than 10 years IV. 'aturity in e8cess o$ 10 years #. III only B. I and III only C. I and IV only &. II and III only (. II and IV only
1). # sin2in/ $und is 'ana/ed by a trustee $or which one o$ the $ollowin/ purposes" #. payin/ interest pay'ents B. early bond rede'ption C. con%ertin/ bonds into e.uity securities &. payin/ pre$erred di%idends (. reducin/ coupon rates
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1,. # bond that can be paid o$$ early at the issuer-s discretion is re$erred to as bein/ which one o$ the $ollowin/" #. 7ero coupon B. callable C. senior &. collaterali7ed (. unsecured
10. # $1+000 $ace %alue bond can be redee'ed early at the issuer-s discretion $or $1+0,0+ plus any accrued interest. 1he additional $,0 is called which one o$ the $ollowin/" #. dirty price B. rede'ption %alue C. call pre'iu' &. ori/inal-issue discount (. rede'ption discount
1*. # de$erred call pro%ision is which one o$ the $ollowin/" #. re.uire'ent that a bond issuer pay the current 'ar2et price+ plus accrued interest+ should the $ir' decide to call a bond B. ability o$ a bond issuer to delay repayin/ a bond until a$ter the 'aturity date should the issuer so opt C. prohibition placed on an issuer which pre%ents that issuer $ro' e%er redee'in/ bonds prior to 'aturity &. prohibition which pre%ents bond issuers $ro' redee'in/ callable bonds prior to a speci$ied date (. re.uire'ent that a bond issuer pay a call pre'iu' which is e.ual to or /reater than one year-s coupon should that issuer decide to call a bond
1 . # call-protected bond is a bond that3 #. is /uaranteed to be called. B. can ne%er be called. C. is currently bein/ called. &. is callable at any ti'e. (. cannot be called durin/ a certain period o$ ti'e.
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17. 1he ite's included in an indenture that li'it certain actions o$ the issuer in order to protect bondholder-s interests are re$erred to as the3 #. trustee relationships. B. bylaws. C. le/al bounds. &. 9plain %anilla9 conditions. (. protecti%e co%enants.
14. # bond that has only one pay'ent+ which occurs at 'aturity+ de$ines which one o$ the $ollowin/" #. debenture B. callable C. $loatin/-rate &. jun2 (. 7ero coupon
15. !hich one o$ the $ollowin/ is the price a dealer will pay to purchase a bond" #. call price B. as2ed price C. bid price &. bid-as2 spread (. par %alue
)0. :ou want to buy a bond $ro' a dealer. !hich one o$ the $ollowin/ prices will you pay" #. call price B. auction price C. bid price &. as2ed price (. bid-as2 spread
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)1. 1he di$$erence between the price that a dealer is willin/ to pay and the price at which he or she will sell is called the3 #. e.uilibriu'. B. pre'iu'. C. discount. &. call price. (. spread.
)). # bond is .uoted at a price o$ $545. 1his price is re$erred to as which one o$ the $ollowin/" #. call price B. $ace %alue C. clean price &. dirty price (. wholesale price
),. ;ete paid $1+0,) as his total cost o$ purchasin/ a bond. 1his price is re$erred to as the3 #. .uoted price. B. spread price. C. clean price. &. dirty price. (. call price.
)0. Real rates are de$ined as no'inal rates that ha%e been adjusted $or which o$ the $ollowin/" #. in$lation B. de$ault ris2 C. accrued interest &. interest rate ris2 (. both in$lation and interest rate ris2
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)*. Interest rates that include an in$lation pre'iu' are re$erred to as3 #. annual percenta/e rates. B. stripped rates. C. e$$ecti%e annual rates. &. real rates. (. no'inal rates.
) . 1he <isher e$$ect is de$ined as the relationship between which o$ the $ollowin/ %ariables" #. de$ault ris2 pre'iu'+ in$lation ris2 pre'iu'+ and real rates B. no'inal rates+ real rates+ and interest rate ris2 pre'iu' C. interest rate ris2 pre'iu'+ real rates+ and de$ault ris2 pre'iu' &. real rates+ in$lation rates+ and no'inal rates (. real rates+ interest rate ris2 pre'iu'+ and no'inal rates
)7. 1he pure ti'e %alue o$ 'oney is 2nown as the3 #. li.uidity e$$ect. B. <isher e$$ect. C. ter' structure o$ interest rates. &. in$lation $actor. (. interest rate $actor.
)4. !hich one o$ the $ollowin/ pre'iu's is co'pensation $or e8pected $uture in$lation" #. de$ault ris2 B. ta8ability C. li.uidity &. in$lation (. interest rate ris2
)5. 1he interest rate ris2 pre'iu' is the3 #. additional co'pensation paid to in%estors to o$$set risin/ prices. B. co'pensation in%estors de'and $or acceptin/ interest rate ris2. C. di$$erence between the yield to 'aturity and the current yield. &. di$$erence between the 'ar2et interest rate and the coupon rate. (. di$$erence between the coupon rate and the current yield.
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,0. # 1reasury yield cur%e plots 1reasury interest rates relati%e to which one o$ the $ollowin/" #. 'ar2et rates B. co'parable corporate bond rates C. the ris2-$ree rate &. in$lation (. 'aturity
,1. !hich one o$ the $ollowin/ ris2 pre'iu's co'pensates $or the possibility o$ nonpay'ent by the bond issuer" #. de$ault ris2 B. ta8ability C. li.uidity &. in$lation (. interest rate ris2
,). 1he ta8ability ris2 pre'iu' co'pensates bond holders $or which one o$ the $ollowin/" #. yield decreases in response to 'ar2et chan/es B. lac2 o$ coupon pay'ents C. possibility o$ de$ault &. a bond-s un$a%orable ta8 status (. decrease in a 'unicipality-s credit ratin/
,,. 1he li.uidity pre'iu' is co'pensation to in%estors $or3 #. purchasin/ a bond in the secondary 'ar2et. B. the lac2 o$ an acti%e 'ar2et wherein a bond can be sold $or its actual %alue. C. ac.uirin/ a bond with an un$a%orable ta8 status. &. redee'in/ a bond prior to 'aturity. (. purchasin/ a bond that has de$aulted on its coupon pay'ents.
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,0. #n 4 percent corporate bond that pays interest se'i-annually was issued last year. !hich two o$ the $ollowin/ 'ost li2ely apply to this bond today i$ the current yield-to-'aturity is 7 percent" I. a structure as an interest-only loan II. a current yield that e.uals the coupon rate III. a yield-to-'aturity e.ual to the coupon rate IV. a 'ar2et price that di$$ers $ro' the $ace %alue #. I and III only B. I and IV only C. II and III only &. II and IV only (. III and IV only
,*. # bond has a 'ar2et price that e8ceeds its $ace %alue. !hich o$ the $ollowin/ $eatures currently apply to this bond" I. discounted price II. pre'iu' price III. yield-to-'aturity that e8ceeds the coupon rate IV. yield-to-'aturity that is less than the coupon rate #. III only B. I and III only C. I and IV only &. II and III only (. II and IV only
, . #ll else constant+ a bond will sell at ===== when the coupon rate is ===== the yield to 'aturity. #. a pre'iu'> less than B. a pre'iu'> e.ual to C. a discount> less than &. a discount> hi/her than (. par> less than
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,7. 1he !althers Co'pany has a se'i-annual coupon bond outstandin/. #n increase in the 'ar2et rate o$ interest will ha%e which one o$ the $ollowin/ e$$ects on this bond" #. increase the coupon rate B. decrease the coupon rate C. increase the 'ar2et price &. decrease the 'ar2et price (. increase the ti'e period
,4. !hich o$ the $ollowin/ are characteristics o$ a pre'iu' bond" I. coupon rate ? yield-to-'aturity II. coupon rate @ yield-to-'aturity III. coupon rate ? current yield IV. coupon rate @ current yield #. I only B. I and III only C. I and IV only &. II and III only (. II and IV only
,5. !hich o$ the $ollowin/ relationships apply to a par %alue bond" I. coupon rate ? yield-to-'aturity II. current yield A yield-to-'aturity III. 'ar2et price A call price IV. 'ar2et price A $ace %alue #. I and II only B. I and III only C. II and IV only &. I+ II+ and III only (. II+ III+ and IV only
00. !hich one o$ the $ollowin/ relationships is stated correctly" #. 1he coupon rate e8ceeds the current yield when a bond sells at a discount. B. 1he call price 'ust e.ual the par %alue. C. #n increase in 'ar2et rates increases the 'ar2et price o$ a bond. &. &ecreasin/ the ti'e to 'aturity increases the price o$ a discount bond+ all else constant. (. Increasin/ the coupon rate decreases the current yield+ all else constant.
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01. Breen Roo$ Inns is preparin/ a bond o$$erin/ with a percent+ se'iannual coupon and a $ace %alue o$ $1+000. 1he bonds will be repaid in 10 years and will be sold at par. Bi%en this+ which one o$ the $ollowin/ state'ents is correct" #. 1he bonds will beco'e discount bonds i$ the 'ar2et rate o$ interest declines. B. 1he bonds will pay 10 interest pay'ents o$ $ 0 each. C. 1he bonds will sell at a pre'iu' i$ the 'ar2et rate is *.* percent. &. 1he bonds will initially sell $or $1+0,0 each. (. 1he $inal pay'ent will be in the a'ount o$ $1+0 0.
0). # newly issued bond has a 7 percent coupon with se'iannual interest pay'ents. 1he bonds are currently priced at par %alue. 1he e$$ecti%e annual rate pro%ided by these bonds 'ust be3 #. ,.* percent. B. /reater than ,.* percent but less than 7 percent. C. 7 percent. &. /reater than 7 percent. (. #nswer cannot be deter'ined $ro' the in$or'ation pro%ided.
0,. !hich o$ the $ollowin/ increase the price sensiti%ity o$ a bond to chan/es in interest rates" I. increase in ti'e to 'aturity II. decrease in ti'e to 'aturity III. increase in coupon rate IV. decrease in coupon rate #. II only B. I and III only C. I and IV only &. II and III only (. II and IV only
00. !hich one o$ the $ollowin/ bonds is the least sensiti%e to interest rate ris2" #. ,-year> 0 percent coupon B. ,-year> percent coupon C. *-year> percent coupon &. 7-year> percent coupon (. 7-year> 0 percent coupon
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0*. #s a bond-s ti'e to 'aturity increases+ the bond-s sensiti%ity to interest rate ris23 #. increases at an increasin/ rate. B. increases at a decreasin/ rate. C. increases at a constant rate. &. decreases at an increasin/ rate. (. decreases at a decreasin/ rate.
0 . :ou own a bond that has a percent annual coupon and 'atures * years $ro' now. :ou purchased this 10-year bond at par %alue when it was ori/inally issued. !hich one o$ the $ollowin/ state'ents applies to this bond i$ the rele%ant 'ar2et interest rate is now *.4 percent" #. 1he current yield-to-'aturity is /reater than percent. B. 1he current yield is percent. C. 1he ne8t interest pay'ent will be $,0. &. 1he bond is currently %alued at one-hal$ o$ its issue price. (. :ou will reali7e a capital /ain on the bond i$ you sell it today.
07. :ou e8pect interest rates to decline in the near $uture e%en thou/h the bond 'ar2et is not indicatin/ any si/n o$ this chan/e. !hich one o$ the $ollowin/ bonds should you purchase now to 'a8i'i7e your /ains i$ the rate decline does occur" #. short-ter'> low coupon B. short-ter'> hi/h coupon C. lon/-ter'> 7ero coupon &. lon/-ter'> low coupon (. lon/-ter'> hi/h coupon
04. # percent+ annual coupon bond is currently sellin/ at a pre'iu' and 'atures in 7 years. 1he bond was ori/inally issued , years a/o at par. !hich one o$ the $ollowin/ state'ents is accurate in respect to this bond today" #. 1he $ace %alue o$ the bond today is /reater than it was when the bond was issued. B. 1he bond is worth less today than when it was issued. C. 1he yield-to-'aturity is less than the coupon rate. &. 1he coupon rate is /reater than the current yield. (. 1he yield-to-'aturity e.uals the current yield.
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05. !hich o$ the $ollowin/ state'ents concernin/ bonds are correct" I. Bonds pro%ide ta8 bene$its to issuers. II. 1he ris2 o$ a $ir' $inancially $ailin/ increases when the $ir' issues bonds. III. Most lon/-ter' bond issues are re$erred to as un$unded debt. IV. #ll bonds are treated e.ually in a ban2ruptcy proceedin/. #. II and III only B. I and II only C. III and IV only &. II and IV only (. I+ II+ and III only
*0. 1e8as <oods has a percent bond issue outstandin/ that pays $,0 in interest e%ery March and Cepte'ber. 1he bonds are in%est'ent /rade and sell at par. 1he bonds are callable at a price e.ual to the present %alue o$ all $uture interest and principal pay'ents discounted at a rate e.ual to the co'parable 1reasury rate plus 0.*0 percent. !hich o$ the $ollowin/ correctly describe the $eatures o$ this bond" I. bond ratin/ o$ B II. 9'a2e whole9 call price III. $1+000 $ace %alue IV. o$$er price o$ $1+000 #. I and III only B. III and IV only C. I+ III+ and IV only &. II+ III+ and IV only (. I+ II+ III+ and IV
*1. 6ast year+ 6e8in/ton Do'es issued $1 'illion in unsecured+ non-callable debt. 1his debt pays an annual interest pay'ent o$ $** and 'atures years $ro' now. 1he $ace %alue is $1+000 and the 'ar2et price is $1+0)0. !hich one o$ these ter's correctly describes a $eature o$ this debt" #. se'i-annual coupon B. discount bond C. note &. trust deed (. collaterali7ed
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*). Callable bonds /enerally3 #. /rant the bondholder the option to call the bond anyti'e a$ter the de$er'ent period. B. are callable at par as soon as the call-protection period ends. C. are called when 'ar2et interest rates increase. &. are called within the $irst three years a$ter issuance. (. ha%e a sin2in/ $und pro%ision.
*,. !hich o$ the $ollowin/ are ne/ati%e co%enants that 'i/ht be $ound in a bond indenture" I. 1he co'pany shall 'aintain a current ratio o$ 1.10 or better. II. Eo debt senior to this issue can be issued. III. 1he co'pany cannot lease any 'ajor assets without appro%al by the lender. IV. 1he co'pany 'ust 'aintain the loan collateral in /ood wor2in/ order. #. I and II only B. II and III only C. III and IV only &. II+ III+ and IV only (. I+ II+ and III only
*0. ;rotecti%e co%enants3 #. apply to short-ter' debt issues but not to lon/-ter' debt issues. B. only apply to pri%ately issued bonds. C. are a $eature $ound only in /o%ern'ent-issued bond indentures. &. only apply to bonds that ha%e a de$erred call pro%ision. (. are pri'arily desi/ned to protect bondholders.
**. !hich one o$ the $ollowin/ state'ents concernin/ bond ratin/s is correct" #. In%est'ent /rade bonds are rated BB or hi/her by Ctandard F ;oor-s. B. Bond ratin/s assess both interest rate ris2 and de$ault ris2. C. Cplit rated bonds are called crosso%er bonds. &. 1he hi/hest ratin/ issued by Moody-s is ###. (. # 9$allen an/el9 is a ter' applied to all 9jun29 bonds.
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* . # 9$allen an/el9 is a bond that has 'o%ed $ro'3 #. bein/ publicly traded to bein/ pri%ately traded. B. bein/ a lon/-ter' obli/ation to bein/ a short-ter' obli/ation. C. ha%in/ a yield-to-'aturity in e8cess o$ the coupon rate to ha%in/ a yield-to- 'aturity that is less than the coupon rate. &. senior status to junior status $or li.uidation purposes. (. in%est'ent /rade to speculati%e /rade.
*7. Bonds issued by the G.C. /o%ern'ent3 #. are considered to be $ree o$ interest rate ris2. B. /enerally ha%e hi/her coupons than those issued by an indi%idual state. C. are considered to be $ree o$ de$ault ris2. &. pay interest that is e8e'pt $ro' $ederal inco'e ta8es. (. are called 9'unis9.
*4. 1reasury bonds are3 #. issued by any /o%ern'ental a/ency in the G.C. B. issued only on the $irst day o$ each $iscal year by the G.C. &epart'ent o$ 1reasury. C. bonds that o$$er the best ta8 bene$its o$ any bonds currently a%ailable. &. /enerally issued as se'i-annual coupon bonds. (. totally ris2-$ree.
*5. Municipal bonds3 #. are totally ris2-$ree. B. /enerally ha%e hi/her coupon rates than corporate bonds. C. pay interest that is $ederally ta8-$ree. &. are rarely callable. (. are $ree o$ de$ault-ris2.
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0. 1he brea2-e%en ta8 rate between a ta8able corporate bond yieldin/ 7 percent and a co'parable nonta8able 'unicipal bond yieldin/ * percent can be e8pressed as3 #. 0.0*HI1 - tJK A 0.07. B. 0.0* - I1 - tJK A 0.07. C. 0.07 L I1 - tJK A 0.0*. &. 0.0* I1 - tJK A 0.07. (. 0.0* I1 L tJK A 0.07.
1. # 7ero coupon bond3 #. is sold at a lar/e pre'iu'. B. pays interest that is ta8 deductible to the issuer when paid. C. can only be issued by the G.C. 1reasury. &. has 'ore interest rate ris2 than a co'parable coupon bond. (. pro%ides no ta8able inco'e to the bondholder until the bond 'atures.
). !hich one o$ the $ollowin/ ris2s would a $loatin/-rate bond tend to ha%e less o$ as co'pared to a $i8ed-rate coupon bond" #. real rate ris2 B. interest rate ris2 C. de$ault ris2 &. li.uidity ris2 (. ta8ability ris2
,. 1he collar o$ a $loatin/-rate bond re$ers to the 'ini'u' and 'a8i'u'3 #. call periods. B. 'aturity dates. C. 'ar2et prices. &. coupon rates. (. yields to 'aturity.
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0. 6ast year+ you purchased a 91I;C9 at par. Cince that ti'e+ both 'ar2et interest rates and the in$lation rate ha%e increased by 0.)* percent. :our bond has 'ost li2ely done which one o$ the $ollowin/ since last year" #. decreased in %alue due to the chan/e in in$lation rates B. e8perienced an increase in its bond ratin/ C. 'aintained a $i8ed real rate o$ return &. increased in %alue in response to the chan/e in 'ar2et rates (. increased in %alue due to a decrease in ti'e to 'aturity
*. Recently+ you disco%ered a putable inco'e bond that is con%ertible. I$ you purchase this bond+ you will ha%e the ri/ht to do which o$ the $ollowin/" I. $orce the issuer to repurchase the bond prior to 'aturity II. choose when you wish to recei%e interest pay'ents III. con%ert the bond into a 1I;C IV. con%ert the bond into e.uity shares #. I and III only B. I and IV only C. II and III only &. III and IV only (. I+ II+ and IV only
. 9Cat9 bonds are pri'arily desi/ned to help3 #. 'unicipalities sur%i%e econo'ic recessions. B. corporations respond to o%erseas co'petition. C. the $ederal /o%ern'ent cope with hu/e de$icits. &. corporations reco%er $ro' in%oluntary reor/ani7ations. (. insurance co'panies $und e8cessi%e clai's.
7. Mary is a retired widow who is $inancially dependent upon the interest inco'e produced by her bond port$olio. !hich one o$ the $ollowin/ bonds is the least suitable $or her to own" #. -year+ putable+ hi/h coupon bond B. *-year 1I;C C. 10-year ### coupon bond &. *-year $loatin/ rate bond (. 7- year inco'e bond
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4. #l is retired and enjoys his daily li$e. Dis one concern is that his bonds pro%ide a steady strea' o$ inco'e that will continue to allow hi' to ha%e the 'oney he desires to continue his acti%e li$estyle without lowerin/ his present standard o$ li%in/. #lthou/h he has su$$icient principal to li%e on+ he only wants to spend the interest inco'e pro%ided by his holdin/s and thus is concerned about the purchasin/ power o$ that inco'e. !hich one o$ the $ollowin/ bonds should best ease #l-s concerns" #. -year+ putable+ hi/h coupon bond B. *-year 1I;C C. 10-year ### coupon bond &. *-year 'unicipal bond (. 7- year inco'e bond
5. ;hil has researched 16M 1echnolo/ies and belie%es the $ir' is poised to %astly increase in %alue. De wants to in%est in this co'pany. ;hil has decided to purchase 16M 1echnolo/ies bonds so that he can ha%e a steady strea' o$ interest inco'e. Dowe%er+ he still wishes that he could share in the $ir'-s success alon/ with 16M-s shareholders. !hich one o$ the $ollowin/ bond $eatures will help ;hil $ul$ill his wish" #. put pro%ision B. positi%e co%enant C. warrant &. crosso%er ratin/ (. call pro%ision
70. # G.C. 1reasury bond that is .uoted at 100311 is sellin/3 #. $or 11 percent 'ore than par %alue. B. at an 11 percent discount. C. $or 100.11 percent o$ $ace %alue. &. at par and pays an 11 percent coupon. (. $or 100 and 11H,)nds percent o$ $ace %alue.
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71. !hich o$ the $ollowin/ correctly describe G.C. 1reasury bonds" I. ha%e a 9tic29 si7e o$ 1H,) II. hi/hly li.uid III. .uoted in dollars and cents IV. .uoted at the dirty price #. I and II only B. I and IV only C. II and III only &. II and IV only (. I+ II+ and III only
7). # -year+ $1+000 $ace %alue bond issued by 1aylor 1ools pays interest se'iannually on <ebruary 1 and #u/ust 1. #ssu'e today is Mctober 1. !hat will the di$$erence+ i$ any+ be between this bond-s clean and dirty prices today" #. no di$$erence B. one 'onth-s interest C. two 'onth-s interest &. $our 'onth-s interest (. $i%e 'onth-s interest
7,. 1oday+ Nune 1*+ you want to buy a bond with a .uoted price o$ 54. 0. 1he bond pays interest on Nanuary 1 and Nuly 1. !hich one o$ the $ollowin/ prices represents your total cost o$ purchasin/ this bond today" #. clean price B. dirty price C. as2ed price &. .uoted price (. bid price
70. !hich one o$ the $ollowin/ rates represents the chan/e+ i$ any+ in your purchasin/ power as a result o$ ownin/ a bond" #. ris2-$ree rate B. reali7ed rate C. no'inal rate &. real rate (. current rate
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7*. !hich one o$ the $ollowin/ state'ents is correct" #. 1he ris2-$ree rate represents the chan/e in purchasin/ power. B. #ny return /reater than the in$lation rate represents the ris2 pre'iu'. C. Distorical real rates o$ return 'ust be positi%e. &. Eo'inal rates e8ceed real rates by the a'ount o$ the ris2-$ree rate. (. 1he real rate 'ust be less than the no'inal rate /i%en a positi%e rate o$ in$lation.
7 . 1he <isher ($$ect pri'arily e'phasi7es the e$$ects o$ ===== on an in%estor-s rate o$ return. #. de$ault B. 'ar2et C. interest rate &. in$lation (. 'aturity
77. :ou are tryin/ to co'pare the present %alues o$ two separate strea's o$ cash $lows which ha%e e.ui%alent ris2s. Mne strea' is e8pressed in no'inal %alues and the other strea' is e8pressed in real %alues. :ou decide to discount the no'inal cash $lows usin/ a no'inal annual rate o$ 4 percent. !hat rate should you use to discount the real cash $lows" #. 4 percent B. (#R o$ 4 percent co'pounded 'onthly C. co'parable ris2-$ree rate &. co'parable real rate (. :ou cannot co'pare the present %alues o$ these two strea's o$ cash $lows.
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74. !hich o$ the $ollowin/ state'ents is correct concernin/ the ter' structure o$ interest rates" I. (8pectations o$ lower in$lation rates in the $uture tend to lower the slope o$ the ter' structure o$ interest rates. II. 1he ter' structure o$ interest rates includes both an in$lation pre'iu' and an interest rate ris2 pre'iu'. III. 1he real rate o$ return has 'ini'al+ i$ any+ a$$ect on the slope o$ the ter' structure o$ interest rates. IV. 1he ter' structure o$ interest rates and the ti'e to 'aturity are always directly related. #. I and II only B. II and IV only C. I+ II+ and III only &. II+ III+ and IV only (. I+ II+ and IV only
75. !hich two o$ the $ollowin/ $actors cause the yields on a corporate bond to di$$er $ro' those on a co'parable 1reasury security" I. in$lation ris2 II. interest rate ris2 III. ta8ability IV. de$ault ris2 #. I and II only B. III and IV only C. I+ II+ and IV only &. II+ III+ and IV only (. I+ II+ III+ and IV
40. 1he bonds issued by Ctainless 1ubs bear a percent coupon+ payable se'iannually. 1he bonds 'ature in 11 years and ha%e a $1+000 $ace %alue. Currently+ the bonds sell $or $545. !hat is the yield to 'aturity" #. *.47 percent B. *.5) percent C. .04 percent &. .10 percent (. .)0 percent
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41. Breenbrier Industrial ;roducts- bonds ha%e a 7. 0 percent coupon and pay interest annually. 1he $ace %alue is $1+000 and the current 'ar2et price is $1+0 ).*0 per bond. 1he bonds 'ature in 1 years. !hat is the yield to 'aturity" #. .50 percent B. 7.)) percent C. 7.0 percent &. 7.71 percent (. 7.40 percent
4). Collin/wood Do'es has a bond issue outstandin/ that pays an 4.* percent coupon and 'atures in 14.* years. 1he bonds ha%e a par %alue o$ $1+000 and a 'ar2et price o$ $5 0.)0. Interest is paid se'iannually. !hat is the yield to 'aturity" #. 4., percent B. 4.0) percent C. 4. 1 percent &. 4.70 percent (. 4.50 percent
4,. Mil !ell Cupply o$$ers 7.* percent coupon bonds with se'iannual pay'ents and a yield to 'aturity o$ 7. 4 percent. 1he bonds 'ature in years. !hat is the 'ar2et price per bond i$ the $ace %alue is $1+000" #. $545.70 B. $551.07 C. $55 .04 &. $1+00). 0 (. $1+01,.04
40. Roadside Mar2ets has a .7* percent coupon bond outstandin/ that 'atures in 10.* years. 1he bond pays interest se'iannually. !hat is the 'ar2et price per bond i$ the $ace %alue is $1+000 and the yield to 'aturity is . 5 percent" #. $555.40 B. $555.4* C. $1+00,.0) &. $1+000.07 (. $1+007.*)
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4*. Brand #d%enture ;roperties o$$ers a 5.* percent coupon bond with annual pay'ents. 1he yield to 'aturity is 11.) percent and the 'aturity date is 11 years $ro' today. !hat is the 'ar2et price o$ this bond i$ the $ace %alue is $1+000" #. $45*.0, B. $45 . 7 C. $501.)0 &. $50 .14 (. $5*,.,0
4 . Redesi/ned Co'puters has *.)* percent coupon bonds outstandin/ with a current 'ar2et price o$ $*0 .15. 1he yield to 'aturity is 1 .)4 percent and the $ace %alue is $1+000. Interest is paid se'iannually. Dow 'any years is it until these bonds 'ature" #. . 0 years B. 7.04 years C. 1).01 years &. 10.1 years (. )4.,) years
47. Blobal Co''unications has a 7 percent+ se'iannual coupon bond outstandin/ with a current 'ar2et price o$ $1+0),.0 . 1he bond has a par %alue o$ $1+000 and a yield to 'aturity o$ .7) percent. Dow 'any years is it until this bond 'atures" #. 1).) years B. 1).*, years C. 14.05 years &. )0.,7 years (. )*.0* years
44. :ou are purchasin/ a )*-year+ 7ero-coupon bond. 1he yield to 'aturity is 4. 4 percent and the $ace %alue is $1+000. !hat is the current 'ar2et price" #. $10 . 7 B. $104.14 C. $115.*) &. $1)1.*0 (. $1)4.07
7-),
45. 1oday+ you want to sell a $1+000 $ace %alue 7ero coupon bond you currently own. 1he bond 'atures in 0.* years. Dow 'uch will you recei%e $or your bond i$ the 'ar2et yield to 'aturity is currently *.,, percent" I/nore any accrued interest. #. $ 5 . 0 B. $ 54.05 C. $701.04 &. $7* .10 (. $745.))
50. 1he 7ero coupon bonds o$ &F6 Mo%ers ha%e a 'ar2et price o$ $,15.)0+ a $ace %alue o$ $1+000+ and a yield to 'aturity o$ 5.17 percent. Dow 'any years is it until these bonds 'ature" #. 11.5) years B. 1).)4 years C. 1).7, years &. 1,.01 years (. 1,.07 years
51. # 1 -year+ 0.* percent coupon bond pays interest annually. 1he bond has a $ace %alue o$ $1+000. !hat is the percenta/e chan/e in the price o$ this bond i$ the 'ar2et yield to 'aturity rises to *.7 percent $ro' the current rate o$ *.* percent" #. ).10 percent decrease B. 1.57 percent decrease C. 0.)1 percent increase &. 1.57 percent increase (. ).10 percent increase
5). 1he Corner Brocer has a 7-year+ percent annual coupon bond outstandin/ with a $1+000 par %alue. 1he bond has a yield to 'aturity o$ *.* percent. !hich one o$ the $ollowin/ state'ents is correct i$ the 'ar2et yield suddenly increases to .* percent" #. 1he bond price will increase by $*7.10. B. 1he bond price will increase by *.)5 percent. C. 1he bond price will decrease by $*,. ). &. 1he bond price will decrease by *.0, percent. (. 1he bond price will decrease by *., percent.
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5,. Blac2well bonds ha%e a $ace %alue o$ $1+000 and are currently .uoted at 54.0. 1he bonds ha%e a * percent coupon rate. !hat is the current yield on these bonds" #. 0. 7 percent B. 0.74 percent C. *.04 percent &. *.,, percent (. *.*0 percent
50. 1he outstandin/ bonds o$ 1he Ri%er <ront <erry carry a .* percent coupon. 1he bonds ha%e a $ace %alue o$ $1+000 and are currently .uoted at 101. . !hat is the current yield on these bonds" #. 1. 0 percent B. ).,7 percent C. .00 percent &. .05 percent (. .44 percent
5*. 1he 7 percent+ se'i-annual coupon bonds o$$ered by Douse Reno%ators are callable in ) years at $1+0*0. !hat is the a'ount o$ the call pre'iu' on a $1+000 par %alue bond" #. $*) B. $*0 C. $7) &. $40 (. $45
5 . # corporate bond was .uoted yesterday at 10).1 while today-s .uote is 10).15. !hat is the chan/e in the %alue o$ a bond that has a $ace %alue o$ $ +000" #. $0.,0 B. $1.40 C. $,.00 &. $14.00 (. $140.00
7-)*
57. # 10-year+ 0.* percent+ se'iannual coupon bond issued by 1yler Rentals has a $1+000 $ace %alue. 1he bond is currently .uoted at 54.7. !hat is the clean price o$ this bond i$ the ne8t interest pay'ent will occur ) 'onths $ro' today" #. $547.00 B. $550.*0 C. $1+00).00 &. $1+011.)* (. $1+0)).*0
54. # 1reasury bond is .uoted at a price o$ 10*31*. !hat is the 'ar2et price o$ this bond i$ the $ace %alue is $*+000" #. $*+00*.1* B. $*+10*.1* C. $*+)*7.*0 &. $*+)7,.00 (. $*+*1*.00
55. # 1reasury bond is .uoted at a price o$ 101310 with a current yield o$ 7.), percent. !hat is the coupon rate" #. 7.)0 percent B. 7.)4 percent C. 7.,0 percent &. 7.,0 percent (. 7.,5 percent
100. # corporate bond is .uoted at a price o$ 10,.1 and carries a .*0 percent coupon. 1he bond pays interest se'iannually. !hat is the current yield on one o$ these bonds" #. .)0 percent B. .,0 percent C. ., percent &. . ) percent (. . percent
7-)
101. # 1reasury bond is .uoted at a price o$ 10 3), with a ,.*0 percent coupon. 1he bond pays interest se'iannually. !hat is the current yield on one o$ these bonds" #. ,.0 percent B. ,.15 percent C. ,.)4 percent &. ,.,, percent (. ,.,4 percent
10). # 1reasury bond is .uoted as 55311 as2ed and 55305 bid. !hat is the bid-as2 spread in dollars on a $*+000 $ace %alue bond" #. $0.0, B. $0. , C. $1.00 &. $,.1, (. $ .)*
10,. 1he se'iannual+ 4-year bonds o$ #lto Music are sellin/ at par and ha%e an e$$ecti%e annual yield o$ 4. )4* percent. !hat is the a'ount o$ each interest pay'ent i$ the $ace %alue o$ the bonds is $1+000" #. $01.*0 B. $0).)* C. $0,.1* &. $4*.00 (. $4 .)5
100. # bond that pays interest annually yielded 7.07 percent last year. 1he in$lation rate $or the sa'e period was .10 percent. !hat was the actual real rate o$ return on this bond $or last year" #. 1.15 percent B. 1.)* percent C. 1.)5 percent &. 1., percent (. 1.01 percent
7-)7
10*. Betty Mar2ets has bonds outstandin/ that pay a * percent se'iannual coupon+ ha%e a *.)4 percent yield to 'aturity+ and a $ace %alue o$ $1+000. 1he current rate o$ in$lation is 0.1 percent. !hat is the real rate o$ return on these bonds" #. 0.4 percent B. 0.50 percent C. 1.00 percent &. 1.1, percent (. 1.15 percent
10 . 1he outstandin/ bonds o$ !inter 1i'e ;roducts pro%ide a real rate o$ return o$ ,.0, percent. 1he current rate o$ in$lation is 0. 4 percent. !hat is the actual no'inal rate o$ return on these bonds" #. 7.*4 percent B. 7.,, percent C. 7.71 percent &. 7.7 percent (. 7.4* percent
107. 1he yield to 'aturity on a bond is currently 4.0 percent. 1he real rate o$ return is ,.)) percent. !hat is the rate o$ in$lation" #. *.04 percent B. *. 0 percent C. .)0 percent &. .*, percent (. .71 percent
104. # 7ero coupon bond with a $ace %alue o$ $1+000 is issued with an initial price o$ $)1).* . 1he bond 'atures in )* years. !hat is the i'plicit interest+ in dollars+ $or the $irst year o$ the bond-s li$e" #. $1).7) B. $1,.*4 C. $1,.50 &. $1*. , (. $1*.45
7-)4
105. Eorthern !arehouses wants to raise $11.0 'illion to e8pand its business. 1o acco'plish this+ it plans to sell 00-year+ $1+000 $ace %alue+ 7ero-coupon bonds. 1he bonds will be priced to yield 4.7* percent. !hat is the 'ini'u' nu'ber o$ bonds it 'ust sell to raise the $11.0 'illion it needs" #. )10+011 B. ),5+400 C. )*0+507 &. ,) +0)5 (. ,*0+004
110. :ou ha%e won a contest and will recei%e $)+*00 a year in real ter's $or the ne8t , years. (ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent occurrin/ one year $ro' today. 1he rele%ant no'inal discount rate is ., percent and the in$lation rate is 0.* percent. !hat are your winnin/s worth today" #. $7+)05 B. $7+, 7 C. $7+001 &. $7+*00 (. $7+4,4
111. :ou purchased an in%est'ent which will pay you $4+000+ in real dollars+ a year $or the ne8t three years. (ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent occurrin/ one year $ro' today. 1he no'inal discount rate is 7.* percent and the in$lation rate is ).5 percent. !hat is the present %alue o$ these pay'ents" #. $)1+7)0 B. $))+000 C. $))+*11 &. $),+00 (. $),+*)5
Essay Questions
7-)5
11). &e$ine li.uidity ris2+ de$ault ris2+ and ta8ability ris2 and e8plain how these ris2s relate to bonds and bond yields.
11,. In$lation has re'ained low $or the past three years but you ha%e co'e to the conclusion that trend is endin/ and in$lation will increase si/ni$icantly o%er the ne8t 14 'onths. #ssu'e you ha%e reached this conclusion prior to other in%estors reachin/ the sa'e conclusion. !hat adjust'ents should you 'a2e to your bond port$olio in li/ht o$ your conclusions"
110. (8plain the conditions that would need to e8ist $or the 1reasury yield cur%e to be downward slopin/.
11*. &escribe the relationships that e8ist between the coupon rate+ the yield to 'aturity+ and the current yield $or both a discount bond and a pre'iu' bond.
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11 . Cyl%an 1rees has a 7 percent coupon bond on the 'ar2et with ten years le$t to 'aturity. 1he bond 'a2es annual pay'ents and currently sells $or $4 1.)0. !hat is the yield-to'aturity" #. 4.*0 percent B. 4. 4 percent C. 4.5) percent &. 5.14 percent (. 5.)7 percent
117. Oaiser Industries has bonds on the 'ar2et 'a2in/ annual pay'ents+ with 10 years to 'aturity+ and sellin/ $or $1+,4).01. #t this price+ the bonds yield 7.* percent. !hat is the coupon rate" #. 4.00 percent B. 4.*0 percent C. 5.00 percent &. 10.*0 percent (. 1).00 percent
114. &e8ter Mills issued )0-year bonds a year a/o at a coupon rate o$ 11.0 percent. 1he bonds 'a2e se'iannual pay'ents. 1he yield-to-'aturity on these bonds is 5.) percent. !hat is the current bond price" #. $54*.** B. $551.50 C. $1+15).1 &. $1+15*.40 (. $1+154.00
7-,1
115. Coo 6ee I'ports issued 17-year bonds ) years a/o at a coupon rate o$ 10., percent. 1he bonds 'a2e se'iannual pay'ents. 1hese bonds currently sell $or 10) percent o$ par %alue. !hat is the yield-to-'aturity" #. 5.54 percent B. 10.00 percent C. 10.1, percent &. 10.)7 percent (. 10.0) percent
1)0. Bryceton+ Inc. has bonds on the 'ar2et with 1, years to 'aturity+ a yield-to-'aturity o$ 5.) percent+ and a current price o$ $45*.05. 1he bonds 'a2e se'iannual pay'ents. !hat is the coupon rate" #. 7.40 percent B. 4.00 percent C. 4.)* percent &. 4.00 percent (. 4. * percent
1)1. Cuppose the real rate is 5.* percent and the in$lation rate is 1.4 percent. !hat rate would you e8pect to see on a 1reasury bill" #. 5.*0 percent B. 11.,0 percent C. 11.07 percent &. 11.* percent (. 11. 0 percent
1)). #n in%est'ent o$$ers a 10.* percent total return o%er the co'in/ year. Ca' Bernan2e thin2s the total real return on this in%est'ent will be only 0.* percent. !hat does Ca' belie%e the in$lation rate will be $or the ne8t year" #. *. 0 percent B. *. 7 percent C. *.70 percent &. .00 percent (. .)1 percent
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1),. Bond C is a 0 percent coupon bond. Bond 1 is a 10 percent coupon bond. Both bonds ha%e 11 years to 'aturity+ 'a2e se'iannual pay'ents+ and ha%e a yield-to-'aturity o$ 7 percent. I$ interest rates suddenly rise by ) percent+ what will the percenta/e chan/e in the price o$ Bond 1 be" #. -1*.1 percent B. -10.47 percent C. -1,.* percent &. -1).5) percent (. -1). 7 percent
1)0. 1echnical Cales+ Inc. has . percent coupon bonds on the 'ar2et with 5 years le$t to 'aturity. 1he bonds 'a2e se'iannual pay'ents and currently sell $or 44.75 percent o$ par. !hat is the e$$ecti%e annual yield" #. 4.,0 percent B. 4.00 percent C. 4.*) percent &. 4.*4 percent (. 4. 0 percent
1)*. Bonner Metals wants to issue new 14-year bonds $or so'e 'uch-needed e8pansion projects. 1he co'pany currently has 11 percent bonds on the 'ar2et that sell $or $1+0*5.*1+ 'a2e se'iannual pay'ents+ and 'ature in 14 years. !hat should the coupon rate be on the new bonds i$ the $ir' wants to sell the' at par" #. *.7* percent B. .), percent C. .01 percent &. . 0 percent (. .75 percent
1) . :ou purchase a bond with an in%oice price o$ $1+0 0. 1he bond has a coupon rate o$ 5.0 percent+ and there are , 'onths to the ne8t se'iannual coupon date. !hat is the clean price o$ this bond" #. $1+0, .*0 B. $1+0*).17 C. $1+0 0.00 &. $1+0 7.4, (. $1+04,.*0
7-,,
1)7. Cuppose the $ollowin/ bond .uote $or the Beta Co'pany appears in the $inancial pa/e o$ today-s newspaper. #ssu'e the bond has a $ace %alue o$ $1+000 and the current date is #pril 1*+ )005. !hat is the yield to 'aturity on this bond"
#. . 0 percent B. 4.5 percent C. 10.), percent &. 1).07 percent (. 1,.)7 percent
1)4. :ou want to ha%e $1.00 'illion in real dollars in an account when you retire in 0 years. 1he no'inal return on your in%est'ent is 4 percent and the in$lation rate is ,.* percent. !hat is the real a'ount you 'ust deposit each year to achie%e your /oal" #. $ + 7. 7 B. $ +474.05 C. $7+0,,.0) &. $7+*1*.05 (. $7+700.1)
1)5. 1he yield-to-'aturity on a bond is the interest rate you earn on your in%est'ent i$ interest rates do not chan/e. I$ you actually sell the bond be$ore it 'atures+ your reali7ed return is 2nown as the holdin/ period yield. Cuppose that today+ you buy a 1) percent annual coupon bond $or $1+000. 1he bond has 1, years to 'aturity. 1wo years $ro' now+ the yieldto-'aturity has declined to 11 percent and you decide to sell. !hat is your holdin/ period yield" #. 4.40 percent B. 5.05 percent C. 1).00 percent &. 1,.01 percent (. 10.45 percent
7-,0
Chapter 07 Interest Rates and Bond Valuation #nswer Oey
1. Mary just purchased a bond which pays $ 0 a year in interest. !hat is this $ 0 called" A. coupon B. $ace %alue C. discount &. call pre'iu' (. yield Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Cou'on
). Bert owns a bond that will pay hi' $7* each year in interest plus a $1+000 principal pay'ent at 'aturity. !hat is the $1+000 called" #. coupon B. $ace %alue C. discount &. yield (. dirty price Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: (ace !alue
7-,*
,. # bond-s coupon rate is e.ual to the annual interest di%ided by which one o$ the $ollowin/" #. call price B. current price C. $ace %alue &. clean price (. dirty price Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Cou'on rate
0. 1he speci$ied date on which the principal a'ount o$ a bond is payable is re$erred to as which one o$ the $ollowin/" #. coupon date B. yield date C. 'aturity &. dirty date (. clean date Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: )aturity
7-,
*. Currently+ the bond 'ar2et re.uires a return o$ 11. percent on the 10-year bonds issued by !inston Industries. 1he 11. percent is re$erred to as which one o$ the $ollowin/" #. coupon rate B. $ace rate C. call rate D. yield to 'aturity (. interest rate Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: *ield to maturity
. 1he current yield is de$ined as the annual interest on a bond di%ided by which one o$ the $ollowin/" #. coupon B. $ace %alue C. 'ar2et price &. call price (. dirty price Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Current yield
7-,7
7. #n indenture is3 #. another na'e $or a bond-s coupon. B. the written record o$ all the holders o$ a bond issue. C. a bond that is past its 'aturity date but has yet to be repaid. &. a bond that is secured by the in%entory held by the bond-s issuer. E. the le/al a/ree'ent between the bond issuer and the bondholders. Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: ,ndenture
4. #tlas (ntertain'ent has 1*-year bonds outstandin/. 1he interest pay'ents on these bonds are sent directly to each o$ the indi%idual bondholders. 1hese direct pay'ents are a clear indication that the bonds can accurately be de$ined as bein/ issued3 #. at par. B. in re/istered $or'. C. in street $or'. &. as debentures. (. as callable. Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: -egistered form
7-,4
5. # bond that is payable to who'e%er has physical possession o$ the bond is said to be in3 #. new-issue condition. B. re/istered $or'. C. bearer $or'. &. debenture status. (. collateral status. Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Bearer form
10. 1he 6eeward Co'pany just issued 1*-year+ 4 percent+ unsecured bonds at par. 1hese bonds $it the de$inition o$ which one o$ the $ollowin/ ter's" #. note B. discounted C. 7ero-coupon &. callable E. debenture
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Debenture
7-,5
11. !hich o$ the $ollowin/ de$ines a note" I. secured II. unsecured III. 'aturity less than 10 years IV. 'aturity in e8cess o$ 10 years #. III only B. I and III only C. I and IV only D. II and III only (. II and IV only
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Note
1). # sin2in/ $und is 'ana/ed by a trustee $or which one o$ the $ollowin/ purposes" #. payin/ interest pay'ents B. early bond rede'ption C. con%ertin/ bonds into e.uity securities &. payin/ pre$erred di%idends (. reducin/ coupon rates
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Sin.ing fund
7-00
1,. # bond that can be paid o$$ early at the issuer-s discretion is re$erred to as bein/ which one o$ the $ollowin/" #. 7ero coupon B. callable C. senior &. collaterali7ed (. unsecured Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Call 'ro!ision
10. # $1+000 $ace %alue bond can be redee'ed early at the issuer-s discretion $or $1+0,0+ plus any accrued interest. 1he additional $,0 is called which one o$ the $ollowin/" #. dirty price B. rede'ption %alue C. call pre'iu' &. ori/inal-issue discount (. rede'ption discount Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Call 'remium
7-01
1*. # de$erred call pro%ision is which one o$ the $ollowin/" #. re.uire'ent that a bond issuer pay the current 'ar2et price+ plus accrued interest+ should the $ir' decide to call a bond B. ability o$ a bond issuer to delay repayin/ a bond until a$ter the 'aturity date should the issuer so opt C. prohibition placed on an issuer which pre%ents that issuer $ro' e%er redee'in/ bonds prior to 'aturity D. prohibition which pre%ents bond issuers $ro' redee'in/ callable bonds prior to a speci$ied date (. re.uire'ent that a bond issuer pay a call pre'iu' which is e.ual to or /reater than one year-s coupon should that issuer decide to call a bond Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Deferred call 'ro!ision
1 . # call-protected bond is a bond that3 #. is /uaranteed to be called. B. can ne%er be called. C. is currently bein/ called. &. is callable at any ti'e. E. cannot be called durin/ a certain period o$ ti'e. Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Call#'rotected bond
7-0)
17. 1he ite's included in an indenture that li'it certain actions o$ the issuer in order to protect bondholder-s interests are re$erred to as the3 #. trustee relationships. B. bylaws. C. le/al bounds. &. 9plain %anilla9 conditions. E. protecti%e co%enants. Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: /rotecti!e co!enants
14. # bond that has only one pay'ent+ which occurs at 'aturity+ de$ines which one o$ the $ollowin/" #. debenture B. callable C. $loatin/-rate &. jun2 E. 7ero coupon Re$er to section 7.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: 1ero#cou'on bond
7-0,
15. !hich one o$ the $ollowin/ is the price a dealer will pay to purchase a bond" #. call price B. as2ed price C. bid price &. bid-as2 spread (. par %alue Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Bid 'rice
)0. :ou want to buy a bond $ro' a dealer. !hich one o$ the $ollowin/ prices will you pay" #. call price B. auction price C. bid price D. as2ed price (. bid-as2 spread Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: As.ed 'rice
7-00
)1. 1he di$$erence between the price that a dealer is willin/ to pay and the price at which he or she will sell is called the3 #. e.uilibriu'. B. pre'iu'. C. discount. &. call price. E. spread. Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Bid#as. s'read
)). # bond is .uoted at a price o$ $545. 1his price is re$erred to as which one o$ the $ollowin/" #. call price B. $ace %alue C. clean price &. dirty price (. wholesale price Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Clean 'rice
7-0*
),. ;ete paid $1+0,) as his total cost o$ purchasin/ a bond. 1his price is re$erred to as the3 #. .uoted price. B. spread price. C. clean price. D. dirty price. (. call price. Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Dirty 'rice
)0. Real rates are de$ined as no'inal rates that ha%e been adjusted $or which o$ the $ollowin/" A. in$lation B. de$ault ris2 C. accrued interest &. interest rate ris2 (. both in$lation and interest rate ris2 Re$er to section 7.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: -eal rate
7-0
)*. Interest rates that include an in$lation pre'iu' are re$erred to as3 #. annual percenta/e rates. B. stripped rates. C. e$$ecti%e annual rates. &. real rates. E. no'inal rates. Re$er to section 7.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: Nominal rate
) . 1he <isher e$$ect is de$ined as the relationship between which o$ the $ollowin/ %ariables" #. de$ault ris2 pre'iu'+ in$lation ris2 pre'iu'+ and real rates B. no'inal rates+ real rates+ and interest rate ris2 pre'iu' C. interest rate ris2 pre'iu'+ real rates+ and de$ault ris2 pre'iu' D. real rates+ in$lation rates+ and no'inal rates (. real rates+ interest rate ris2 pre'iu'+ and no'inal rates Re$er to section 7.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: (is4er effect
7-07
)7. 1he pure ti'e %alue o$ 'oney is 2nown as the3 #. li.uidity e$$ect. B. <isher e$$ect. C. ter' structure o$ interest rates. &. in$lation $actor. (. interest rate $actor. Re$er to section 7.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%" &o'ic: &erm structure of interest rates
)4. !hich one o$ the $ollowin/ pre'iu's is co'pensation $or e8pected $uture in$lation" #. de$ault ris2 B. ta8ability C. li.uidity D. in$lation (. interest rate ris2 Re$er to section 7.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%" &o'ic: ,nflation 'remium
7-04
)5. 1he interest rate ris2 pre'iu' is the3 #. additional co'pensation paid to in%estors to o$$set risin/ prices. B. co'pensation in%estors de'and $or acceptin/ interest rate ris2. C. di$$erence between the yield to 'aturity and the current yield. &. di$$erence between the 'ar2et interest rate and the coupon rate. (. di$$erence between the coupon rate and the current yield. Re$er to section 7.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%" &o'ic: ,nterest rate ris. 'remium
,0. # 1reasury yield cur%e plots 1reasury interest rates relati%e to which one o$ the $ollowin/" #. 'ar2et rates B. co'parable corporate bond rates C. the ris2-$ree rate &. in$lation E. 'aturity Re$er to section 7.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%" &o'ic: &reasury yield cur!e
7-05
,1. !hich one o$ the $ollowin/ ris2 pre'iu's co'pensates $or the possibility o$ nonpay'ent by the bond issuer" A. de$ault ris2 B. ta8ability C. li.uidity &. in$lation (. interest rate ris2 Re$er to section 7.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%" &o'ic: Default ris. 'remium
,). 1he ta8ability ris2 pre'iu' co'pensates bond holders $or which one o$ the $ollowin/" #. yield decreases in response to 'ar2et chan/es B. lac2 o$ coupon pay'ents C. possibility o$ de$ault D. a bond-s un$a%orable ta8 status (. decrease in a 'unicipality-s credit ratin/ Re$er to section 7.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%" &o'ic: &a5ability 'remium
7-*0
,,. 1he li.uidity pre'iu' is co'pensation to in%estors $or3 #. purchasin/ a bond in the secondary 'ar2et. B. the lac2 o$ an acti%e 'ar2et wherein a bond can be sold $or its actual %alue. C. ac.uirin/ a bond with an un$a%orable ta8 status. &. redee'in/ a bond prior to 'aturity. (. purchasin/ a bond that has de$aulted on its coupon pay'ents. Re$er to section 7.7
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%" &o'ic: Li6uidity 'remium
,0. #n 4 percent corporate bond that pays interest se'i-annually was issued last year. !hich two o$ the $ollowin/ 'ost li2ely apply to this bond today i$ the current yield-to-'aturity is 7 percent" I. a structure as an interest-only loan II. a current yield that e.uals the coupon rate III. a yield-to-'aturity e.ual to the coupon rate IV. a 'ar2et price that di$$ers $ro' the $ace %alue #. I and III only B. I and IV only C. II and III only &. II and IV only (. III and IV only Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Bond features
7-*1
,*. # bond has a 'ar2et price that e8ceeds its $ace %alue. !hich o$ the $ollowin/ $eatures currently apply to this bond" I. discounted price II. pre'iu' price III. yield-to-'aturity that e8ceeds the coupon rate IV. yield-to-'aturity that is less than the coupon rate #. III only B. I and III only C. I and IV only &. II and III only E. II and IV only Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: /remium bonds
, . #ll else constant+ a bond will sell at ===== when the coupon rate is ===== the yield to 'aturity. #. a pre'iu'> less than B. a pre'iu'> e.ual to C. a discount> less than &. a discount> hi/her than (. par> less than Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Discount bond
7-*)
,7. 1he !althers Co'pany has a se'i-annual coupon bond outstandin/. #n increase in the 'ar2et rate o$ interest will ha%e which one o$ the $ollowin/ e$$ects on this bond" #. increase the coupon rate B. decrease the coupon rate C. increase the 'ar2et price D. decrease the 'ar2et price (. increase the ti'e period Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: ,nterest rate ris.
,4. !hich o$ the $ollowin/ are characteristics o$ a pre'iu' bond" I. coupon rate ? yield-to-'aturity II. coupon rate @ yield-to-'aturity III. coupon rate ? current yield IV. coupon rate @ current yield #. I only B. I and III only C. I and IV only &. II and III only E. II and IV only Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Bond yields
7-*,
,5. !hich o$ the $ollowin/ relationships apply to a par %alue bond" I. coupon rate ? yield-to-'aturity II. current yield A yield-to-'aturity III. 'ar2et price A call price IV. 'ar2et price A $ace %alue #. I and II only B. I and III only C. II and IV only &. I+ II+ and III only (. II+ III+ and IV only Re$er to sections 7.1 and 7.)
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ and "%+ &o'ic: Bond c4aracteristics
00. !hich one o$ the $ollowin/ relationships is stated correctly" #. 1he coupon rate e8ceeds the current yield when a bond sells at a discount. B. 1he call price 'ust e.ual the par %alue. C. #n increase in 'ar2et rates increases the 'ar2et price o$ a bond. D. &ecreasin/ the ti'e to 'aturity increases the price o$ a discount bond+ all else constant. (. Increasin/ the coupon rate decreases the current yield+ all else constant. Re$er to sections 7.1 and 7.)
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#+ Section: "%$ and "%+ &o'ic: Bond c4aracteristics
7-*0
01. Breen Roo$ Inns is preparin/ a bond o$$erin/ with a percent+ se'iannual coupon and a $ace %alue o$ $1+000. 1he bonds will be repaid in 10 years and will be sold at par. Bi%en this+ which one o$ the $ollowin/ state'ents is correct" #. 1he bonds will beco'e discount bonds i$ the 'ar2et rate o$ interest declines. B. 1he bonds will pay 10 interest pay'ents o$ $ 0 each. C. 1he bonds will sell at a pre'iu' i$ the 'ar2et rate is *.* percent. &. 1he bonds will initially sell $or $1+0,0 each. (. 1he $inal pay'ent will be in the a'ount o$ $1+0 0. Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Bond !alues
0). # newly issued bond has a 7 percent coupon with se'iannual interest pay'ents. 1he bonds are currently priced at par %alue. 1he e$$ecti%e annual rate pro%ided by these bonds 'ust be3 #. ,.* percent. B. /reater than ,.* percent but less than 7 percent. C. 7 percent. D. /reater than 7 percent. (. #nswer cannot be deter'ined $ro' the in$or'ation pro%ided. Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 7ffecti!e annual rate
7-**
0,. !hich o$ the $ollowin/ increase the price sensiti%ity o$ a bond to chan/es in interest rates" I. increase in ti'e to 'aturity II. decrease in ti'e to 'aturity III. increase in coupon rate IV. decrease in coupon rate #. II only B. I and III only C. I and IV only &. II and III only (. II and IV only Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: ,nterest rate sensiti!ity
00. !hich one o$ the $ollowin/ bonds is the least sensiti%e to interest rate ris2" #. ,-year> 0 percent coupon B. ,-year> percent coupon C. *-year> percent coupon &. 7-year> percent coupon (. 7-year> 0 percent coupon Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: ,nterest rate sensiti!ity
7-*
0*. #s a bond-s ti'e to 'aturity increases+ the bond-s sensiti%ity to interest rate ris23 #. increases at an increasin/ rate. B. increases at a decreasin/ rate. C. increases at a constant rate. &. decreases at an increasin/ rate. (. decreases at a decreasin/ rate. Re$er to section 7.1
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: ,nterest rate ris.
0 . :ou own a bond that has a percent annual coupon and 'atures * years $ro' now. :ou purchased this 10-year bond at par %alue when it was ori/inally issued. !hich one o$ the $ollowin/ state'ents applies to this bond i$ the rele%ant 'ar2et interest rate is now *.4 percent" #. 1he current yield-to-'aturity is /reater than percent. B. 1he current yield is percent. C. 1he ne8t interest pay'ent will be $,0. &. 1he bond is currently %alued at one-hal$ o$ its issue price. E. :ou will reali7e a capital /ain on the bond i$ you sell it today. Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#+ Section: "%$ &o'ic: ,nterest rate effects
7-*7
07. :ou e8pect interest rates to decline in the near $uture e%en thou/h the bond 'ar2et is not indicatin/ any si/n o$ this chan/e. !hich one o$ the $ollowin/ bonds should you purchase now to 'a8i'i7e your /ains i$ the rate decline does occur" #. short-ter'> low coupon B. short-ter'> hi/h coupon C. lon/-ter'> 7ero coupon &. lon/-ter'> low coupon (. lon/-ter'> hi/h coupon Re$er to section 7.1
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: ,nterest rate ris.
04. # percent+ annual coupon bond is currently sellin/ at a pre'iu' and 'atures in 7 years. 1he bond was ori/inally issued , years a/o at par. !hich one o$ the $ollowin/ state'ents is accurate in respect to this bond today" #. 1he $ace %alue o$ the bond today is /reater than it was when the bond was issued. B. 1he bond is worth less today than when it was issued. C. 1he yield-to-'aturity is less than the coupon rate. &. 1he coupon rate is /reater than the current yield. (. 1he yield-to-'aturity e.uals the current yield. Re$er to section 7.1
AACSB: N/A Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Bond yields
7-*4
05. !hich o$ the $ollowin/ state'ents concernin/ bonds are correct" I. Bonds pro%ide ta8 bene$its to issuers. II. 1he ris2 o$ a $ir' $inancially $ailin/ increases when the $ir' issues bonds. III. Most lon/-ter' bond issues are re$erred to as un$unded debt. IV. #ll bonds are treated e.ually in a ban2ruptcy proceedin/. #. II and III only B. I and II only C. III and IV only &. II and IV only (. I+ II+ and III only Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Bond features
*0. 1e8as <oods has a percent bond issue outstandin/ that pays $,0 in interest e%ery March and Cepte'ber. 1he bonds are in%est'ent /rade and sell at par. 1he bonds are callable at a price e.ual to the present %alue o$ all $uture interest and principal pay'ents discounted at a rate e.ual to the co'parable 1reasury rate plus 0.*0 percent. !hich o$ the $ollowin/ correctly describe the $eatures o$ this bond" I. bond ratin/ o$ B II. 9'a2e whole9 call price III. $1+000 $ace %alue IV. o$$er price o$ $1+000 #. I and III only B. III and IV only C. I+ III+ and IV only D. II+ III+ and IV only (. I+ II+ III+ and IV Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Bond features
7-*5
*1. 6ast year+ 6e8in/ton Do'es issued $1 'illion in unsecured+ non-callable debt. 1his debt pays an annual interest pay'ent o$ $** and 'atures years $ro' now. 1he $ace %alue is $1+000 and the 'ar2et price is $1+0)0. !hich one o$ these ter's correctly describes a $eature o$ this debt" #. se'i-annual coupon B. discount bond C. note &. trust deed (. collaterali7ed Re$er to section 7.)
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Bond features
*). Callable bonds /enerally3 #. /rant the bondholder the option to call the bond anyti'e a$ter the de$er'ent period. B. are callable at par as soon as the call-protection period ends. C. are called when 'ar2et interest rates increase. &. are called within the $irst three years a$ter issuance. E. ha%e a sin2in/ $und pro%ision. Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Callable bonds
7- 0
*,. !hich o$ the $ollowin/ are ne/ati%e co%enants that 'i/ht be $ound in a bond indenture" I. 1he co'pany shall 'aintain a current ratio o$ 1.10 or better. II. Eo debt senior to this issue can be issued. III. 1he co'pany cannot lease any 'ajor assets without appro%al by the lender. IV. 1he co'pany 'ust 'aintain the loan collateral in /ood wor2in/ order. #. I and II only B. II and III only C. III and IV only &. II+ III+ and IV only (. I+ II+ and III only Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: Negati!e co!enants
*0. ;rotecti%e co%enants3 #. apply to short-ter' debt issues but not to lon/-ter' debt issues. B. only apply to pri%ately issued bonds. C. are a $eature $ound only in /o%ern'ent-issued bond indentures. &. only apply to bonds that ha%e a de$erred call pro%ision. E. are pri'arily desi/ned to protect bondholders. Re$er to section 7.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%+ &o'ic: /rotecti!e co!enants
7- 1
**. !hich one o$ the $ollowin/ state'ents concernin/ bond ratin/s is correct" #. In%est'ent /rade bonds are rated BB or hi/her by Ctandard F ;oor-s. B. Bond ratin/s assess both interest rate ris2 and de$ault ris2. C. Cplit rated bonds are called crosso%er bonds. &. 1he hi/hest ratin/ issued by Moody-s is ###. (. # 9$allen an/el9 is a ter' applied to all 9jun29 bonds. Re$er to section 7.,
AACSB: N/A Bloom's: Knowledge Difficulty: ,ntermediate Learning Ob ecti!e: "#8 Section: "%8 &o'ic: Bond ratings
* . # 9$allen an/el9 is a bond that has 'o%ed $ro'3 #. bein/ publicly traded to bein/ pri%ately traded. B. bein/ a lon/-ter' obli/ation to bein/ a short-ter' obli/ation. C. ha%in/ a yield-to-'aturity in e8cess o$ the coupon rate to ha%in/ a yield-to- 'aturity that is less than the coupon rate. &. senior status to junior status $or li.uidation purposes. E. in%est'ent /rade to speculati%e /rade. Re$er to section 7.,
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#8 Section: "%8 &o'ic: (allen angel
7- )
*7. Bonds issued by the G.C. /o%ern'ent3 #. are considered to be $ree o$ interest rate ris2. B. /enerally ha%e hi/her coupons than those issued by an indi%idual state. C. are considered to be $ree o$ de$ault ris2. &. pay interest that is e8e'pt $ro' $ederal inco'e ta8es. (. are called 9'unis9. Re$er to section 7.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: 9o!ernment bonds
*4. 1reasury bonds are3 #. issued by any /o%ern'ental a/ency in the G.C. B. issued only on the $irst day o$ each $iscal year by the G.C. &epart'ent o$ 1reasury. C. bonds that o$$er the best ta8 bene$its o$ any bonds currently a%ailable. D. /enerally issued as se'i-annual coupon bonds. (. totally ris2-$ree. Re$er to section 7.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: &reasury bonds
7- ,
*5. Municipal bonds3 #. are totally ris2-$ree. B. /enerally ha%e hi/her coupon rates than corporate bonds. C. pay interest that is $ederally ta8-$ree. &. are rarely callable. (. are $ree o$ de$ault-ris2. Re$er to section 7.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: )unici'al bonds
0. 1he brea2-e%en ta8 rate between a ta8able corporate bond yieldin/ 7 percent and a co'parable nonta8able 'unicipal bond yieldin/ * percent can be e8pressed as3 A. 0.0*HI1 - tJK A 0.07. B. 0.0* - I1 - tJK A 0.07. C. 0.07 L I1 - tJK A 0.0*. &. 0.0* I1 - tJK A 0.07. (. 0.0* I1 L tJK A 0.07. Re$er to section 7.0
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: Brea.#e!en ta5 rate
7- 0
1. # 7ero coupon bond3 #. is sold at a lar/e pre'iu'. B. pays interest that is ta8 deductible to the issuer when paid. C. can only be issued by the G.C. 1reasury. D. has 'ore interest rate ris2 than a co'parable coupon bond. (. pro%ides no ta8able inco'e to the bondholder until the bond 'atures. Re$er to section 7.0
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%0 &o'ic: 1ero#cou'on bond
). !hich one o$ the $ollowin/ ris2s would a $loatin/-rate bond tend to ha%e less o$ as co'pared to a $i8ed-rate coupon bond" #. real rate ris2 B. interest rate ris2 C. de$ault ris2 &. li.uidity ris2 (. ta8ability ris2 Re$er to section 7.0
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#2 Section: "%0 &o'ic: (loating#rate bond
7- *
,. 1he collar o$ a $loatin/-rate bond re$ers to the 'ini'u' and 'a8i'u'3 #. call periods. B. 'aturity dates. C. 'ar2et prices. D. coupon rates. (. yields to 'aturity. Re$er to section 7.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: (loating#rate bond
0. 6ast year+ you purchased a 91I;C9 at par. Cince that ti'e+ both 'ar2et interest rates and the in$lation rate ha%e increased by 0.)* percent. :our bond has 'ost li2ely done which one o$ the $ollowin/ since last year" #. decreased in %alue due to the chan/e in in$lation rates B. e8perienced an increase in its bond ratin/ C. 'aintained a $i8ed real rate o$ return &. increased in %alue in response to the chan/e in 'ar2et rates (. increased in %alue due to a decrease in ti'e to 'aturity Re$er to section 7.0
AACSB: N/A Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%0 &o'ic: &,/S
7-
*. Recently+ you disco%ered a putable inco'e bond that is con%ertible. I$ you purchase this bond+ you will ha%e the ri/ht to do which o$ the $ollowin/" I. $orce the issuer to repurchase the bond prior to 'aturity II. choose when you wish to recei%e interest pay'ents III. con%ert the bond into a 1I;C IV. con%ert the bond into e.uity shares #. I and III only B. I and IV only C. II and III only &. III and IV only (. I+ II+ and IV only Re$er to section 7.0
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: Bond ty'es
. 9Cat9 bonds are pri'arily desi/ned to help3 #. 'unicipalities sur%i%e econo'ic recessions. B. corporations respond to o%erseas co'petition. C. the $ederal /o%ern'ent cope with hu/e de$icits. &. corporations reco%er $ro' in%oluntary reor/ani7ations. E. insurance co'panies $und e8cessi%e clai's. Re$er to section 7.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: :Cat: bonds
7- 7
7. Mary is a retired widow who is $inancially dependent upon the interest inco'e produced by her bond port$olio. !hich one o$ the $ollowin/ bonds is the least suitable $or her to own" #. -year+ putable+ hi/h coupon bond B. *-year 1I;C C. 10-year ### coupon bond &. *-year $loatin/ rate bond E. 7- year inco'e bond Re$er to section 7.0
AACSB: N/A Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%0 &o'ic: Bond features
4. #l is retired and enjoys his daily li$e. Dis one concern is that his bonds pro%ide a steady strea' o$ inco'e that will continue to allow hi' to ha%e the 'oney he desires to continue his acti%e li$estyle without lowerin/ his present standard o$ li%in/. #lthou/h he has su$$icient principal to li%e on+ he only wants to spend the interest inco'e pro%ided by his holdin/s and thus is concerned about the purchasin/ power o$ that inco'e. !hich one o$ the $ollowin/ bonds should best ease #l-s concerns" #. -year+ putable+ hi/h coupon bond B. *-year 1I;C C. 10-year ### coupon bond &. *-year 'unicipal bond (. 7- year inco'e bond Re$er to section 7.0
AACSB: N/A Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%0 &o'ic: Bond features
7- 4
5. ;hil has researched 16M 1echnolo/ies and belie%es the $ir' is poised to %astly increase in %alue. De wants to in%est in this co'pany. ;hil has decided to purchase 16M 1echnolo/ies bonds so that he can ha%e a steady strea' o$ interest inco'e. Dowe%er+ he still wishes that he could share in the $ir'-s success alon/ with 16M-s shareholders. !hich one o$ the $ollowin/ bond $eatures will help ;hil $ul$ill his wish" #. put pro%ision B. positi%e co%enant C. warrant &. crosso%er ratin/ (. call pro%ision Re$er to section 7.0
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%0 &o'ic: Bond features
70. # G.C. 1reasury bond that is .uoted at 100311 is sellin/3 #. $or 11 percent 'ore than par %alue. B. at an 11 percent discount. C. $or 100.11 percent o$ $ace %alue. &. at par and pays an 11 percent coupon. E. $or 100 and 11H,)nds percent o$ $ace %alue. Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%2 &o'ic: &reasury bond 6uote
7- 5
71. !hich o$ the $ollowin/ correctly describe G.C. 1reasury bonds" I. ha%e a 9tic29 si7e o$ 1H,) II. hi/hly li.uid III. .uoted in dollars and cents IV. .uoted at the dirty price A. I and II only B. I and IV only C. II and III only &. II and IV only (. I+ II+ and III only Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%2 &o'ic: &reasury bonds
7). # -year+ $1+000 $ace %alue bond issued by 1aylor 1ools pays interest se'iannually on <ebruary 1 and #u/ust 1. #ssu'e today is Mctober 1. !hat will the di$$erence+ i$ any+ be between this bond-s clean and dirty prices today" #. no di$$erence B. one 'onth-s interest C. two 'onth-s interest &. $our 'onth-s interest (. $i%e 'onth-s interest Re$er to section 7.*
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Clean and dirty 'rices
7-70
7,. 1oday+ Nune 1*+ you want to buy a bond with a .uoted price o$ 54. 0. 1he bond pays interest on Nanuary 1 and Nuly 1. !hich one o$ the $ollowin/ prices represents your total cost o$ purchasin/ this bond today" #. clean price B. dirty price C. as2ed price &. .uoted price (. bid price Re$er to section 7.*
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Dirty 'rice
70. !hich one o$ the $ollowin/ rates represents the chan/e+ i$ any+ in your purchasin/ power as a result o$ ownin/ a bond" #. ris2-$ree rate B. reali7ed rate C. no'inal rate D. real rate (. current rate Re$er to section 7.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: -eal rate
7-71
7*. !hich one o$ the $ollowin/ state'ents is correct" #. 1he ris2-$ree rate represents the chan/e in purchasin/ power. B. #ny return /reater than the in$lation rate represents the ris2 pre'iu'. C. Distorical real rates o$ return 'ust be positi%e. &. Eo'inal rates e8ceed real rates by the a'ount o$ the ris2-$ree rate. E. 1he real rate 'ust be less than the no'inal rate /i%en a positi%e rate o$ in$lation. Re$er to section 7.
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#2 Section: "%3 &o'ic: Bond yields
7 . 1he <isher ($$ect pri'arily e'phasi7es the e$$ects o$ ===== on an in%estor-s rate o$ return. #. de$ault B. 'ar2et C. interest rate D. in$lation (. 'aturity Re$er to section 7.
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: (is4er effect
7-7)
77. :ou are tryin/ to co'pare the present %alues o$ two separate strea's o$ cash $lows which ha%e e.ui%alent ris2s. Mne strea' is e8pressed in no'inal %alues and the other strea' is e8pressed in real %alues. :ou decide to discount the no'inal cash $lows usin/ a no'inal annual rate o$ 4 percent. !hat rate should you use to discount the real cash $lows" #. 4 percent B. (#R o$ 4 percent co'pounded 'onthly C. co'parable ris2-$ree rate D. co'parable real rate (. :ou cannot co'pare the present %alues o$ these two strea's o$ cash $lows. Re$er to section 7.
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: Nominal and real rates
74. !hich o$ the $ollowin/ state'ents is correct concernin/ the ter' structure o$ interest rates" I. (8pectations o$ lower in$lation rates in the $uture tend to lower the slope o$ the ter' structure o$ interest rates. II. 1he ter' structure o$ interest rates includes both an in$lation pre'iu' and an interest rate ris2 pre'iu'. III. 1he real rate o$ return has 'ini'al+ i$ any+ a$$ect on the slope o$ the ter' structure o$ interest rates. IV. 1he ter' structure o$ interest rates and the ti'e to 'aturity are always directly related. #. I and II only B. II and IV only C. I+ II+ and III only &. II+ III+ and IV only (. I+ II+ and IV only Re$er to section 7.7
AACSB: N/A Bloom's: Com're4ension Difficulty: ,ntermediate Learning Ob ecti!e: "#2 Section: "%" &o'ic: &erm structure of interest rates
7-7,
75. !hich two o$ the $ollowin/ $actors cause the yields on a corporate bond to di$$er $ro' those on a co'parable 1reasury security" I. in$lation ris2 II. interest rate ris2 III. ta8ability IV. de$ault ris2 #. I and II only B. III and IV only C. I+ II+ and IV only &. II+ III+ and IV only (. I+ II+ III+ and IV Re$er to sections 7.0 and 7.7
AACSB: N/A Bloom's: Com're4ension Difficulty: Basic Learning Ob ecti!e: "#2 Section: "%0 and "%" &o'ic: Determinants of bond yields
7-70
40. 1he bonds issued by Ctainless 1ubs bear a percent coupon+ payable se'iannually. 1he bonds 'ature in 11 years and ha%e a $1+000 $ace %alue. Currently+ the bonds sell $or $545. !hat is the yield to 'aturity" #. *.47 percent B. *.5) percent C. .04 percent D. .10 percent (. .)0 percent
1his cannot be sol%ed directly+ so it-s easiest to just use the calculator 'ethod to /et an answer. :ou can then use the calculator answer as the rate in the $or'ula just to %eri$y that your answer is correct.
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: *ield to maturity
7-7*
41. Breenbrier Industrial ;roducts- bonds ha%e a 7. 0 percent coupon and pay interest annually. 1he $ace %alue is $1+000 and the current 'ar2et price is $1+0 ).*0 per bond. 1he bonds 'ature in 1 years. !hat is the yield to 'aturity" A. .50 percent B. 7.)) percent C. 7.0 percent &. 7.71 percent (. 7.40 percent
7-7
4). Collin/wood Do'es has a bond issue outstandin/ that pays an 4.* percent coupon and 'atures in 14.* years. 1he bonds ha%e a par %alue o$ $1+000 and a 'ar2et price o$ $5 0.)0. Interest is paid se'iannually. !hat is the yield to 'aturity" #. 4., percent B. 4.0) percent C. 4. 1 percent &. 4.70 percent E. 4.50 percent
7-77
4,. Mil !ell Cupply o$$ers 7.* percent coupon bonds with se'iannual pay'ents and a yield to 'aturity o$ 7. 4 percent. 1he bonds 'ature in years. !hat is the 'ar2et price per bond i$ the $ace %alue is $1+000" #. $545.70 B. $551.07 C. $55 .04 &. $1+00). 0 (. $1+01,.04
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Bond 'rice
7-74
40. Roadside Mar2ets has a .7* percent coupon bond outstandin/ that 'atures in 10.* years. 1he bond pays interest se'iannually. !hat is the 'ar2et price per bond i$ the $ace %alue is $1+000 and the yield to 'aturity is . 5 percent" #. $555.40 B. $555.4* C. $1+00,.0) D. $1+000.07 (. $1+007.*)
7-75
4*. Brand #d%enture ;roperties o$$ers a 5.* percent coupon bond with annual pay'ents. 1he yield to 'aturity is 11.) percent and the 'aturity date is 11 years $ro' today. !hat is the 'ar2et price o$ this bond i$ the $ace %alue is $1+000" A. $45*.0, B. $45 . 7 C. $501.)0 &. $50 .14 (. $5*,.,0
7-40
4 . Redesi/ned Co'puters has *.)* percent coupon bonds outstandin/ with a current 'ar2et price o$ $*0 .15. 1he yield to 'aturity is 1 .)4 percent and the $ace %alue is $1+000. Interest is paid se'iannually. Dow 'any years is it until these bonds 'ature" #. . 0 years B. 7.04 years C. 1).01 years &. 10.1 years (. )4.,) years
It-s easiest to sol%e this proble' usin/ a $inancial calculator. :ou can then use the calculator answer as the ti'e period in the $or'ula just to %eri$y that your answer is correct.
1he nu'ber o$ si8-'onth periods is 10.1 . 1he nu'ber o$ years is 7.04 years.
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: &ime to maturity
7-41
47. Blobal Co''unications has a 7 percent+ se'iannual coupon bond outstandin/ with a current 'ar2et price o$ $1+0),.0 . 1he bond has a par %alue o$ $1+000 and a yield to 'aturity o$ .7) percent. Dow 'any years is it until this bond 'atures" #. 1).) years B. 1).*, years C. 14.05 years &. )0.,7 years (. )*.0* years
It-s easiest to sol%e this proble' usin/ $inancial calculator. :ou can then use the calculator answer as the ti'e period in the $or'ula just to %eri$y that your answer is correct.
1he nu'ber o$ si8-'onth periods is )*.0*). 1he nu'ber o$ years is 1).*, years.
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: &ime to maturity
7-4)
44. :ou are purchasin/ a )*-year+ 7ero-coupon bond. 1he yield to 'aturity is 4. 4 percent and the $ace %alue is $1+000. !hat is the current 'ar2et price" #. $10 . 7 B. $104.14 C. $115.*) &. $1)1.*0 (. $1)4.07
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ and "%0 &o'ic: 1ero bond 'rice
7-4,
45. 1oday+ you want to sell a $1+000 $ace %alue 7ero coupon bond you currently own. 1he bond 'atures in 0.* years. Dow 'uch will you recei%e $or your bond i$ the 'ar2et yield to 'aturity is currently *.,, percent" I/nore any accrued interest. #. $ 5 . 0 B. $ 54.05 C. $701.04 &. $7* .10 E. $745.))
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ and "%0 &o'ic: 1ero bond 'rice
7-40
50. 1he 7ero coupon bonds o$ &F6 Mo%ers ha%e a 'ar2et price o$ $,15.)0+ a $ace %alue o$ $1+000+ and a yield to 'aturity o$ 5.17 percent. Dow 'any years is it until these bonds 'ature" #. 11.5) years B. 1).)4 years C. 1).7, years &. 1,.01 years (. 1,.07 years
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ and "%0 &o'ic: &ime to maturity
7-4*
51. # 1 -year+ 0.* percent coupon bond pays interest annually. 1he bond has a $ace %alue o$ $1+000. !hat is the percenta/e chan/e in the price o$ this bond i$ the 'ar2et yield to 'aturity rises to *.7 percent $ro' the current rate o$ *.* percent" A. ).10 percent decrease B. 1.57 percent decrease C. 0.)1 percent increase &. 1.57 percent increase (. ).10 percent increase
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: ,nterest rate ris.
7-4
5). 1he Corner Brocer has a 7-year+ percent annual coupon bond outstandin/ with a $1+000 par %alue. 1he bond has a yield to 'aturity o$ *.* percent. !hich one o$ the $ollowin/ state'ents is correct i$ the 'ar2et yield suddenly increases to .* percent" #. 1he bond price will increase by $*7.10. B. 1he bond price will increase by *.)5 percent. C. 1he bond price will decrease by $*,. ). D. 1he bond price will decrease by *.0, percent. (. 1he bond price will decrease by *., percent.
&i$$erence in prices A $57).*4 - $1+0)4.01 A -$**.4, ;ercenta/e di$$erence in prices A
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#+ Section: "%$ &o'ic: ,nterest rate ris.
7-47
5,. Blac2well bonds ha%e a $ace %alue o$ $1+000 and are currently .uoted at 54.0. 1he bonds ha%e a * percent coupon rate. !hat is the current yield on these bonds" #. 0. 7 percent B. 0.74 percent C. *.04 percent &. *.,, percent (. *.*0 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Current yield
50. 1he outstandin/ bonds o$ 1he Ri%er <ront <erry carry a .* percent coupon. 1he bonds ha%e a $ace %alue o$ $1+000 and are currently .uoted at 101. . !hat is the current yield on these bonds" #. 1. 0 percent B. ).,7 percent C. .00 percent &. .05 percent (. .44 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Current yield
7-44
5*. 1he 7 percent+ se'i-annual coupon bonds o$$ered by Douse Reno%ators are callable in ) years at $1+0*0. !hat is the a'ount o$ the call pre'iu' on a $1+000 par %alue bond" #. $*) B. $*0 C. $7) &. $40 (. $45 Call pre'iu' A $1+0*0 - $1+000 A $*0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%+ &o'ic: Call 'remium
5 . # corporate bond was .uoted yesterday at 10).1 while today-s .uote is 10).15. !hat is the chan/e in the %alue o$ a bond that has a $ace %alue o$ $ +000" #. $0.,0 B. $1.40 C. $,.00 &. $14.00 (. $140.00 Mar2et price A I1.0)15 - 1.0)1 K $ +000 A $1.40
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Bond 6uote
7-45
57. # 10-year+ 0.* percent+ se'iannual coupon bond issued by 1yler Rentals has a $1+000 $ace %alue. 1he bond is currently .uoted at 54.7. !hat is the clean price o$ this bond i$ the ne8t interest pay'ent will occur ) 'onths $ro' today" A. $547.00 B. $550.*0 C. $1+00).00 &. $1+011.)* (. $1+0)).*0 Clean price A 0.547 $1+000 A $547
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Clean 'rice
54. # 1reasury bond is .uoted at a price o$ 10*31*. !hat is the 'ar2et price o$ this bond i$ the $ace %alue is $*+000" #. $*+00*.1* B. $*+10*.1* C. $*+)*7.*0 D. $*+)7,.00 (. $*+*1*.00 ;rice A 10*31* A 10* and 1*H,) percent o$ $ace A 1.0*0 47* $*+000 A $*+)7,.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: &reasury bond 6uote
7-50
55. # 1reasury bond is .uoted at a price o$ 101310 with a current yield o$ 7.), percent. !hat is the coupon rate" #. 7.)0 percent B. 7.)4 percent C. 7.,0 percent D. 7.,0 percent (. 7.,5 percent ;rice A 101 and 10H,) percent o$ $ace A 1.010,7* $1+000 A $1+010.,7* #nnual interest A 0.07), $1+010.,7* A $7,.00 Coupon rate A $7,.00H$1+000 A 7.,0 percent
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Bond yields
100. # corporate bond is .uoted at a price o$ 10,.1 and carries a .*0 percent coupon. 1he bond pays interest se'iannually. !hat is the current yield on one o$ these bonds" #. .)0 percent B. .,0 percent C. ., percent &. . ) percent (. . percent Current yield A I0.0 * $1+000KHI1.0,1 $1+000K A .,0 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Current yield
7-51
101. # 1reasury bond is .uoted at a price o$ 10 3), with a ,.*0 percent coupon. 1he bond pays interest se'iannually. !hat is the current yield on one o$ these bonds" #. ,.0 percent B. ,.15 percent C. ,.)4 percent &. ,.,, percent (. ,.,4 percent Current price A 10 and ),H,)nds percent o$ $ace A 1.0 7147* $1+000 A $1+0 7.147* Current yield A I0.0,* $1+000KH$1+0 7.147* A ,.)4 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%$ and "%2 &o'ic: &reasury yield
10). # 1reasury bond is .uoted as 55311 as2ed and 55305 bid. !hat is the bid-as2 spread in dollars on a $*+000 $ace %alue bond" #. $0.0, B. $0. , C. $1.00 D. $,.1, (. $ .)* Bid-as2 spread A 55311 - 55305 A )H,) o$ 1 percent o$ $*+000 A $,.1,
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%2 &o'ic: Bid#as. s'read
7-5)
10,. 1he se'iannual+ 4-year bonds o$ #lto Music are sellin/ at par and ha%e an e$$ecti%e annual yield o$ 4. )4* percent. !hat is the a'ount o$ each interest pay'ent i$ the $ace %alue o$ the bonds is $1+000" #. $01.*0 B. $0).)* C. $0,.1* &. $4*.00 (. $4 .)5
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Bond yields and 'ayments
100. # bond that pays interest annually yielded 7.07 percent last year. 1he in$lation rate $or the sa'e period was .10 percent. !hat was the actual real rate o$ return on this bond $or last year" #. 1.15 percent B. 1.)* percent C. 1.)5 percent &. 1., percent (. 1.01 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: -eal return
7-5,
10*. Betty Mar2ets has bonds outstandin/ that pay a * percent se'iannual coupon+ ha%e a *.)4 percent yield to 'aturity+ and a $ace %alue o$ $1+000. 1he current rate o$ in$lation is 0.1 percent. !hat is the real rate o$ return on these bonds" #. 0.4 percent B. 0.50 percent C. 1.00 percent D. 1.1, percent (. 1.15 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: -eal rate
10 . 1he outstandin/ bonds o$ !inter 1i'e ;roducts pro%ide a real rate o$ return o$ ,.0, percent. 1he current rate o$ in$lation is 0. 4 percent. !hat is the actual no'inal rate o$ return on these bonds" #. 7.*4 percent B. 7.,, percent C. 7.71 percent &. 7.7 percent E. 7.4* percent I1 L 0.0,0,K I1 L 0.00 4K - 1 A 7.4* percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: (is4er effect
7-50
107. 1he yield to 'aturity on a bond is currently 4.0 percent. 1he real rate o$ return is ,.)) percent. !hat is the rate o$ in$lation" A. *.04 percent B. *. 0 percent C. .)0 percent &. .*, percent (. .71 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#0 Section: "%3 &o'ic: (is4er effect
104. # 7ero coupon bond with a $ace %alue o$ $1+000 is issued with an initial price o$ $)1).* . 1he bond 'atures in )* years. !hat is the i'plicit interest+ in dollars+ $or the $irst year o$ the bond-s li$e" #. $1).7) B. $1,.*4 C. $1,.50 &. $1*. , (. $1*.45
I'plicit interest A $)) .10 - $)1).* A $1,.*4
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%0 &o'ic: ,m'licit interest
7-5*
105. Eorthern !arehouses wants to raise $11.0 'illion to e8pand its business. 1o acco'plish this+ it plans to sell 00-year+ $1+000 $ace %alue+ 7ero-coupon bonds. 1he bonds will be priced to yield 4.7* percent. !hat is the 'ini'u' nu'ber o$ bonds it 'ust sell to raise the $11.0 'illion it needs" #. )10+011 B. ),5+400 C. )*0+507 &. ,) +0)5 E. ,*0+004
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#+ Section: "%0 &o'ic: 1ero#cou'on bond
7-5
110. :ou ha%e won a contest and will recei%e $)+*00 a year in real ter's $or the ne8t , years. (ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent occurrin/ one year $ro' today. 1he rele%ant no'inal discount rate is ., percent and the in$lation rate is 0.* percent. !hat are your winnin/s worth today" A. $7+)05 B. $7+, 7 C. $7+001 &. $7+*00 (. $7+4,4
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%3 &o'ic: -eal cas4 flows
7-57
111. :ou purchased an in%est'ent which will pay you $4+000+ in real dollars+ a year $or the ne8t three years. (ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent occurrin/ one year $ro' today. 1he no'inal discount rate is 7.* percent and the in$lation rate is ).5 percent. !hat is the present %alue o$ these pay'ents" #. $)1+7)0 B. $))+000 C. $))+*11 &. $),+00 (. $),+*)5
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#0 Section: "%3 &o'ic: -eal cas4 flows
Essay Questions
7-54
11). &e$ine li.uidity ris2+ de$ault ris2+ and ta8ability ris2 and e8plain how these ris2s relate to bonds and bond yields. 6i.uidity ris2 is the inability to .uic2ly sell a bond $or its $ull %alue. 1his ris2 e8ists pri'arily in thinly traded issues. &e$ault ris2 is the li2elihood the issuer will de$ault on its bond obli/ations and is the basis $or bond ratin/s. 1a8ability ris2 re$lects the $act that bond interest can be ta8ed di$$erently at the $ederal+ state+ and local le%els and that these ta8 rates can chan/e. (ach o$ these ris2s increase bond yields as in%estors re.uire co'pensation in e8chan/e $or ris2 acceptance. <eedbac23 Re$er to section 7.7
AACSB: -eflecti!e t4in.ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#2 Section: "%" &o'ic: Determinants of bond yields
11,. In$lation has re'ained low $or the past three years but you ha%e co'e to the conclusion that trend is endin/ and in$lation will increase si/ni$icantly o%er the ne8t 14 'onths. #ssu'e you ha%e reached this conclusion prior to other in%estors reachin/ the sa'e conclusion. !hat adjust'ents should you 'a2e to your bond port$olio in li/ht o$ your conclusions" Increases in in$lation will increase interest rates accordin/ to the ter' structure o$ interest rates. 1here$ore+ you should sell any lon/-ter' bonds you own and replace the' with shortter' bonds. :ou should also replace lower coupon bonds with hi/her coupon bonds. 1hese chan/es should be done pro'ptly be$ore other in%estors co''ence ta2in/ the sa'e actions. <eedbac23 Re$er to section 7.7
AACSB: -eflecti!e t4in.ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#2 Section: "%" &o'ic: &erm structure and interest rate ris.
7-55
110. (8plain the conditions that would need to e8ist $or the 1reasury yield cur%e to be downward slopin/. # downward slopin/ 1reasury yield cur%e e8ists when current in$lation rates are hi/h but are e8pected to decline in the $uture. 1he decline in the in$lation pre'iu' 'ust be si/ni$icant enou/h to o%erco'e the risin/ interest rate ris2 pre'iu' as the ti'e to 'aturity increases. <eedbac23 Re$er to section 7.7
AACSB: -eflecti!e t4in.ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#2 Section: "%" &o'ic: &reasury yield cur!e
11*. &escribe the relationships that e8ist between the coupon rate+ the yield to 'aturity+ and the current yield $or both a discount bond and a pre'iu' bond. &iscount bond3 :ield to 'aturity @ Current yield @ Coupon rate ;re'iu' bond3 :ield to 'aturity ? Current yield ? Coupon rate <eedbac23 Re$er to section 7.1
AACSB: -eflecti!e t4in.ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Bond yields
7-100
11 . Cyl%an 1rees has a 7 percent coupon bond on the 'ar2et with ten years le$t to 'aturity. 1he bond 'a2es annual pay'ents and currently sells $or $4 1.)0. !hat is the yield-to'aturity" #. 4.*0 percent B. 4. 4 percent C. 4.5) percent D. 5.14 percent (. 5.)7 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 7OC ;: "#0 Learning Ob ecti!e: "#+ Section: "%$ &o'ic: *ield to maturity
7-101
117. Oaiser Industries has bonds on the 'ar2et 'a2in/ annual pay'ents+ with 10 years to 'aturity+ and sellin/ $or $1+,4).01. #t this price+ the bonds yield 7.* percent. !hat is the coupon rate" #. 4.00 percent B. 4.*0 percent C. 5.00 percent &. 10.*0 percent E. 1).00 percent
Coupon rate A $1)0H$1+000 A 1) percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 7OC ;: "#2 Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Cou'on rate
7-10)
114. &e8ter Mills issued )0-year bonds a year a/o at a coupon rate o$ 11.0 percent. 1he bonds 'a2e se'iannual pay'ents. 1he yield-to-'aturity on these bonds is 5.) percent. !hat is the current bond price" #. $54*.** B. $551.50 C. $1+15).1 D. $1+15*.40 (. $1+154.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 7OC ;: "#3 Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Bond 'rice
7-10,
115. Coo 6ee I'ports issued 17-year bonds ) years a/o at a coupon rate o$ 10., percent. 1he bonds 'a2e se'iannual pay'ents. 1hese bonds currently sell $or 10) percent o$ par %alue. !hat is the yield-to-'aturity" #. 5.54 percent B. 10.00 percent C. 10.1, percent &. 10.)7 percent (. 10.0) percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 7OC ;: "#" Learning Ob ecti!e: "#+ Section: "%$ &o'ic: *ield to maturity
7-100
1)0. Bryceton+ Inc. has bonds on the 'ar2et with 1, years to 'aturity+ a yield-to-'aturity o$ 5.) percent+ and a current price o$ $45*.05. 1he bonds 'a2e se'iannual pay'ents. !hat is the coupon rate" A. 7.40 percent B. 4.00 percent C. 4.)* percent &. 4.00 percent (. 4. * percent
Coupon rate A I$,5 )KH$1+000 A 7.40 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 7OC ;: "#< Learning Ob ecti!e: "#+ Section: "%$ &o'ic: Cou'on rate
7-10*
1)1. Cuppose the real rate is 5.* percent and the in$lation rate is 1.4 percent. !hat rate would you e8pect to see on a 1reasury bill" #. 5.*0 percent B. 11.,0 percent C. 11.07 percent &. 11.* percent (. 11. 0 percent I1 L RK A I1 L 0.05*K I1 L 0.014K> R A 11.07 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 7OC ;: "#$= Learning Ob ecti!e: "#0 Section: "%3 &o'ic: Nominal rate
1)). #n in%est'ent o$$ers a 10.* percent total return o%er the co'in/ year. Ca' Bernan2e thin2s the total real return on this in%est'ent will be only 0.* percent. !hat does Ca' belie%e the in$lation rate will be $or the ne8t year" #. *. 0 percent B. *. 7 percent C. *.70 percent &. .00 percent (. .)1 percent I1 L 0.10*K A I1 L 0.00*K I1 L hK> h A *.70 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic 7OC ;: "#$$ Learning Ob ecti!e: "#0 Section: "%3 &o'ic: ,nflation rate
7-10
1),. Bond C is a 0 percent coupon bond. Bond 1 is a 10 percent coupon bond. Both bonds ha%e 11 years to 'aturity+ 'a2e se'iannual pay'ents+ and ha%e a yield-to-'aturity o$ 7 percent. I$ interest rates suddenly rise by ) percent+ what will the percenta/e chan/e in the price o$ Bond 1 be" #. -1*.1 percent B. -10.47 percent C. -1,.* percent D. -1).5) percent (. -1). 7 percent
;ercenta/e chan/e in price A I$1+0 4.5) - $1+))7.*1KH$1+))7.*1 A -1).5) percent
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate 7OC ;: "#$" Learning Ob ecti!e: "#$ Section: "%$ &o'ic: ,nterest rate ris.
7-107
1)0. 1echnical Cales+ Inc. has . percent coupon bonds on the 'ar2et with 5 years le$t to 'aturity. 1he bonds 'a2e se'iannual pay'ents and currently sell $or 44.75 percent o$ par. !hat is the e$$ecti%e annual yield" #. 4.,0 percent B. 4.00 percent C. 4.*) percent D. 4.*4 percent (. 4. 0 percent
($$ecti%e annual rate A P1 L I0.0400H)KQ) - 1 A 4.*4 percent
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate 7OC ;: "#$< Learning Ob ecti!e: "#+ Section: "%$ &o'ic: 7ffecti!e bond yield
7-104
1)*. Bonner Metals wants to issue new 14-year bonds $or so'e 'uch-needed e8pansion projects. 1he co'pany currently has 11 percent bonds on the 'ar2et that sell $or $1+0*5.*1+ 'a2e se'iannual pay'ents+ and 'ature in 14 years. !hat should the coupon rate be on the new bonds i$ the $ir' wants to sell the' at par" #. *.7* percent B. .), percent C. .01 percent D. . 0 percent (. .75 percent
1o sell a bond at par+ the coupon rate 'ust be set e.ual to the re.uired return.
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate 7OC ;: "#$> Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Bond yields
7-105
1) . :ou purchase a bond with an in%oice price o$ $1+0 0. 1he bond has a coupon rate o$ 5.0 percent+ and there are , 'onths to the ne8t se'iannual coupon date. !hat is the clean price o$ this bond" A. $1+0, .*0 B. $1+0*).17 C. $1+0 0.00 &. $1+0 7.4, (. $1+04,.*0 #ccrued interest A I0.050 $1+000K I,H1)K A $),.*0 Clean price A $1+0 0 - $),.*0 A $1+0, .*0
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate 7OC ;: "#+= Learning Ob ecti!e: "#$ Section: "%2 &o'ic: Accrued interest
7-110
1)7. Cuppose the $ollowin/ bond .uote $or the Beta Co'pany appears in the $inancial pa/e o$ today-s newspaper. #ssu'e the bond has a $ace %alue o$ $1+000 and the current date is #pril 1*+ )005. !hat is the yield to 'aturity on this bond"
#. . 0 percent B. 4.5 percent C. 10.), percent &. 1).07 percent E. 1,.)7 percent
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate 7OC ;: "#+8 Learning Ob ecti!e: "#2 Section: "%" &o'ic: ?sing bond 6uotes
7-111
1)4. :ou want to ha%e $1.00 'illion in real dollars in an account when you retire in 0 years. 1he no'inal return on your in%est'ent is 4 percent and the in$lation rate is ,.* percent. !hat is the real a'ount you 'ust deposit each year to achie%e your /oal" #. $ + 7. 7 B. $ +474.05 C. $7+0,,.0) &. $7+*1*.05 (. $7+700.1) I1 L 0.04K A I1 L rK I1 L 0.0,*K> r A 0.,074) percent
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate 7OC ;: "#+< Learning Ob ecti!e: "#0 Section: "%3 &o'ic: -eal cas4 flows
7-11)
1)5. 1he yield-to-'aturity on a bond is the interest rate you earn on your in%est'ent i$ interest rates do not chan/e. I$ you actually sell the bond be$ore it 'atures+ your reali7ed return is 2nown as the holdin/ period yield. Cuppose that today+ you buy a 1) percent annual coupon bond $or $1+000. 1he bond has 1, years to 'aturity. 1wo years $ro' now+ the yieldto-'aturity has declined to 11 percent and you decide to sell. !hat is your holdin/ period yield" #. 4.40 percent B. 5.05 percent C. 1).00 percent &. 1,.01 percent E. 10.45 percent 1he yield-to-'aturity at the ti'e o$ purchase 'ust be 1) percent+ which is the coupon rate+ because the bond was purchased at par %alue. :ield-to-'aturity in ) years A 1) percent - 1 percent A 11 percent
AACSB: Analytic Bloom's: Analysis Difficulty: C4allenge 7OC ;: "#8= Learning Ob ecti!e: "#$ Section: "%$ &o'ic: @olding 'eriod yield
7-11,

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Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Multiple Choice Questions

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 Interest Rates and Bond Valuation #nswer Oey

Multiple Choice Questions

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

Chapter 07 - Interest Rates and Bond Valuation

;ercenta/e chan/e in price A I$1+0 4.5) - $1+))7.1KH$1+))7.1 A -1).5) percent