FIN 300 Exam 2 Chapters 7 & 8

The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? Coupon rate. Face rate. Call rate. Yield to maturity. Current yield.

Yield to maturity

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: Dirty price. Redemption value. Call premium. Original-issue discount. Redemption discount.

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. Callable. Senior. Subordinated. Unsecured.

callable

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

clean

. S. Treasury bonds: Are highly illiquid. Are quoted as a percentage of par. Are quoted at the dirty price. Pay interest that is federally tax-exempt. Must be held until maturity.

are quoted as a percentage of par

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

liquidity

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

long term, taxable junk bond

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

maturity

Interest rates that include an inflation premium are referred to as: Annual percentage rates. Stripped rates. Effective annual rates. Real rates. Nominal rates.

nominal rates

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the: Trustee relationships. Bylaws. Legal bounds. Trust deed. Protective covenants.

protective convenants

The pure time value of money is known as the: Liquidity effect. Fisher effect. Term structure of interest rates. Inflation factor. Interest rate factor.

term structure of interest rates

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

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

A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? The face value of the bond today is greater than it was when the bond was issued. The bond is worth less today than when it was issued. The yield-to-maturity is less than the coupon rate. The coupon rate is greater than the current yield. The yield-to-maturity equals the current yield.

the yield to maturity is less than the coupon rate

Real rates are defined as nominal rates that have been adjusted for which of the following? Inflation. Default risk. Accrued interest. Interest rate risk. Both inflation and interest rate risk.

inflation

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? 12.26 years 12.53 years 18.49 years 24.37 years 25.05 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: 6.72 / 2 -1,023.46 35 1,000 N I/Y PV PMT FV Solve for: 25.052 The number of six-month periods is 25.052. The number of years is 12.53 years.

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: .05 / (1 - t*) = .07. .05 - (1 - t*) = .07. .07 + (1 - t*) = .05. .05 × (1 - t*) = .07. .05 × (1 + t*) = .07.

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

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate? 8.00 percent 8.50 percent 9.00 percent 10.50 percent 12.00 percent

12

Global Exporters wants to raise $29.6 million to expand its business. To accomplish this, it plans to sell 20-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 7.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? Assume semiannual compounding. 110,411 139,800 154,907 126,029 135,436

154,907

A newly issued 20-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding. $17.72 $18.70 $18.47 $17.63 $17.89

18.70

A 3.25 percent Treasury bond is quoted at a price of 101.16. The bond pays interest semiannually. What is the current yield? 3.06 percent 3.17 percent 3.21 percent 3.33 percent 3.38 percent

3.21

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? 6.36 percent 6.42 percent 5.61 percent 5.74 percent 5.92 percent

5.92

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? 6.87 percent 6.92 percent 6.08 percent 6.48 percent 7.20 percent

6.48

A Treasury bond is quoted at a price of 101.6533 with a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond? 7.20 percent 6.48 percent 6.41 percent 6.38 percent 6.27 percent

Price = 1.016533 × $10,000 = $10,165.33 Annual interest = .06276 × $10,165.33 = $637.98 Coupon rate = $637.98 / $10,000 = 6.38 percent

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

a bonds unfavorable tax status

A note is generally defined as: A secured bond with an initial maturity of 10 years or more. A secured bond that initially matures in less than 10 years. Any bond secured by a blanket mortgage. An unsecured bond with an initial maturity of 10 years or less. Any bond maturing in 10 years or more.

an unsecured bond with an initial maturity of 10 years or less

Bonds issued by the U.S. government: Are considered to be free of interest rate risk. Generally have higher coupons than comparable bonds issued by a corporation. Are considered to be free of default risk. Pay interest that is exempt from federal income taxes. Are called "munis."

are considered to be free of default risk

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

are primarily designed to protect bondholders

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

bearer form

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? Note. Discounted. Zero-coupon. Callable. Debenture.

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. Taxability. Liquidity. Inflation. Interest rate risk.

default risk

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

discount, less than

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

early bond redemption

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: 3.5 percent. Greater than 3.5 percent but less than 7 percent. 7 percent. Greater than 7 percent. Less than 3.5 percent.

greater than 7 percent

Callable bonds generally: Grant the bondholder the option to call the bond anytime after the deferment period. Are callable at par as soon as the call-protection period ends. Are called when market interest rates increase. Are called within the first three years after issuance. Have a sinking fund provision.

have a sinking fund provision