Chapter 7 practice

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; zero coupon

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

callable

A call-protected bond is a bond that:

cannot be called at this point in time.

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk.

Premium Bond

coupon rate > current yield > YTM

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

coupon rate decreases and the time to maturity increases.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6%. If the market rate of interest increases, then the:

market price of the bond will decrease

Interest rates that include an inflation premium are referred to as:

nominal rates

Municipal bonds:

pay interest that is federally tax-free

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

taxes and default risk

A Treasury yield curve plots Treasury interest rates relative to:

time to maturity

Which one of the following relationships applies to a par value bond?

Coupon rate = Current yield = Yield to maturity

Which one of the following bonds is the least sensitive to interest rate risk?

3-year; 6 percent coupon - lowest year with highest percent

Al is retired and his sole source of income is his bond portfolio. Although he has sufficient principal to live on, he only wants to spend the interest income and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns?

5-year TIPS *Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.

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 $1,022. Interest is paid semiannually. What is the yield to maturity?

5.18% -N=17 -PV=-1022 -FV=1000 -PMT=((1000*5.5%)/2) 27.50 -I/YR=?*2

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 $987. What is the yield to maturity?

7.22% -N=16 -PV=-987 -FV=1000 -PMT=((1000*7%)/2) -I/YR=?*2

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a current price of $1,108.60. At this price, the bonds yield 7.5 percent. What is the coupon rate?

Bond price = $1,108.60 = C*PVA+(FV/(1+r)^t C = $87.79 Coupon rate = $87.79/$1,000 Coupon rate = .0878, or 8.78%

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?

Debenture

Which one of the following relationships is stated correctly?

Decreasing the time to maturity increases the price of a discount bond, all else constant.

Which one of the following is the price at which a dealer will sell a bond?

asked price

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?

Maintained a fixed real rate of return

The Fisher effect is defined as the relationship between which of the following variables?

Real rates, inflation rates, and nominal rates

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent. *market rate < current yield

Which one of the following statements is correct?

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

Applies to a bond that currently has a market price that exceeds par value

YTM < Coupon rate

The taxability risk premium compensates bondholders for which one of the following?

a bond's unfavorable tax status

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount, less than

Bonds issued by the U.S. government:

are considered to be free of default risk.