Finance Ch.7 Questions

Which one of these correctly defines equivalent taxable yield? A. The pretax rate required on a taxable bond to yield the same rate as a muni bond B. The pretax rate needed on a taxable bond to produce the same after-tax rate as a muni bond C. The after-tax rate needed on a corporate bond to equal the after-tax rate on a muni bond D. The after-tax rate earned on either a taxable or nontaxable bond.

taxable bond to produce the same after-tax rate as a muni bond

What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 203.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago. A. $1,011.22 B. $1,060.90 C. $988.90 D. $1,000.00

A. $1,011.22

How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250? A. $99,625.00 B. $199,625.00 C. $99,000.63 D. $100,099.63

A. $99,625.00

What is the shortest maturity for a newly issued U. S. Treasury bond? A. 10 years B. 30 years C. 5 years D. 20 years

A. 10 years

A typical municipal bond is selling at a price of $5,114.20. What is the price quote for this bond? A. 102.284 B. 100.114 C. 114.200 D. 100.228

A. 102.284

What is an indenture agreement? A. A legal contract between the issuer and the bondholders B. An informal document which lists the basic characteristics of a bond C. A formal document with the sole purpose of outlining the rights of bondholders in the case of default D. An informal document which lists the key characteristics of a bond

A. A legal contract between the issuer and the bondholders

Which of the following are commonly included in an indenture agreement? Select all that apply. A. Coupon rate B. Call premium C. Par value D. Bond price

A. Coupon rate B. Call premium C. Par value

What does a bond rating measure? A. Credit quality, or default risk B. Interest rate and default risk C. Credit quality and inflation risk D. Default risk and market risk

A. Credit quality, or default risk

You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply. A. FV = 1,000 B. PV= 1,000 C. i= 5.5 D. N= 10

A. FV = 1,000 D. N= 10

Which of the following are sources of information on the bond markets? Select all that apply. A. Internet B. Merrill Lynch C. Foreign exchange market D. The Wall Street Journal

A. Internet B. Merrill Lynch D. The Wall Street Journal

Which one of these characteristics designates a premium bond? A. Market price exceeds par value B. Coupon rate exceeds inflation rate C. Coupon rate is lower than current rates D. Market price is less than par value

A. Market price exceeds par value

Which of these are common features of a corporate bond? Select all that apply. A. Publicly traded debt security B. Face value of $1,000 C. Currently issued as bearer bonds D. Semi-annual interest payments

A. Publicly traded debt security B. Face value of $1,000 D. Semi-annual interest payments

Which of the following may be financed with corporate bonds? Select all that apply. A. Research and development B. Public roads C. Plant and equipment D. Inventory

A. Research and development C. Plant and equipment D. Inventory

Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless the problem states otherwise? A. Semiannual interest payments B. Face value= $1,000 C. Annual interest payments D. Face value = $10,000

A. Semiannual interest payments B. Face value= $1,000

You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why? A. The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years. B. The bond with the highest coupon rate because the bond is selling at a premium. C. The bond with the highest coupon rate because you plan to hold the bond to maturity. D. The bond with the highest premium as it will provide the highest payment at maturity.

A. The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.

Which of the following correctly explains how a factor affects interest rate risk? Select all that apply. A. The longer the term to maturity, the greater the interest rate risk will be. B. The shorter the term to maturity, the greater the interest rate risk will be. C. The higher the coupon rate, the greater the interest rate risk will be. D. The lower the coupon rate, the greater the interest rate risk will be.

A. The longer the term to maturity, the greater the interest rate risk will be. D. The lower the coupon rate, the greater the interest rate risk will be.

What is the definition of yield to maturity? A. The rate that will be earned if a bond is purchased today and held until maturity B. The amount paid at maturity expressed as a percentage of the current bond price C. The annual rate of return from the interest earnings assuming a bond is purchased today D. The capital gain that will be earned if a bond is purchased today and held until maturity

A. The rate that will be earned if a bond is purchased today and held until maturity

How does the yield to call differ from the yield to maturity for the same bond? Select all that apply. A. There are fewer time periods in the yield to call. B. The call price used in the yield to call usually exceeds the face value used in the yield to maturity. C. The interest payments are annual in the yield to call and semiannual in the yield to maturity. D. The interest payments will vary as the coupon rate is applied to the call price rather than the par value in the yield to call.

A. There are fewer time periods in the yield to call. B. The call price used in the yield to call usually exceeds the face value used in the yield to maturity.

Why are U. S. Treasury bonds considered to be safe? A. They are secured by the full-faith-and-credit of the U. S. government. B. They provide income exempt from all forms of income taxes. C. They mature in one year or less. D. They are repaid from user fees.

A. They are secured by the full-faith-and-credit of the U. S. government.

A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment? A. $151.28 B. $75.64 C. $74.36 D. $148.73

B. $75.64

A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds? A. 1.48 percent B. 1.36 percent C. 1.98 percent D. 0.50 percent

B. 1.36 percent

A typical municipal bond is selling at a price of $5,114.20. What is the price quote for this bond? A. 100.114 B. 102.284 C. 100.228 D. 114.200

B. 102.284

A corporate bond has a current yield of 6.39 percent and a price quote of 97.8. What is the coupon rate? A. 6.60 percent B. 6.25 percent C. 6.00 percent D. 6.50 percent

B. 6.25 percent

What is a zero coupon bond? A. A zero coupon bond is a bond that provides no interest income to its holder. B. A zero coupon bond is sold at a steep discount and pays no semiannual interest payments. C. A zero coupon bond has a current value equal to its future maturity value. D. A zero coupon bond is sold at par value and pays no regular interest payments.

B. A zero coupon bond is sold at a steep discount and pays no semiannual interest payments.

Which of these is not the traditional bond issuers? A. U.S Treasury bonds B. Agency bonds C. Municipal bonds D. Corporate bonds

B. Agency bonds

Which of these represents the compensation earned by a bond dealer? A. Bid price - ask price B. Bid- ask spread C. Ask price D. Bid price

B. Bid- ask spread

Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par? Select all that apply. A. Face amount B. Bond term C. Market rates of interest D. Default risk

B. Bond term C. Market rates of interest D. Default risk

Why might a corporation issue bonds? A. Bonds provide a steady stream of income to the issuer. B. Bonds may offer a lower aftertax cost than equity securities. C. Bonds tend to maximize a firm's total capital costs. D. Bonds provide a perpetual source of funds.

B. Bonds may offer a lower aftertax cost than equity securities.

Why might a corporation issue bonds? A. Why might a corporation issue bonds? B. Bonds may offer a lower aftertax cost than equity securities. C. Bonds provide a steady stream of income to the issuer. D. Bonds provide a perpetual source of funds.

B. Bonds may offer a lower aftertax cost than equity securities.

Which of the following yields or rates are inversely related to a bond's market price? A. Current yield, coupon rate, and yield to maturity B. Current yield and yield to maturity only C. Current yield only D. Yield to maturity only

B. Current yield and yield to maturity only

What is the yield spread? A. Difference between the expected yield to maturity and the actual yield to maturity B. Difference between the yields to maturity on bonds with differing levels of credit risk C. Difference between the coupon rate and the yield to maturity D. Difference between the current yield and the yield to maturity on any individual bond

B. Difference between the yields to maturity on bonds with differing levels of credit risk

You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond? A. i=0.08 B. N= 14 C. Par Value = $5,000 D. PMT= $60

B. N= 14

What is a common means of reporting the daily direction of overall bond price movements? A. Reporting the latest price of 10-year Treasury bonds B. Reporting the yield-to-maturity on the 10-year Treasury bonds C. Reporting the average coupon rate for all bonds issued that day D. Reporting the average price change in all daily corporate bond trades

B. Reporting the yield-to-maturity on the 10-year Treasury bonds

Which of these statements is correct? A. The value of the bond market is about half of the value of the stock market. B. The average daily trading volume of the U. S. bond market reached over $760 billion in 2017. C. The U. S. bond market consists of only government-issued bonds. D. The bond market is an insignificant source of funds for business firms.

B. The average daily trading volume of the U. S. bond market reached over $760 billion in 2017.

A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond. A. The municipal bond is selling at a premium price of $4,933.50. B. The municipal bond is selling at a discounted price of $4,933.50. C. The municipal bond is selling at a premium price of $986.70. D. The municipal bond is selling at a discounted price of $986.70.

B. The municipal bond is selling at a discounted price of $4,933.50.

An investor buys bonds at the Blank______ price and sells them at the Blank______ price. A. bid; bid B. ask; bid C. ask; ask D. bid; ask

B. ask; bid

What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446? A. $100,102.14 B. $102,000.15 C. $102,144.60 D. $100,214.46

C. $102,144.60

A $1,000 corporate bond has an asked price of 97.82 and a bid price of 97.81. What price will you receive if you sell this bond now? A. $978.15 B. $978.20 C. $978.10 D. $1,000

C. $978.10

Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent? A. +$19.04 B. +$38.07 C. -$38.07 D. -$19.04

C. -$38.07

A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI? A. 207.70 B. 202.12 C. 205.17 D. 204.61

C. 205.17

Which one of these is the best description of a 5-year zero coupon bond? A. A bond that will make a total of 5 payments over its life B. A bond that will make a total of 10 payments over its life C. A bond with a current value equal to its discounted par value D. A bond that will sell at par throughout the entire five years

C. A bond with a current value equal to its discounted par value

Which one of these is the current yield formula? A. Annual interest/Principal value B. Annual interest/Par value C. Annual Interest/Current Value D. Annual interest/Face value

C. Annual Interest/Current Value

Most secondary trades in the U. S. bond market occur between which two parties? A. Issuers and bond dealers B. Large institutions and private individuals C. Bond dealers and large institutions D. Bond dealers and private individuals

C. Bond dealers and large institutions

Which statement related to bonds is true? A. Bonds are rarely traded. B. Bonds that offer high potential returns are low-risk. C. Bonds have varying levels of risk. D. All bonds are considered to be low-risk.

C. Bonds have varying levels of risk.

Which of these statements is correct? Select all that apply. A. A zero coupon bond has no yield to maturity. B. Investors should base their purchase decisions on the yield to call when interest rates are rising. C. If the market interest rate rises, bond prices will fall, and yields to maturity will rise. D. A Treasury bond should have a higher yield to maturity than a comparable muni bond.

C. If the market interest rate rises, bond prices will fall, and yields to maturity will rise. D. A Treasury bond should have a higher yield to maturity than a comparable muni bond.

Which of these characteristics apply to a discount bond? Select all that apply. A. Coupon rate equals the market rate B. Coupon rate exceeds market rate C. Market price is less than the principal amount of the loan D. Selling for less than face value

C. Market price is less than the principal amount of the loan D. Selling for less than face value

Which one of these formulas correctly computes the equivalent taxable yield? A. Muni yield/(1 + Tax rate) B. Muni yield × (1 + Tax rate) C. Muni yield/(1 - Tax rate) D. Muni yield × (1 - Tax rate)

C. Muni yield/(1 - Tax rate)

Which one of these applies to agency bonds? A. Issued by state and local governments B. Highly risky securities C. Relatively safe securities D. Unique type of equity securities

C. Relatively safe securities

If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own? A. Long-term, low coupon B. Short-term, low coupon C. Short-term, high coupon D. Long-term, high coupon

C. Short-term, high coupon

The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply. A. Bond's coupon rate B. Bond's face value C. Tax status of the bond D. Credit quality of the bond

C. Tax status of the bond D. Credit quality of the bond

You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why? A. The bond with the highest coupon rate because the bond is selling at a premium. B. The bond with the highest coupon rate because you plan to hold the bond to maturity. C. The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years. D. The bond with the highest premium as it will provide the highest payment at maturity.

C. The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.

Which of these best explains the current value of a bond? A. The current value equals the par value plus the present value of the bond's expected future interest payments. B. The current value is the present value of the bond's expected future interest payments discounted at the coupon rate. C. The current value is the present value of the bond's expected future cash flows discounted at the market rate of interest. D. The current value is the future value of the bond's cash flows compounded at the market rate of interest.

C. The current value is the present value of the bond's expected future cash flows discounted at the market rate of interest.

Which one of the following should be used to compare various corporate bonds if you plan to purchase a bond today, hold it until maturity, and want to select the bond with the highest rate of return? A. coupon rate B. current price C. yield to maturity D. current yield

C. yield to maturity

A TIPS was issued with a par value of $1,000, a coupon rate of 2.5 percent, and a reference CPI of 204.89. Which one of these is the correct calculation of the current interest payment if the CPI is now 205.44? A. $1,000 × (204.89/205.44) × 0.025 B. $1,000 × 0.025 C. $1,000 × (205.44/204.89) × 0.025 D. $1,000 × (205.44/204.89) × (0.025/2)

D. $1,000 × (205.44/204.89) × (0.025/2)

Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000. A. -$11.89; -$47.56 B. -$12.08; -$49.19 C. -$14.76; -$52.33 D. -$13.43; -$47.45

D. -$13.43; -$47.45

Which one of the following bond quotes indicates a corporate bond is selling at a premium? A. 100.00 B. 99.67 C. 99.96 D. 101.49

D. 101.49

A corporate bond has a yield to maturity of 6.48 percent, a current price of $916.58, and matures in 5 years. What is the coupon rate? A. 6.25 percent B. 6.50 percent C. 4.25 percent D. 4.50 percent

D. 4.50 percent

A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity? A. 6.8309 percent B. 7.2524 percent C. 6.8414 percent D. 7.2547 percent

D. 7.2547 percent

Which one of these is correct if a bond is selling at a premium? A. Current yield > Coupon rate >Yield to maturity B. Yield to maturity > Current yield > Coupon rate C. Yield to maturity > Coupon rate >Current yield D. Coupon rate > Current yield > Yield to maturity

D. Coupon rate > Current yield > Yield to maturity

Which one of these characteristics fits the definition of an agency bond? A. Backed by the full-faith-and-credit of the U. S. government B. Generally provide a lower rate of return than comparable Treasury securities C. Issued by the U. S. Treasury Department D. Issued to support a sector of the U. S. economy

D. Issued to support a sector of the U. S. economy

Where does the majority of trading volume in bonds in the secondary markets occur? A. Direct placements B. NASDAQ C. NYSE D. Over-the-counter

D. Over-the-counter

Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent? A. PV = $1,000 × (1.08)10 B. PV = $1,000/1.0810 C. PV = $1,000 × [1 + (0.08/2)]20 D. PV = $1,000/[1 + (0.08/2)]20

D. PV = $1,000/[1 + (0.08/2)]20

Which one of these defines the yield to call? A. Purchasing a bond on its first call date and holding it until its maturity date. B. The call premium expressed as a percentage of the par value C. Coupon rate compounded by the number of periods until a bond can be called D. Rate earned by buying a bond at today's price and holding it until the first call date

D. Rate earned by buying a bond at today's price and holding it until the first call date

What is the definition of credit quality risk? A. The probability that a bond issuer will call a bond early B. The probability that tax rates may change in the future affecting a bond's yield C. The chance that a bond issuer may repay a bond prior to maturity D. The chance that an issuer will either be late paying or will not pay an interest or principal payment

D. The chance that an issuer will either be late paying or will not pay an interest or principal payment

Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon and a face value at issuance of $1,000. The reference CPI is 202.34 and the current CPI is 203.18. What do you know for certain about this bond? A. The current semiannual interest payment is $10. B. The current par value is $1,000 but the coupon rate is currently greater than 2 percent. C. The current par value is $1,000. D. The coupon rate is still 2 percent but the interest payments have increased.

D. The coupon rate is still 2 percent but the interest payments have increased.

Which one of these correctly defines a bond feature? A. Bonds are fixed-income equity securities. B. The maturity date is the initial date a bond was issued. C. The annual interest expressed as a percentage of face value is called a bond's yield to maturity. D. The principal value of a bond is referred to as the par value, or face value.

D. The principal value of a bond is referred to as the par value, or face value.

Which one of these descriptions defines a Treasury inflation-protection security (TIPS)? A. U. S. government bond with inflation-adjusted interest payments and a fixed par value B. U.S. government bond with a fixed coupon rate and par value C. U.S. government bond with a variable coupon rate and a fixed par value D. U. S. government bond with an inflation-adjusted par value and varying interest payments

D. U. S. government bond with an inflation-adjusted par value and varying interest payments

True or false: If you buy a bond today at par value and sell it one year from today, also at par value, the rate of return you will earn will equal to current yield.

True

True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.

True