Chapt 10 Inv

29. Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

B

A 1% decline in yield will have the least effect on the price of a bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

B

62. Consider a -year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

A

82. The price on a Treasury bond is 104.3625, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103.5, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04%

A

9. In regard to bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

A

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

A

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds

A

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.3% B. 4.5% C. 5.2% D. 5.5%

A

Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

A

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____. A. 4.8% B. 6.1% C. .% D. 10.4%

A

Which of the following yield curves generally implies a normal healthy economy? A. positive slope B. negative slope C. flat D. hump-shaped curve

A

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

A

You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

A

36. A convertible bond has a par value of $1,000, but its current market price is $95. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980

B

37. A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50 B. $190 C. $200 D. $240

B

54. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $50, what is the capital gain yield of this bond over the next year? A. .2% B. 1.85% C. 2.58% D. 3.42%

B

80. If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925 C. $9,934.3 D. $9,955.43

B

90. A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A. increased B. decreased C. stayed the same D. The answer cannot be determined from the information given.

B

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.8% B. 4.85% C. 9.6% D. 9.%

B

Bonds rated _____ or better by Standard & Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

B

Which one of the following statements is correct? A. invoice price = flat price - accrued interest B. invoice price = flat price + accrued interest C. flat price = invoice price + accrued interest D. invoice price = settlement price - accrued interest

B

39. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________. A. 6% B. .23% C. 8.12% D. 9.45%

C

6. If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

C

7. Floating-rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

C

76. If the quote for a Treasury bond is listed in the newspaper as 98:2812 bid, 98:4062 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________. A.$9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42

C

85. You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.2 C. $9.38 D. $33.51

C

86. You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $.68 D. $5.20

C

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

C

If the price of a $10,000 par Treasury bond is $10,23.50, the quote would be listed in the newspaper as ________. A. 102.23 B. 102.102 C. 102.35 D. 102.50

C

In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. zero-coupon bonds B. coupon bonds selling at a discount C. coupon bonds selling at a premium D. floating-rate bonds

C

TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds

C

TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

C

Which country experienced the largest-ever sovereign default in 2012? A. Germany B. Ireland C. Greece D. Portugal

C

Which type of risk is most significant for bonds? A. maturity risk B. default risk C. interest rate risk D. reinvestment rate risk

C

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. mortgage bonds B. senior debentures C. preferred stock D. equipment obligation bonds

C

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset-backed bonds B. TIPS C. Catastrophe D. Pay-in-kind

C

21. The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

D

24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

D

32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. callable feature B. convertible feature C. subordination clause D. sinking fund

D

38. A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $85. The actual yield to maturity on this bond is _________. A. .2% B. 8.8% C. 9.1% D. 9.6%

D

45. A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________. A. .4%; .3% B. .4%; .5% C. .5%; .5% D. .5%; .8%

D

61. A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.2% B. 9.1% C. 4.49% D. 8.98%

D

64. The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II, and III

D

89. The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $95. What is the holding-period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.5% C. 5.1% D. 5.6%

A

8. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

C

__________ are examples of synthetically created zero-coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

C

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

B

40. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $5.25 discount from par value. The current yield on this bond is _________. A. 6% B. 6.49% C. 6.3% D. %

B

42. A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is %, the intrinsic value of the bond today will be __________. A. $1,000 B. $1,062.81 C. $1,081.82 D. $1,100.03

B

43. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________. A. $856.04 B. $891.86 C. $926.4 D. $1,000

B

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

B

68. A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________. A. $581.9 B. $1,163.93 C. $2,32.8 D. $3,000

B

78. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $5, what is the accrued interest? (Assume 182 days in the 6-month period.) A. $13.21 B. $12.5 C. $15.44 D. $16.32

B

79. A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,00.45 D. $1,012.13

B

You would typically find all but which one of the following in a bond contract? A. a dividend restriction clause B. a sinking fund clause C. a requirement to subordinate any new debt issued D. a price-earnings ratio

D

1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

A

3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

A

41. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6% B. 6.58% C. .2% D. 8%

A

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.11 B. $641.11 C. $89.11 D. $1,100.11

A

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

A

66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $9.22 B. $104.49 C. $364.08 D. $32.14

A

81. A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25 D. $50

A

84. You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to %. Your 1-year holding-period return was ___. A. .61% B. -5.39% C. 1.28% D. -3.25%

A

A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II, and III

A

The ___________ is the document that defines the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

A

The primary difference between Treasury notes and bonds is ________. A. maturity at issue B. default risk C. coupon rate D. tax status

A

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short-term bonds than on long-term bonds B. a higher yield on long-term bonds than on short-term bonds C. the same yield on both short-term bonds and long-term bonds D. none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

B

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

B

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio A. I only B. II and III only C. I and III only D. I, II, and III

B

Which of the following bonds would most likely sell at the lowest yield? A. a callable debenture B. a puttable mortgage bond C. a callable mortgage bond D. a puttable debenture

B

Which of the following rates represents a bond's annual interest payment per dollar of par value? A. holding period return B. coupon rate C. IRR D. YTM

B

10. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

C

2. Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer

C

20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________. A. $30 B. $33 C. $32.8 D. $30.90

C

4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

C

44. A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 11% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,10 C. $1,180 D. $1,200

C

48. You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5% B. 5.5% C. .6% D. 8.9%

C

75. One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of %, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today? A. 2.0% B. 8.03% C. 9.01% D. 11.12%

C

A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. Treasury

C

What is the lowest grade a bond can receive and still be considered investment grade? A. AAA B. A C. BBB D. BB

C

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

C

15. According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______. A. declining liquidity premiums B. an expectation of an upcoming recession C. a decline in future inflation expectations D. an increase in expected interest rate volatility

D

5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

D

83. You buy a bond with a $1,000 par value today for a price of $85. The bond has 6 years to maturity and makes annual coupon payments of $5 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.4% B. 9.5% C. .45% D. 8.8%

D

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds. A. an asset-backed B. a TIPS C. a catastrophe D. a pay-in-kind

D