FIN_3610_CH_7_80

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows? A. 8 percent. B. EAR of 8 percent compounded monthly. C. Comparable risk-free rate. D. Comparable real rate. E. Nominal rate-risk-free rate

A. 8 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? A. 6-year coupon bonds B. 5-year TIPS C. 20-year coupon bonds 220 D. 5-year municipal bonds E. 7- year income bonds

B. 5-year TIPS

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today? A. No difference. B. One month's interest. C. Two month's interest. D. Four month's interest. E. Five month's interest.

C. Two month's interest.

The collar of a floating-rate bond refers to the minimum and maximum: A. Call periods. B. Maturity dates. C. Market prices. D. Coupon rates. E. yields to maturity.

D. Coupon rates

Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? A. 6-year, high-coupon, put bond. B. 5-year TIPS. C. 10-year AAA coupon bond. D. 5-year floating rate bond. E. 7- year income bond.

E. 7- year income bond.

Cat bonds are primarily designed to help: A. Municipalities survive economic recessions. B. Corporations respond to overseas competition. C. The federal government cope with huge deficits. D. Corporations recover from involuntary reorganizations. E. Insurance companies fund excessive claims.

E. Insurance companies fund excessive claims.

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

B. Are quoted as a percentage of par.

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? A. Clean price. B. Dirty price. C. Asked price. D. Quoted price. E. Bid price.

B. Dirty price.

Which one of the following statements is false concerning the term structure of interest rates? A. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. B. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. C. The term structure of interest rates and the time to maturity are always directly related. D. The real rate of return has minimal, if any, affect on the slope of the term structure of interest rates. E. The interest rate risk premium increases as the time to maturity increases.

C. The term structure of interest rates and the time to maturity are always directly related.

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish? A. Put provision. B. Positive covenant. C. Warrant. D. Crossover rating. E. Call provision.

C. Warrant.

Sue is considering purchasing a bond that will only return its principal at maturity if the stock market declines. However, if the stock market increases in value during the bond term, at maturity, she will receive both the bond principal and a percentage of the stock market gain. What type of bond is this? A. NoNo bond. B. Put bond. C. Contingent, callable bond. D. Structured note. E. Sukuk.

D. Structured note.

Recently, you discovered a convertible, callable bond with a 5 percent semiannual coupon. If you purchase this bond you will have the right to: A. Force the issuer to repurchase the bond prior to maturity. B. Convert the bond into equity shares. C. Defer all taxable income until the bond matures. D. Convert the bond into a 5 percent perpetuity. E. Have the principal amount adjusted for inflation.

B. Convert the bond into equity shares.

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? A. Real rate risk B. Interest rate risk C. Default risk D. Liquidity risk E. Taxability risk

B. Interest rate risk

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of: A. Interest rate risk and taxes. B. Taxes and default risk. C. Default and interest rate risks. D. Liquidity and inflation rate risks. E. Default, inflation, and interest rate risks.

B. Taxes and default risk.

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? A. Decreased in value due to the change in inflation rates. B. Experienced an increase in its bond rating. C. Maintained a fixed real rate of return. D. Increased in value in response to the change in market rates. E. Increased in value due to a decrease in time to maturity.

C. Maintained a fixed real rate of return.

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? A. 6.87 percent B. 6.92 percent C. 6.08 percent D. 6.48 percent E. 7.20 percent

D. 6.48 percent

A zero coupon bond: A. Is sold at a large premium. B. Pays interest that is tax deductible to the issuer at the time of payment. C. Can only be issued by the U.S. Treasury. D. Has more interest rate risk than a comparable coupon bond. E. Provides no taxable income to the bondholder until the bond matures.

D. Has more interest rate risk than a comparable coupon bond.

The Fisher effect primarily emphasizes the effects of _____ on an investor's rate of return. A. Default. B. market movements. C. Interest rate changes. D. Inflation. E. The time to maturity.

D. Inflation.

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? A. Risk-free rate. B. Realized rate. C. Nominal rate. D. Real rate. E. Current rate.

D. Real rate.

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

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