Chapter 6

Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period? A) Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity. B) Since a bondʹs price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. C) Since interest rates will rise and fall in response to the movement in bond prices. D) Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.

A) Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.

Which of the following bonds is trading at a premium? A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually B) a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly

A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually

Which of the following bonds will be least sensitive to a change in interest rates? A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually

A bond certificate includes _____________. . A) the terms of the bond B) the individual to whom payments will be made C) the yield to maturity of the bond D) the price of the bond

A) the terms of the bond

A bond has a $10,000 face value, ten years to maturity, and 8% semiannual coupon payments. What would be the expected difference in this bondʹs price immediately before and immediately after the next coupon payment? A) $800 B) $400 C) $1200 D) $200

B) $400 (The expected difference in this bondʹs price will be $400 since the bond pays semiannual coupon of $400)

Which of the following statements regarding bonds and their terms is FALSE? A) Bonds are securities sold by governments and corporations to raise money from investors today in exchange for a promised future payment. B) By convention, the coupon rate is expressed as an effective annual rate. C) Bonds typically make two types of payments to their holders. D) The time remaining until the repayment date is known as the term of the bond.

B) By convention, the coupon rate is expressed as an effective annual rate.

Which of the following statements regarding bonds and their terms is FALSE? A) The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default-free bond at its current price and hold it to maturity. B) The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond. C) Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields. D) When we calculate a bondʹs yield to maturity by solving the formula, Price of an n-period bond = ( Coupon / (1 + YTM)^1) + (Coupon (1 + YTM)^2) +.....+ (Coupon + Face / (1 + YTM)^n) , the yield we compute will be a rate per coupon interval.

B) The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond.

Which of the following statements regarding bonds and their terms is FALSE? A) One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity. C) Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. D) The internal rate of return (IRR) of a bond is given a special name, the yield to maturity (YTM).

B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 8.1% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 10.6 %, then this bond will trade at ______________. . A) a premium B) a discount C) par D) none of the above

B) a discount (As the coupon rate of 8.1% is less than the YTM of 10.6 % on the bonds, so they will trade at a discount.)

A corporate bond which receives a BBB rating from Standard & Poorʹs is considered . A) a junk bond B) an investment grade bond C) a defaulted bond D) a high-yield bond

B) an investment grade bond

What is the dirty price of a bond? A) the bondʹs price based only on the bondʹs yield B) the bondʹs actual cash price C) the bondʹs price based only on coupon payments D) the bondʹs price less an adjustment for changes in interest rates

B) the bondʹs actual cash price

Which of the following is true about the face value of a bond? A) It is the notional amount we use to compute coupon payments. B) It is the amount that is repaid at maturity. C) It is usually denominated in standard increments, such as $1,000. D) All of the above are true.

D) All of the above are true.

A bond is currently trading below par. Which of the following must be true about that bond? A) The bondʹs yield to maturity is less than its coupon rate. B) The bond is a zero-coupon bond. C) The bondʹs yield to maturity is greater than its coupon rate. D) B or C above

D) B or C above

Which of the following best illustrates why a bond is a type of loan? A) The issuers of bonds make regular payments to bondholders. B) When a company issues a bond, the buyer of that bond becomes an owner of the issuing company. C) Funds raised are used to finance long-term projects. D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.

D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.

Which of the following statements regarding bonds and their terms is FALSE? A) Zero-coupon bonds are also called pure discount bonds. B) The internal rate of return (IRR) of an investment opportunity is the discount rate at which the net present value (NPV) of the investment opportunity is equal to zero. C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

Which of the following bonds will be most sensitive to a change in interest rates? A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value? A) a bond with a $10,000 face value, four years to maturity and 6.2% semiannual coupon payments B) a bond with a $500 face value, seven years to maturity and 5.2% annual coupon payments C) a bond with a $5,000 face value, seven years to maturity and 5.5% annual coupon payments D) a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments

D) a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments

Which of the following best describes a bond rated by Standard & Poorʹs and Moody as B? A) judged to be high quality by all standards B) considered to be medium grade obligations C) neither highly protected nor poorly secured D) generally lacks the characteristics of a desirable investment

D) generally lacks the characteristics of a desirable investment

Which of the following statements is true of bond prices? A) A fall in bond prices causes interest rates to fall. B) A fall in interest rates causes a fall in bond prices. C) A rise in interest rates causes bond prices to fall. D) Bond prices and interest rates are not connected.

C) A rise in interest rates causes bond prices to fall.

How are investors in zero-coupon bonds compensated for making such an investment? A) Such bonds are purchased at their face value and sold at a premium on a later date. B) Such bonds make regular interest payments. C) Such bonds are purchased at a discount, below their face value. D) Such bonds have a lower face value as compared to other bonds of similar term.

C) Such bonds are purchased at a discount, below their face value.

Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds? A) The U.S. government has a high credit spread. B) There is significant risk that the U.S. government will default. C) U.S. Treasury securities are widely regarded to be risk-free. D) U.S. Treasury securities yield inflation adjusted interest rates.

C) U.S. Treasury securities are widely regarded to be risk-free.

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity? A) a ten-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually B) a ten-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually C) a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually D) a 20-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually

C) a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually

Which of the following bonds is trading at par? A) a bond with a $2,000 face value trading at $1,987 B) a bond with a $1,000 face value trading at $999 C) a bond with a $1,000 face value trading at $1,000 D) a bond with a $2,000 face value trading at $2,012

C) a bond with a $1,000 face value trading at $1,000

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at _____________. . A) par B) a discount C) a premium D) none of the above

C) a premium (As the coupon rate of 10.0 % is more than the YTM of 7.5% on the bonds, so the bonds will trade at a premium.)