FIN 300 Ch. 7

A bond's coupon rate is equal to the annual interest divided by which one of the following? -Call price. -Current price. -Dirty price. -Clean price. -Face value.

Face value

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? -Dirty price. -Face value. -Discount. -Yield. -Coupon.

Face value

Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 9.2 percent, what is the current bond price? -$1,089.02 -$1,098.00 -$1,042.16 -$985.55 -$991.90

$1,089.02 Bond price = $51 × [(1 - {1 / [1 + (.092 / 2)]^(19 × 2)}) / (.092 / 2)] + $1,000 / [1 + (.092 / 2)]^(19 × 2) = $1,089.02

A Treasury bond is quoted as 99.6325 asked and 99.1250 bid. What is the bid-ask spread in dollars on a $5,000 face value bond? -$.675 -$17.500 -$.508 -$16.250 -$25.375

$25.375 Bid-ask spread = (.996325 − .991250) × $5,000 = $25.375

A Treasury bond is quoted at a price of 105.4620. What is the market price of this bond if the face value is $5,000? -$5,005.46 -$5,215.00 -$5,273.10 -$5,105.46 -$5,264.44

$5,273.10 Price = 1.054620 × $5,000 = $5,273.10

Luxury Properties offers bond with a coupon rate of 9.5 percent paid semiannually. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000? -$946.18 -$953.30 -$896.67 -$893.99 -$941.20

$893.99 Bond price = $47.50 × [(1 − {1 / [1 + (.112 / 2)]^(11 × 2)}) / (.112 / 2)] + $1,000 / [1 + (.112 / 2)]^(11 × 2) Bond price = $893.99

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent? -$967.24 -$899.80 -$903.42 -$1,007.52 -$899.85

$967.24 Bond price = $33.75 × [(1 − {1 / [1 + (.072 / 2)]^(10.5 × 2)}) / (.072 / 2)] + $1,000 / [1 + (.072 / 2)]^(10.5 × 2) Bond price = $967.24

Oil Wells offers 6.5 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? -$975.93 -$996.48 -$902.60 -$913.48 -$989.70

$975.93 Bond price = $32.50 × [(1 − {1 / [1 + (.0694 / 2)]^(7 × 2)}) / (.0694 / 2)] + $1,000 / [1 + (.0694 / 2)]^(7 × 2) Bond price = $975.93

A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today? -$1,022.50 -$994.50 -$1,002.00 -$987.00 -$1,011.25

$987.00 Clean price = .987 × $1,000 = $987

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: -.07 + (1 - t*) = .05. -.05 / (1 - t*) = .07. -.05 - (1 - t*) = .07. -.05 × (1 - t*) = .07. -.05 × (1 + t*) = .07.

.05 / (1 - t*) = .07.

The outstanding bonds of Winter Tires Inc. provide a real rate of return of 5.6 percent. If the current rate of inflation is 4.68 percent, what is the actual nominal rate of return on these bonds? -10.54 percent -9.33 percent -9.76 percent -8.58 percent -9.71 percent

10.54 percent R = (1 + .056) × (1 + .0468) - 1 = .1054, or 10.54 percent

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? -24.37 years -18.49 years -12.53 years -25.05 years -12.26 years

12.53 years $1,023.46 = $35 × [(1 − {1 / [1 + (.0672 / 2)]^(t × 2)}) / (.0672 / 2)] + $1,000 / [1 + (.0672 / 2)]^(t × 2) To solve for t, use the formula, a financial calculator, or a computer. Enter: I/Y= 6.72/2, PV= -1,023.46, PMT=35, FV=1,000 Solve: N=25.052 The number of six-month periods is 25.052. The number of years is 12.53 years.

An investment offers a total return of 12.4 percent over the coming year. You believe the total real return will be only 9.7 percent. What do you believe the exact inflation rate will be for the next year? -2.67 percent -2.70 percent -2.52 percent -2.58 percent -2.46 percent

2.46 percent h = 1.124 / 1.097 - 1 = .0246, or 2.46 percent

The zero coupon bonds of JK Industries have a market price of $211.16, a face value of $1,000, and a yield to maturity of 7.39 percent. How many years is it until these bonds mature? Assume semiannual compounding. -46.59 years -21.43 years -44.01 years -23.92 years -22.28 years

21.43 years Bond price = $211.16 = $1,000 / [1 + (.0739 / 2)]^(t × 2) t = 21.43 years

Which one of the following bonds is the least sensitive to interest rate risk? -3-year; 4 percent coupon. -7-year; 4 percent coupon. -3-year; 6 percent coupon. -7-year; 6 percent coupon. -5-year; 6 percent coupon.

3-year; 6 percent coupon

A bond that pays interest annually yielded 6.48 percent last year. The inflation rate for the same period was 2.5 percent. What was the actual real rate of return? -4.19 percent -3.88 percent -3.41 percent -4.25 percent -3.49 percent

3.88 percent R=(D1/Po)+g r = 1.0648 / 1.025 − 1 = .0388, or 3.88%

You own a bond that pays $64 in interest annually. The face value is $1,000 and the current market price is $1,062.50. The bond matures in 11 years. What is the yield to maturity? -6.71 percent -6.46 percent -5.80 percent -6.22 percent -5.62 percent

5.62 percent $1,062.50 = $64 × ({1 − [1 / (1 + r)^11]} / r) + $1,000 / (1 + r)^11 To solve for r, use trial-and-error, a financial calculator, or a computer. Enter: N=11, PV= -1,062.50, PMT= 64, FV= 1,000 Solve for: I/Y=5.62

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $742. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature? -7.41 years -8.32 years -6.16 years -5.73 years -4.19 years

5.73 years $742 = $65 × ({1 - [1 / (1 + .132)^t]} / .132) + $1,000 / (1 + .132)^t To solve for t, use the formula, a financial calculator, or a computer. Enter: I/Y=13.2, PV=-742, PMT=65, FV=1,000 Solve for N=5.73

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $972. Interest is paid semiannually. What is the yield to maturity? -6.42 percent -5.92 percent -5.61 percent -5.74 percent -6.36 percent

5.92 percent $972 = $27.50 × ({1 − [1 / (1 + r)^(8.5 × 2)]} / r) + $1,000 / (1 + r)^(8.5 × 2) To solve for r, use trial-and-error, a financial calculator, or a computer. Enter: N=17, PV =-972, PMT=27.50, FV=1,000, Solve for: I/Y = 2.962 YTM = 2 × 2.962% = 5.92%

The yield to maturity on a bond is currently 9.84 percent. The real rate of return is 3.29 percent. What is the rate of inflation? -6.53 percent -5.64 percent -6.71 percent -6.24 percent -6.34 percent

6.34 percent h = 1.0984 / 1.0329 - 1 = .0634, or 6.34%

Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate? -6.50 percent -6.33 percent -6.40 percent -6.67 percent -6.60 percent

6.40 percent Calculator: N=2*13=26 I/Y=7.6/2=3.8 PV=-901.98 CMT: PMT FV=1000 Bond price = $901.98 = C × [(1 - {1 / [1 + (.076 / 2)]^(13 × 2)}) / (.076 / 2)] + $1,000 / [1 + (.076 / 2)]^(13 × 2) C = $32.00 Coupon rate = ($32 × 2) / $1,000 = .0640, or 6.40%

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity? -6.08 percent -6.48 percent -6.92 percent -6.87 percent -7.20 percent

6.48 percent $1,032 = $35 × [(1 − {1 / [1 + (r / 2)]^(8 × 2)}) / (r / 2)] + $1,000 / [1 + (r / 2)]^(8 × 2) To solve for r, use trial-and-error, a financial calculator, or a computer. Enter: N=16, PV=-1,032, PMT=35, FV=1,000 Solve for: 3.2405 YTM = 2 × 3.2405% = 6.48%

Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have a 7 percent coupon rate. What is the current yield on these bonds? -7.67 percent -7.42 percent -9.03 percent -8.47 percent -8.07 percent

8.07 percent Current yield = (.07 × $1,000) / (.86725 × $1,000) = .0807, or 8.07%

Bare Trees United issued 15-year bonds 2 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 98.6 percent of par value, what is the YTM? -9.27 percent -8.68 percent -9.13 percent -8.98 percent -8.42 percent

8.68 percent $986 = $42.50 × ({1 - [1 / (1 + r)(13 × 2)]} / r) + $1,000 / (1 + r)(13 × 2) To solve for r, use trial-and-error, a financial calculator, or a computer. Enter: N=26, PV= -986, PMT=42.50, FV=1,000 Solve for: I/Y=4.34 YTM = 2 × 4.34% = 8.68%

The taxability risk premium compensates bondholders for which one of the following? -Possibility of default. -Lack of coupon payments. -A bond's unfavorable tax status. -Yield decreases in response to market changes. -Decrease in a municipality's credit rating.

A bond's unfavorable tax status

Protective covenants: -Are a feature found only in government-issued bond indentures. -Only apply to bonds that have a deferred call provision. -Only apply to privately issued bonds. -Are primarily designed to protect bondholders. -Apply to short-term debt issues but not to long-term debt issues.

Are primarily designed to protect bondholders

Which one of the following is the price at which a dealer will sell a bond? -Call price -Bid-ask spread -Asked price -Bid price -Par value

Asked price

A bond that is payable to whomever has physical possession of the bond is said to be in: -Registered form. -New-issue condition. -Debenture status. -Collateral status. -Bearer form.

Bearer form

Which one of these statements is correct? -All bonds are treated equally in a bankruptcy proceeding. -Bonds provide tax benefits to issuers. -The risk of a firm financially failing decreases when a firm issues bonds. -Most long-term bond issues are referred to as unfunded debt. -A debenture is a senior secured debt.

Bonds provide tax benefits to issuers

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: -Call premium. -Dirty price. -Redemption discount. -Original-issue discount. -Redemption value.

Call premium

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? -Par value. -Unsecured. -Subordinated. -Senior. -Callable.

Callable

A bond is quoted at a price of $1,011. This price is referred to as the: -Call price. -Face value. -Maturity price. -Clean price. -Dirty price.

Clean price

The interest rate risk premium is the: -Additional compensation paid to investors to offset rising prices. -Compensation investors demand for accepting interest rate risk. -Difference between the market interest rate and the coupon rate. -Difference between the yield to maturity and the current yield. -Difference between the coupon rate and the current yield.

Compensation investors demand for accepting interest rate risk.

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to: -Convert the bond into a 5 percent perpetuity. -Force the issuer to repurchase the bond prior to maturity. -Convert the bond into equity shares. -Have the principal amount adjusted for inflation. -Defer all taxable income until the bond matures.

Convert the bond into equity shares

Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment? -Yield. -Face value. -Coupon. -Call premium. -Discount.

Coupon

The collar of a floating-rate bond refers to the minimum and maximum: -Yields to maturity. -Maturity dates. -Market prices. -Coupon rates. -Call periods.

Coupon rates

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? -Discounted. -Note. -Debenture. -Callable. -Zero-coupon.

Debenture

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? -Default risk. -Liquidity. -Interest rate risk. -Taxability. -Inflation.

Default risk

Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the: -Call price. -Dirty price. -Quoted price. -Spread price. -Clean price.

Dirty price

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? -Clean price. -Dirty price. -Bid price. -Asked price. -Quoted price.

Dirty price

A sinking fund is managed by a trustee for which one of the following purposes? -Converting bonds into equity securities. -Reducing bond coupon rates. -Paying preferred dividends. -Early bond redemption. -Paying bond interest payments.

Early bond redemption

A zero coupon bond: -Can only be issued by the U.S. Treasury. -Provides no taxable income to the bondholder until the bond matures. -Pays interest that is tax deductible to the issuer at the time of payment. -Is sold at a large premium. -Has more interest rate risk than a comparable coupon bond.

Has more interest rate risk than a comparable coupon bond.

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: -Increases at an increasing rate. -Decreases at a decreasing rate. -Decreases at an increasing rate. -Increases at a decreasing rate. -Increases at a constant rate.

Increases at a decreasing rate

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? -Taxability risk -Real rate risk -Interest rate risk -Default risk -Liquidity risk

Interest rate risk

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? -Liquidity. -Taxability. -Inflation. -Default risk. -Interest rate risk.

Liquidity

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? -Current market price. -Written record of all the current bond holders. -Current yield. -Price at which a bondholder can resell the bond to another bondholder. -List of collateral used as bond security.

List of collateral used as bond security

Which bond would you generally expect to have the highest yield? -Long-term, taxable junk bond -Short-term, inflation-adjusted bond -Risk-free Treasury bond -Non-taxable, highly-liquid bond -Long-term, high-quality, tax-free bond

Long-term, taxable junk bond

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? -Long-term; low coupon. -Long-term; zero coupon. -Short-term; high coupon. -Short-term; low coupon. -Long-term; high coupon.

Long-term; zero coupon.

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year? -Decreased in value due to the change in inflation rates. -Increased in value in response to the change in market rates. -Increased in value due to a decrease in time to maturity. -Experienced an increase in its bond rating. -Maintained a fixed real rate of return.

Maintained a fixed real rate of return.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: -Current yield will decrease. -Coupon payment will increase. -Market price of the bond will decrease. -Coupon rate will also increase. -Yield to maturity will be less than the coupon rate.

Market price of the bond will decrease

A Treasury yield curve plots Treasury interest rates relative to which one of the following? -Inflation. -Comparable corporate bond rates. -Market rates. -The risk-free rate. -Maturity.

Maturity

The bond principal is repaid on which one of these dates? -Maturity date. -Clean date. -Yield date. -Dirty date. -Coupon date.

Maturity date

Municipal bonds: -Pay interest that is federally tax free. -Are free of default risk. -Are rarely callable. -Generally have higher coupon rates than corporate bonds. -Are totally risk free.

Pay interest that is federally tax free

A deferred call provision is which one of the following? -Prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity. -Requirement that a bond issuer pay a call premium that is equal to or greater than one year's coupon should that issuer decide to call a bond. -Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date. -Ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt. -Requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond.

Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? -Realized rate. -Nominal rate. -Current rate. -Risk-free rate. -Real rate.

Real rate

The Fisher effect is defined as the relationship between which of the following variables? -Default risk premium, inflation risk premium, and real rates -Real rates, interest rate risk premium, and nominal rates -Real rates, inflation rates, and nominal rates -Interest rate risk premium, real rates, and default risk premium -Nominal rates, real rates, and interest rate risk premium

Real rates, inflation rates, and nominal rates

Which one of these is a negative covenant that might be found in a bond indenture? -The company shall provide audited financial statements in a timely manner. -The company must maintain the loan collateral in good working order. -The company shall maintain a cash surplus of $100,000 at all times. -The company shall maintain a current ratio of 1.1 or higher. -The company cannot lease any major assets without bondholder approval.

The company cannot lease any major assets without bondholder approval.

Which one of the following statements is correct? -The real rate must be less than the nominal rate given a positive rate of inflation. -The risk-free rate represents the change in purchasing power. -Historical real rates of return must be positive. -Nominal rates exceed real rates by the amount of the risk-free rate. -Any return greater than the inflation rate represents the risk premium.

The real rate must be less than the nominal rate given a positive rate of inflation

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today? -One month's interest. -Four month's interest. -No difference. -Two month's interest. -Five month's interest.

Two month's interest

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish? -Call provision. -Positive covenant. -Crossover rating. -Warrant. -Put provision.

Warrant

A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond? -Currently selling at par. -Current yield greater than coupon rate. -Discount bond. -Yield to maturity equal to the current yield. -Yield to maturity less than the coupon rate.

Yield to maturity less than the coupon rate

You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? -The current yield-to-maturity is greater than 6 percent. -You will realize a capital gain on the bond if you sell it today. -The bond is currently valued at one-half of its issue price. -The next interest payment will be $30. -The current yield is 6 percent.

You will realize a capital gain on the bond if you sell it today

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. -a premium; equal to -a premium; less than -a discount; higher than -par; less than -a discount; less than

a discount; less than

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? -Callable. -Debenture. -Floating-rate. -Zero coupon. -Junk.

zero coupon