FINA Test 2

If an investor purchases a 3%, two-year TIPS and the CPI increases 3% over each of the next two years, how much does the investor receive at maturity?

$1,092.73 1,030 x (1.03)2 = 1,092.73.

What price was quoted to an investor who paid $982.50 for a $1,000 par value bond?

98:08 980 + (8/32 x 10) = 982.50

Periodic receipts of interest by the bondholders are known as:

Coupon payments

If you purchase a three-year, 9% coupon bond for $950, how much could it be sold for two years later if interest rates have remained stable?

$981.56

Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?

A zero-coupon bond with 30 years until maturity.

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

Increase over time, reaching par value at maturity.

The existence of an upward-sloping yield curve suggests that:

Interest rates will be increasing in the future.

An investor holds two bonds, one with five years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

The 20-year bond will decrease more in price.

Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?

The CCC bond will offer a higher promised yield to maturity.

Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?

The bond is selling at a discount to par value.

Which of the following is correct when a bond investor's rate of return for a particular period equals the bond's coupon rate?

The bond price remained unchanged during the period.

Assume that a bond has been owned by four different investors during its 20-year history. Which of the following is not likely to have been shared by these different owners?

Yield to maturity

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

Yield to maturity

How does a bond dealer generate profits when trading bonds?

By maintaining bid prices lower than ask prices

If the 7s of 2005 are offered at 102:23, then the price of a $1,000 bond would be:

$1,027.19 $1,000 + $20 + $10(23/32) = $1,027.19

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

$1,082.00

How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% one year later? (Hint: How much would the price change from a year earlier?)

$19.93 Price = 1,000/(1.10)30 = 57.31 New Price = 1,000/(1.12)29= 37.38 Difference = 19.93

What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a yield to maturity of 6%?

8%

What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750?

8.0% $60/750 = 8%

What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8% with semi-annual payments, current price is $960, three years until maturity.

9.57%

Which of the following bonds would be considered to be of investment-grade?

A Baa-rated bond.

The numerator of the rate of return formula for bond consists of the following:

A. coupon income. B. bond price change. Both A and B.

The yield curve depicts the current relationship between:

Bond yields and maturity

Which of the following identifies the distinction between a U.S. Treasury bond and a Treasury note?

Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.

A bond's yield to maturity takes into consideration:

Both current yield and price changes of a bond.

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

Coupon rate

Which of the following would not be associated with a zero-coupon bond?

Current yield

Investors who own bonds having lower credit ratings should expect:

Higher default possibilities.

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

Increasing interest rates; bonds sold before maturity.

Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's:

Interest payments increse

When market interest rates exceed a bond's coupon rate, the bond will:

Sell for more than par value.

What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?

The coupon rate remains at 8%.

Which of the following will not happen for an investor who owns TIPS during a period of inflation?

The coupon payment will increase in real terms.

Where does a "convertible bond" get its name?

The option of converting into shares of common stock.

Which of the following factors will change when interest rates change?

The present value of a bond's payments

How much would an investor need to receive in nominal return if she desires a real return of 4% and the rate of inflation is 5%?

9.20% 1.04 = 1 + nominal return/1.05 9.2% = nominal return

What is the yield to maturity for a bond paying $100 annually that has six years until maturity and sells for $1,000?

10.0%

An investor buys a five-year, 9% coupon bond for $975, holds it for one year and then sells the bond for $985. What was the investor's rate of return?

10.26% (90 + 10)/975 = 10.26%

What price was reported in the financial press for a bond that was sold to an investor for $1,045.63?

104:18

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

5.00% Rate of Return = ($70.00 - $17.28)/$1,054.47 = $52.72/$1,054.47 = 5%

An investor buys a ten-year, 7% coupon bond for $1,050, holds it for one year and then sells it for $1,040. What was the investor's rate of return?

5.71% (70 - 10)/1,050 = 5.71%

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation was 4%, then the investor's real return was:

6.73% 1 + real return = 1.11/1.04 real return = 6.73%

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and five years remaining until maturity, then sells the bond after one year for $1,085?

6.82% (90 - 15)/1,100 = 6.82%

Many investors may be drawn to municipal bonds because of the bonds':

Exemption from federal taxes

A bond's par value can also be called its:

Face value

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

The price of the bond increases

What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity?

There is no predetermined relationship.

What price will be paid for a U.S. Treasury bond with an ask price of 135:20?

$1,356.25

U.S. Treasury bond yields do not contain a:

Default premium

The current yield of a bond can be calculated by:

Dividing the annual coupon payments by the price.

Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments?

Each payment of interest equals $50.

If the coupon rate is lower than current interest rates, then the yield to maturity will be:

Equal to the coupon rate.

By how much did the price of a $1,000 par-value bond increase if The Wall Street Journal shows a change of +6 from the previous day?

$1.875 6/32 x 10 = $1,875

What is the amount of the annual coupon payment for a bond that has six years until maturity, sells for $1,050, and has a yield to maturity of 9.37%?

$105.00

By how much will a bond increase in price over the next year if it currently sells for $925, has five years until maturity, and an annual coupon rate of 7%?

$12.55

By how much did the price of a $1,000 par-value bond decrease if The Wall Street Journal shows a change of -12 from the previous day?

$3.75 12/32 x 10 = $3.75

If you purchase a five-year, zero-coupon bond for $500, how much could it be sold for three years later if interest rates have remained stable?

$757.86

How much does the $1,000 to be received upon a bond's maturity in four years add to the bond's price if the appropriate discount rate is 6%?

$792.09 $1,000/(1.06)4 = $792.09

How much should you be prepared to pay for a 10-year bond with a 6% coupon, semi-annual payments, and a semi-annually compounded yield of 7.5%?

$895.78

How much should you be prepared to pay for a 10-year bond with a 6% coupon and a yield to maturity to maturity of 7.5%?

$897.04

If a four year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth one year from now if interest rates are constant?

$925.39

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%?

$927.90

Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7% coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?

$928.84

If a bond is priced at par value, then:

Its coupon rate equals its yield to maturity.

Which of the following is correct for a bond currently selling at a premium to par?

Its current yield is lower than its coupon rate.

The coupon rate of a bond equals:

A percentage of its face value

What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%?

A price increase of $53.47

When riskier corporations issue bonds that include a default premium, the promised yield will sometimes be:

Greater than the actual yield.

The value of a callable bond:

Is limited by its call price.

Suppose a 30-year maturity bond currently selling for $1,040 is callable in 10 years at a call price of $1,060. If its yield to maturity is 8.14%, its yield to call is:

More than 8.14%

The purpose of a floating-rate bond is to:

Offer rates adjusted to current market conditions.

When an investor purchases a $1,000 par value bond that was quoted at 97.16, the investor:

Pays 97.5% of face value for the bond

Capital losses will automatically be the case for bond investors who buy:

Premium bonds

A bond with 10 years until maturity, an 8% coupon, and an 8% yield to maturity increased in price to $1,107.83 yesterday. What apparently happened to interest rates?

Rates decreased by 1.5%

Which of the following is correct concerning real interest rates?

Real interest rates, if positive, indicate increased purchasing power.

When the yield curve is upward-sloping, then:

Short-maturity bonds yield less than long-maturity bonds.

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The bond's maturity value is lower than the bond's price.

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

The bond's price will decline each year.

The current yield tends to understate a bond's total return when the bond sells for a discount because:

The bond's price will increase each year.

What causes bonds to sell for a premium compared to face value?

The bonds have a higher than market coupon rate.