SIE - Ch. 2-A: Bonds and Yields - Practice Quiz

Q. 59922 A corporate bond has a bid-ask spread of 97^5/8 - 98^7/8. What is the dollar value of the spread? A. $12.50 B. $62.50 C. $25.12 D. $1.25

A. $12.50 Bond quotes represent the percentage of the bond's par value. Par value for corporate bonds is $1,000. So this bid-ask spread, when converted to dollars, is $976.25-$988.75 (.97625 x $1,000 = $976.25; .98875 x $1,000 = $988.75.) Thus the spread when converted to dollars is $12.50 ($988.75 - $976.25 = $12.50).

Q. #57248 An investor buys 5M of ABC 5s '20 debentures. At maturity, the investor will receive: A. $5,125 B. $5,250 C. $1,025 D. $1,050

A. $5,125 Here is what the notation means in this question: - 5M means $5,000. (The M stands for $1,000.) - ABC is the corporation. - 5 is the coupon rate, so it pays 5% or $50 over the course of the year, but the "s" means it is paid semi-annually, or twice a year - Debenture is a bond that is backed by the good name of the company that issues it. It means it's a corporate bond, so it matures at $1,000. So 5M of these debentures equals five debentures. - '20 is the year it matures; it means 2020 At maturity, each of the five bonds will mature at $1,000, so that would be $5,000 total. But each bond would also get an additional $25 interest payment (this is the semi-annual interest payment). So that would be $25*5 or $125. That means the total at maturity would be $5,125.

Q. 57514 If market interest rates are falling, which of the following is likely to be true of bonds in the secondary market? I. Yields of existing bonds are falling. II. Yields of existing bonds are rising. III. Prices of existing bonds are falling. IV. Prices of existing bonds are rising. A. I and IV B. II and IV C. I and III D. II and III

A. I and IV When market interest rates in general are falling, bonds in the secondary market tend to go up in value. When the price of a bond in the secondary market rises, its yield goes down.

Q. 57346 Harry bought a bond with a duration of 11, this means that: A. If interest rates rise by 1%, the bond's price will fall by 11%. B. The bond has 11 years remaining to maturity. C. The bond will be callable after 11 years. D. If interest rates fall by 1%, the bond's price will fall 11%.

A. If interest rates rise by 1%, the bond's price will fall 11%. Durationis a measure of a bond's sensitivity to changes in interest rates. A bond's duration expresses the percentage change in the price of a bond that would result from a 1% change in yield. A bond with a high duration is more sensitive to interest rate changes than a bond with a low duration. If a bond has a duration of 5, its price will decrease roughly 5% with a 1% increase in interest rates, while a bond's price will decrease 10% if it has a duration of 10. So, in other words, duration measures the risk of interest rate volatility.

Q. #60446 The prices of long-term bonds are _____ sensitive to changes in interest rates than those of short-term bonds because: A. More; there is more time for interest rates to move in an undesirable way. B. Less; there is more time for interest rates to move in a positive direction than for short-term bonds. C. Neither more nor less; interest rate changes affect all bonds equally no matter the length of time to maturity. D. More; the price of long-term bonds is almost always higher than the price of short-term bonds.

A. More; there is more time for interest rates to move in an undesirable way. Because there is more time for interest rates to move in an undesirable way, the prices of long-term bonds are more sensitive to changes in interest rate than the prices of short-term bonds. Sensitivity to interest rates is also known as duration, and long-term bonds have a higher duration than short-term bonds. Also keep in mind that it is not true to say that the price of long-term bonds is almost always higher than the price of short-term bonds; in fact, in a normal bond yield curve the opposite is typically the case.

Q. 47463 Yield spreads, as measured by the difference in yields between high-yield ("junk") bonds and Treasury bonds, begin to widen. This widening: A. is a negative indicator for the economy. B. has no relation to the overall economy. C. indicates a complete economic collapse is imminent. D. is a positive indicator for the economy.

A. is a negative indicator for the economy. The widening yield spread means the yield on the high-yield bonds has increased relative to Treasuries, so the price of high-yield bonds has decreased in relation to Treasuries. A relative price decrease means investors aren't willing to pay as much for the high-yield bonds as they used to. This indicates investors are nervous about the high-yield issuers' ability to repay, and this situation is a negative indicator for the economy. It is not, however, always indicative of a complete economic collapse.

Q. 54551 If a bond's yield to maturity has increased from 4.33% to 4.65%, then: A. The YTM has increased by 3.2 bond points. B. The YTM has increased by 32 basis points. C. The YTM has increased by .32 basis points. D. The YTM has increased by 32 bond points.

B. The YTM has increased by 32 basis points. A basis point is one hundredth of one percent, so an increase of .32% is equal to an increase of 32 basis points. A bond point is equal to one percent.

Q. #52527 Which of the following ratings is investment grade? A. Ba3 B. BB+ C. BBB D. Ba1

BBB is the only investment grade rating in this list. Anything below BBB- on the Starndard and Poor's and Fitch rating systems and Baa3 on the Moody's rating is considered non-investment grade.

Q. 45077 The decimal equivalent of a basis point is: A. 0.01 B. 0.00125 C. 0.0001 D. 0.001

C. 0.0001 A basis point is one-hundredth of one percent, or .0001.

Q. #45203 What is the current yield for a bond with a 5% coupon selling for 75? A. 3.33% B. 5.00% C. 6.66% D. 2.50%

C. 6.66% Current yield equals the annual interest divided by the bond price. Remember that corporate bonds are quoted in bond points and each bond point is worth $10. So this bond will cost $750. Annual interest is calculated by multiplying the coupon rate by the bond's par value. Corporate bonds typically have a par value of $1000, so the annual interest rate would be .05 * $1,000 = $50. So the current yield is $50 / 750 = .0666, or 6.66%.

Which of these statements about bond yield are correct? I. Nominal yield does not always equal the bond's coupon rate. II. Current yield represents the expected return of a bond purchased today and held for a year. III. Yield to maturity is the expected return of a bond purchased today and held to maturity. IV. Bonds selling at a discount have a lower current yield than the coupon rate, while bonds selling at a premium have a higher current yield than the coupon rate. A. I and II B. I and III C. II and III D. III and IV

C. II and III Market interest rates may change dramatically during the life of a bond, but the nominal yield of a bond will always reflect the interest rate stated on the bond certificate. The nominal yield is always equal to the coupon rate. Current yield is a snapshot approximation that represents the return an investor might expect to receive if she purchased a bond today and held it for a year. If a bond is selling at a discount, the current yield will be greater than the coupon rate. Bonds selling at a premium have a lower current yield than their coupon rate. Yield to maturity is the anticipated yield of a bond that is bought and held to maturity. It is, essentially, the rate of return over the life of the bond based on its current value in the market.

Q. 47649 Select the list of yields which is correctly shown for a discounted bond (held to maturity) from lowest to highest: I. Yield to Maturity II. Current Yield III. Nominal Yield IV. Yield to Call A. III, II, IV, I B. II, III, IV, I C. III, II, I, IV D. II, I, IV, III

C. III, II, I, IV For discounted bonds held to maturity, yields go up according to the following order: nominal yield, current yield, yield to maturity and yield to call. For bonds bought above par, yields go down in the same order.

Q. #60497 Sameville's bond has been downgraded from an AA- rating to an A rating. Which of the following would not be a reason for such a downgrade to occur? A. There has been a change in Sameville's city council that could affect the bond's funding. B. Sameville is experiencing economic difficulties. C. Interest rates are rising. D. Sameville's governing structure has changed.

C. Interest rates are rising. When determining the credit rating for a bond, ratings agencies consider several factors about the issuer. These factors include: · History and corporate philosophy · Economic, political, and regulatory environment · Management structure and governance · Financial position, debt structure, and sources of liquidity On the other hand, rising interest rates would not affect an issuer's credit rating; however, they might have a negative effect on the market value of its bonds.

Q. 56273 George has a bond with a coupon rate of 5.4% that he purchased for $900. Given this information which of the following is true? A. The YTM must be less than 5.4% B. The current yield is 5.8% C. The YTM is greater than 6% D. Nothing can be inferred about the YTM

C. The YTM is greater than 6% The current yield of George's bond is 6%, calculated by taking the annual interest of $54 and dividing it by $900, which is .06 or 6%. This bond is purchased at a discount to par because it was purchased at less than $1,000. For bonds purchased at a discount, the YTM is greater than the current yield, so the bond's YTM must be greater than 6%.

Q. 59912 A bond's nominal yield is equivalent to which of the following? A. The amount that an investor who purchases the bond and holds it to maturity can expect to receive. B. The par value divided by the market value. C. The percentage of par value received by the bondholder annually. D. The percentage of par value received by the bondholder with each coupon payment.

C. The percentage of par value received by the bondholder annually. A bond's nominal yield is the percentage of par value received annually in payment for the bond. Bond issuers typically make coupon payments on a semi-annual basis, so the percentage of par value for each coupon payment would typically be half of the nominal yield. A bond's par value divided by its market value is the equation to calculate current yield. Finally, the amount that an investor who purchases and then holds a bond to maturity can expect to receive is the bond's yield to maturity.

Q. #54133 Which federal law states that bond indentures are required for each corporate bond issue valued at over $5 million? A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Trust Indenture Act of 1939 D. Maloney Act of 1975

C. Trust Indenture Act of 1939 The Trust Indenture Act of 1939, requires bond indentures be registered and qualified by the SEC for each corporate bond issue valued over $5 million.

Q. 50814 Jenny Jones purchased a XYZ bond for $800 with a coupon rate of 5%. Upon maturity, how much would you expect Jenny to receive if the bond is a typical corporate bond? A. $1,000 B. $1,050 C. $800 D. $1,025

D. $1,025 Typically corporate bonds pay interest semi-annually. So upon maturity, Jenny would receive the $1,000 par value and the last semi-annual interest payment of $25 , so $1,025 in all.

Q. 52530 When a bond's YTM increases from 3.46% to 4.86%, how many basis points did it increase? A. 1.40 B. 1,400 C. 0 D. 140

D. 140 A basis point equals one hundredth of a percentage point, and it represents the smallest increment of change in a bond's yield. One hundred basis points is 1%; 25 basis points is 0.25%. So when a bond's yield-to-maturity increases from 3.46% to 3.86%, the bond yield is said to have increased by 140 basis points.

Q. #56269 Which of the following is NOT true? A. For a premium bond, the nominal yield is greater than the current yield. B. For a discount bond, the current yield is less than the YTM. C. For a premium bond, the current yield is greater than the YTM. D. For a discount bond, the nominal yield is greater than YTM.

D. For a discount bond, the nominal yield is greater than YTM. For bonds that are purchased at a premium and held to maturity, the order of the yields from highest to lowest is nominal yield, current yield, YTM and YTC.. For bonds that are purchased at a discount, the opposite order is true (YTC > YTM > current yield > nominal yield).

Q. 50727 Harold invested in an XYZ Corporation bond, purchasing it at its par value in 2011. The bond will mature in 2016 at par. His nominal yield is 7% and he just received his first semi-annual payment of $35. Which of the following statements are true? I. The coupon rate for the bond is 7% II. The nominal yield will never change during the lifetime of the bond III. Harold will receive $1070 on the maturity date IV. Harold will receive $1,000 on the maturity date A. I and III B. II and IV C. II and III D. I and II

D. I and II Coupon rate is another term for nominal yield. Therefore, the coupon rate for this bond is the same as the nominal yield, which is 7%. Additionally, the nominal rate (or coupon rate) never changes; it is a fixed rate throughout the lifetime of the bond. Harold will receive $1,035 ($1,000 + $35 semi-annual payment) on the maturity date.

Q. 46496 A bond issued with a 6% coupon has just been quoted at 5.92. Which of the following is true of the bond? A. The bond is trading at par. B. The bond is trading at a discount. C. There is currently no market for the bond. D. The bond is trading at a premium.

D. The bond is trading at a premium. A yield quote of 5.92 means the yield to maturity is 592 basis points, or 5.92%. When the YTM is less than the coupon, the bond is trading at a premium.

Q. 56277 You just purchased a bond with a coupon rate of 6.3% for $1,050. Given this information which of the following is true? A. The bond's YTM must be more than 6.3%. B. Nothing can be inferred about the bond's YTM. C. The bond's current yield is 6.6%. D. The bond's YTM is less than 6%.

D. The bond's YTM is less than 6%. The current yield of this bond is 6%. This is calculated by taking the annual interest of $63 and dividing it by $1,050 which is .06 or 6%. This bond is purchased at a premium to par because it was purchased at more than $1,000. For bonds purchased at a premium, the YTM is less than the current yield, so the bond's YTM must be less than 6%.

Q. 57551 If a bond is selling at a premium, which of the following will most likely be true? A. The coupon rate will be less than the current yield. B. The YTC will be greater than the YTM. C. The YTC will be greater than the coupon rate. D. The current yield will be greater than the YTM.

D. The current yield will be greater than the YTM. Typically, if a callable bond is selling at a premium, the nominal yield > current yield > YTM > YTC, thus the current yield will be greater than the YTM.