EXAM 2 CHAPTER 8

B. 4.03%

A $1,000 par value bond carries a coupon rate of 6.5 percent and has a yield to maturity of 7.29 percent. The inflation rate is 3.13 percent. What is the bond's real rate of return? A. 3.27% B. 4.03% C. 3.37% D. 4.42% E. 3.86%

E. At issuance, the bond's yield to maturity is 5.5 percent.

Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest semiannually. Which one of the following statements is correct? A. The bonds will pay 19 interest payments and one principal payment. B. The bonds will initially sell at a discount. C. At maturity, the bonds will pay a final payment of $1,055. D. The bonds will pay ten equal coupon payments. E. At issuance, the bond's yield to maturity is 5.5 percent.

A. $365.32

Jackson's has $1,000 face value, zero-coupon bonds outstanding that mature in 13.5 years. What is the current value of one of these bonds if the market rate of interest is 7.6 percent? Assume semiannual compounding. A. $365.32 B. $401.12 C. $360.49 D. $378.17 E. $384.07

C. 3.98%

Last year, a bond yielded a nominal return of 7.37 percent while inflation averaged 3.26 percent. What was the real rate of return? A. 3.42% B. 3.2 7% C. 3.98% D. 3.71% E. 3.86%

D. Mason's bond will increase in value by $41.

Mason's has a 5-year, 8 percent annual coupon bond with a $1,000 par value. Dixon's has a 10-year, 8 percent annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 8 percent. Which one of the following statements is correct if the market rate decreases to 7 percent? A. Both bonds will decrease in value by 4.10 percent. B. Mason's bond will increase in value by $52.10. C. Dixon's bond will increase in value by 4.61 percent. D. Mason's bond will increase in value by $41. E. Dixon's bond will increase in value by 6.87 percent.

B. $180.33

TJ's offers a $1,000 face value, zero coupon bond with a yield to maturity of 11.3 percent, given annual compounding. The bond matures in 16 years. What is the current price? A. $178.78 B. $180.33 C. $188.36 D. $190.09 E. $192.18

B. Fisher effect.

The relationship between nominal rates, real rates, and inflation is known as the: A. Miller and Modigliani theorem. B. Fisher effect. C. Gordon growth model. D. term structure of interest rates. E. interest rate risk premium.

C. maturity.

The specified date on which the principal amount of a bond is repaid is called the bond's: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

A. 4.06%

The nominal rate of return on a bond is 7.28 percent while the real rate is 3.09 percent. What is the rate of inflation? A. 4.06% B. 4.28% C. 4.09% D. 4.13% E. 4.17%

B. 1.8 years

Moon Lite Cafe has a semiannual, 5 percent coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 5.68%. How many years is it until this bond matures? A. 1.5 years B. 1.8 years C. 2.1 years D. 2.2 years E. 1.6 years

B. 10-year zero coupon bond

Which one of these bonds is the most interest-rate sensitive? A. 5-year zero coupon bond B. 10-year zero coupon bond C. 5-year, 6 percent, annual coupon bond D. 10-year, 6 percent, semiannual coupon bond E. 10-year, 6 percent, annual coupon bond

B. -4.26%

A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent? A. -5.28% B. -4.26% C. -2.38% D. 1.13% E. 4.13%

A. 7.89%

A bond has a coupon rate of 8.2 percent, a $1,000 par value, matures in 11.5 years, has a yield to maturity of 7.67 percent, and pays interest annually. What is the current yield? A. 7.89% B. 8.21% C. 8.43% D. 7.67% E. 8.52%

B. you can sell that bond at a price equal to 105.4844 percent of face value.

A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted to mean: A. the bond will pay semiannual interest payments of $105.4844 per $1,000 of face value. B. you can sell that bond at a price equal to 105.4844 percent of face value. C. the bond will pay annual interest payments of $105.4844 per $1,000 of face value. D. you can buy that bond at a price equal to 105.4844 percent of face value. E. the bond dealer is willing to sell that bond for a price equal to 105.4844 percent of par.

E. zero coupon

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond. A. Treasury B. municipal C. floating-rate D. junk E. zero coupon

D. $1,000; $30

A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each. A. $1,006; $60 B. $1,060; $30 C. $1,060; $60 D. $1,000; $30 E. $1,000; $60

A. par value

A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond. A. par value B. discount C. premium D. zero coupon E. floating rate

A. $994.86

Aivree is buying a $1,000 face value bond at a quoted price of 99.486. The bond carries a coupon rate of 5.6 percent, with interest paid semiannually. The next interest payment is four months from today. What is the clean price of this bond? A. $994.86 B. $1,004.19 C. $1,013.53 D. $987.21 E. $1,005.73

E. a discount; greater than

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate. A. a premium; greater than B. a premium; equal to C. at par; greater than D. at par; less than E. a discount; greater than

D. a yield to maturity that is less than the coupon rate.

All else constant, a coupon bond that is selling at a premium, must have: A. a coupon rate that is equal to the yield to maturity. B. a market price that is less than par value. C. semi1nnual interest payments. D. a yield to maturity that is less than the coupon rate. E. a coupon rate that is less than the yield to maturity.

D. increases or the coupon rate decreases.

All else held constant, interest rate risk will increase when the time to maturity: A. decreases or the coupon rate increases. B. decreases or the coupon rate decreases. C. increases or the coupon rate increases. D. increases or the coupon rate decreases. E. decreases and the coupon rate equals zero.

C. 61,366

Allison's wants to raise $12.4 million to expand its business. To accomplish this, it plans to sell 25-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 6.5 percent, with semiannual compounding. What is the minimum number of bonds Allison's must sell to raise the $12.4 million it needs? A. 59,864 B. 52,667 C. 61,366 D. 60,107 E. 60,435

A. $25.83

Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The bond has a coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs one month from today. Of the amount paid for the bond, what was the dollar amount of the accrued interest? A. $25.83 B. $5.17 C. $31.00 D. $27.39 E. $6.20

A. $889.29

Chocolate and More offers a bond with a coupon rate of 6 percent, semiannual payments, and a yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market price of a $1,000 face value bond? A. $889.29 B. $963.88 C. $1,008.16 D. $924.26 E. $901.86

B. $843.07

Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the current value of a $1,000 face value bond? A. $830.58 B. $843.07 C. $893.30 D. $929.17 E. $854.08

A. 6.06%

Exactly three years ago, you purchased a $1,000 face value bond for $1,211.16. The coupon rate was 6.5 percent with interest paid semiannually. Today, you sold that bond for $1,089.54. What was your rate of return for the 3-year period, or holding period yield, on this investment? A. 6.06% B. 7.19% C. 6.24% D. 6.38% E. 6.74%

C. to realize a capital loss if she sold the bond at today's market price.

Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect: A. the bond issuer to increase the amount of all future interest payments. B. the yield to maturity to remain constant due to the fixed coupon rate. C. to realize a capital loss if she sold the bond at today's market price. D. today's market price to exceed the face value of the bond. E. the current yield today to be less than 7 percent.

E. 1 + R = (1 + r) ×(1 + h)

The Fisher formula is expressed as _____ where R is the nominal rate, r is the real rate, and h is the inflation rate. A. r = R × h B. R = r ×h C. 1 + h = (1 + r) / (1 + R) D. 1 + R = (1 + r) / (1 + h) E. 1 + R = (1 + r) ×(1 + h)

E. equals both the current yield and the coupon rate for par value bonds.

The yield to maturity: A. that is expected will be realized any time a bond is sold. B. will exceed the coupon rate when the bond is selling at a premium. C. equals the current yield for all annual coupon bonds. D. can only be realized if a bond is purchased on the issue date at par value. E. equals both the current yield and the coupon rate for par value bonds.

C. 13.77 years

The zero coupon bonds of Mark Enterprises have a market price of $394.47, a face value of $1,000, and a yield to maturity of 6.87 percent based on semiannual compounding. How many years is it until this bond matures? A. 11.08 years B. 10.49 years C. 13.77 years D. 12.64 years E. 15.42 years

C. $870.01

Westover's has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years. The bond pays interest semiannually. What is the market price of a $1,000 face value bond if the yield to maturity is 7.13 percent? A. $934.59 B. $880.86 C. $870.01 D. $905.92 E. $947.87

A. $153.30

What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent, compounded semiannually? A. $153.30 B. $192.40 C. $195.26 D. $168.31 E. $172.19

B. discount

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond. A. par B. discount C. premium D. zero coupon E. floating rate

A. 6.31%

A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is $1,000 and the current market price is $1,108.15. The bond matures in 14 years. What is the yield to maturity? A. 6.31% B. 7.82% C. 8.00% D. 8.04% E. 8.12%

C. $1,016.33

A corporate bond is currently quoted at 101.633. What is the market price of a bond with a $1,000 face value? A. $1,000.28 B. $1,002.77 C. $1,016.33 D. $1,102.77 E. $1,276.70

D. 8.28%

A corporate bond with a face value of $1,000 matures in 4 years and has a coupon rate of 6.25 percent. The current price of the bond is $932 and interest is paid semiannually. What is the yield to maturity? A. 9.05% B. 6.67% C. 8.58% D. 8.28% E. 7.92%

C. premium; decrease this premium.

If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will: A. discount; decrease this discount. B. discount; increase this discount. C. premium; decrease this premium. D. premium; increase this premium. E. premium; not affect this premium.

D. Baa; BB

Which one of these combinations of bond ratings represents a crossover situation? A. BBB; Baa B. BB; Ba C. Ba; B D. Baa; BB E. B; CCC

A. $474.30

A firm offers a 10-year, zero coupon bond with a face value of $1,000. What is the current market price if the yield to maturity is 7.6 percent, given semiannual compounding? A. $474.30 B. $473.26 C. $835.56 D. $919.12 E. $1,088.00

A. yield to maturity.

A newspaper listing of bond prices has an "Asked yield" column. This yield is based on the asked price and represents the: A. yield to maturity. B. difference between the current yield and the yield to maturity. C. difference between the bond's yield and the yield of a comparable Treasury issue. D. coupon rate. E. current yield.

D. greater than 7 percent but less than 8 percent.

A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective annual rate provided by these bonds must be: A. equal to 3.5 percent. B. greater than 3.5 percent but less than 4 percent. C. equal to 7 percent. D. greater than 7 percent but less than 8 percent. E. equal to 14 percent.

C. $18.53

A zero coupon bond with a face value of $1,000 is issued with an initial price of $430.84 based on semiannual compounding. The bond matures in 20 years. What is the implicit interest, in dollars, for the first year of the bond's life? A. $19.08 B. $22.56 C. $18.53 D. $21.47 E. $25.25

E. has a market price that is computed using semiannual compounding of interest.

A zero coupon bond: A. is sold at a large premium. B. has a price equal to the future value of the face amount given a positive rate of return. C. can only be issued by the U.S. Treasury. D. has less interest rate risk than a comparable coupon bond. E. has a market price that is computed using semiannual compounding of interest.

D. $957.12

Guggenheim offers a bond with annual payments and a coupon rate of 5 percent. The yield to maturity is 5.62 percent and the maturity date is 9 years away. What is the market price of a $1,000 face value bond? A. $942.66 B. $868.67 C. $869.67 D. $957.12 E. $1,009.59

D. 6.19%

If a bond provides a real rate of return of 2.89 percent at a time when inflation is 3.21 percent, what is the nominal rate of return on the bond? A. 6.10% B. 6.13% C. 6.16% D. 6.19% E. 6.22%

A. $1,039.47

Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond carries a coupon rate of 7.75 percent, with interest paid semiannually. The next interest payment is two months from today. What is the dirty price of this bond? A. $1,039.47 B. $1,042.15 C. $1,056.02 D. $1,028.18 E. $1,026.56

D. 8.93%

Otto Enterprises has a 15-year bond issue outstanding with a coupon of 8 percent. The bond is currently priced at $923.60 and has a par value of $1,000. Interest is paid semiannually. What is the yield to maturity? A. 8.67% B. 9.93% C. 9.16% D. 8.93% E. 8.45%

A. 8.24%

Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of .27 percent, a liquidity premium of .08 percent, and a taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from this particular bond? A. 8.24% B. 7.19% C. 8.40% D. 7.38% E. 8.74%

A. 8.5 years

The Lo Sun Corporation offers a bond with a current market price of $1,029.75, a coupon rate of 8 percent, and a yield to maturity of 7.52 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures? A. 8.5 years B. 8.0 years C. 9.0 years D. 17 years E. 16 years

D. inflation

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power. A. default risk B. taxability C. liquidity D. inflation E. interest rate risk

D. liquidity

The _____ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity. A. default risk B. taxability C. inflation D. liquidity E. interest rate risk

E. coupon rate.

The annual interest paid by a bond divided by the bond's face value is called the: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

C. 6.00%

The bonds issued by Manson amp; Son bear a coupon of 6 percent, payable semiannually. The bond matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity? A. 5.87% B. 5.97% C. 6.00% D. 6.09% E. 6.17%

D. quoted price plus the accrued interest.

The dirty price of a bond is defined as the: A. market price minus any taxes due on the accrued interest. B. market price minus the accrued interest. C. clean price minus the accrued interest. D. quoted price plus the accrued interest. E. clean price minus any taxes due on the accrued interest.

D. exempt from federal income taxation and may or may not be exempt from state taxation.

The interest paid on any municipal bond is: A. free of default risk. B. subject to default risk and is exempt from state income taxation. C. free of both default risk and federal income taxation. D. exempt from federal income taxation and may or may not be exempt from state taxation. E. taxable at the federal level and tax exempt at the state and local level.

D. Taxable rate × (1 - t *).

The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is computed as: A. Taxable rate / (1 - t *). B. Tax-exempt rate × (1 - t *). C. Taxable rate - (1 + t *). D. Taxable rate × (1 - t *). E. Tax-exempt rate / (1 + t *).

C. discount rate decreases.

The market price of a bond increases when the: A. face value decreases. B. coupon rate decreases. C. discount rate decreases. D. par value decreases. E. coupon is paid annually rather than semiannually.

B. face value.

The principal amount of a bond that is repaid at the end of the loan term is called the bond's: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

D. yield to maturity.

The rate of return required by investors in the market for owning a bond is called the: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

C. term structure of interest rates.

The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the: A. liquidity effect. B. Fisher effect. C. term structure of interest rates. D. inflation premium. E. interest rate risk premium.

A. coupon.

The stated interest payment, in dollars, made on a bond each period is called the bond's: A. coupon. B. face value. C. maturity. D. yield to maturity. E. coupon rate.

D. pure time value of money.

The term structure of interest rates reflects the: A. real rate of interest. B. real rate of interest plus the inflation premium. C. nominal interest rate plus the interest rate risk premium. D. pure time value of money. E. real rate, inflation premium, interest rate risk premium, and the liquidity premium.