Finance Ch.6

A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in 3 years and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond?

$1,008.18

Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 13.5 years. What is the current price of these bonds if the yield to maturity is 6.82 percent?

$1,015.72

What is the price of a $1,000 face value bond if the quoted price is 102.1?

$1,021.00

Which one of the following terms denotes for certain that a bond is unsecured?

debenture

Which one of the following bonds is most apt to have the smallest liquidity premium?

treasury bill

A 6 percent bond has a yield to maturity of 6.5 percent. The bond matures in 7 years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment?

$30.00

A bond has a par value of $1,000, a current yield of 7.606 percent, and semi-annual interest payments. The bond quote is 98.6. What is the amount of each coupon payment?

$37.50

AB Builders, Inc. has 12-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate?

3.75 percent

Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest annually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield?

5.43 percent

Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity?

5.77 percent

A 12-year, semiannual coupon bond is priced at $1,102.60. The bond has a $1,000 face value and a yield to maturity of 5.33 percent. What is the coupon rate?

6.50 percent

The 7 percent annual coupon bonds of TPO, Inc. are selling for $1,021. The bonds have a face value of $1,000 and mature in 6.5 years. What is the yield to maturity?

6.59 percent

A bond has a $1,000 face value, a market price of $1,036, and pays interest payments of $70 every year. What is the coupon rate?

7%

The 8 percent, $1,000 face value bonds of Glenmore Foods are currently selling at $1,027. These bonds have 16 years left until maturity. What is the current yield?

7.79%

Which one of the following bonds is the least sensitive to changes in market interest rates? A. Zero-coupon, 10 year B. 6 percent annual coupon, 10 year C. Zero-coupon, 4 year D. 8 percent annual coupon, 4 year E. 6 percent annual coupon, 4 year

8 percent annual coupon, 4 year

The $1,000 face value bonds of Jasper International have a 7.5 percent coupon and pay interest annually. Currently, the bonds are quoted at 98.27 and mature in 3.5 years. What is the yield to maturity?

8.09 percent

A 6-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate?

9.00 percent

Which one of the following statements is true?

A discount bond has a coupon rate that is less than the bond's yield to maturity.

Which one of the following is the price that an investor pays to purchase an outstanding bond?

A. Dirty price

A real rate of return is defined as a rate that has been adjusted for which one of the following?

A. Inflation

The price at which an investor can purchase a bond from a dealer is called the _____ price.

A. asked

The written agreement that contains the specific details related to a bond issue is called the bond:

A. indenture.

Which one of the following statements is correct?

An indenture is a contract between a bond's issuer and its holders.

Which one of the following refers to the relationship between nominal returns, real returns, and inflation?

B. Fisher effect

Which of the following characteristics are most commonly associated with corporate bonds issued in the U.S.? I. registered form II. bearer form III. quarterly coupon payments IV. semiannual coupon payments

B. I and IV only

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.

B. semi-annual

The lowest rating a bond can receive from Moody's and still be classified as an investment-quality bond

Baa

Which one of the following statements is correct? Bond markets have less daily trading volume than equity markets. B. There are less bond issues than there are equity issues. C. Municipal bond prices are highly transparent. D. Bond markets are dealer based. E. Most bond trades occur on the NYSE.

Bond markets are dealer based.

Which of the following ratings indicate that a bond is low-quality? I. Baa II. BB III. B IV. Ba

C. II, III, and IV only

A 5.5 percent $1,000 bond matures in 7 years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond?

C. $959.09

Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses?

C. CAT

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

C. Interest rate risk premium

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?

C. Liquidity premium

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

C. Zero coupon

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

C. bid-ask spread.

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

C. debenture.

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.

C. maturity

A registered form bond is defined as a bond that:

C. pays coupon payments directly to the owner of record.

Which one of the following is a unique characteristic of an income bond?

Coupon payments are dependent upon the issuer's income

The current yield on a bond is equal to the annual interest divided by which one of the following?

Current market price

When you refer to a bond's coupon, you are referring to which one of the following? A. Difference between the purchase price and the face value B. Annual interest divided by the current bond price C. Difference between the bid and ask price D. Annual interest payment E. Principal amount of the bond

D. Annual interest payment

This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed that the bond matured today. He presented the bond to the bank teller and received both the principal and interest payment. The bond that Jeff found must have been which one of the following?

D. Bearer form bond

Manning, Inc. originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. Which one of the following terms applies to this situation?

D. Fallen angel

Which of the following can generally be found in a bond's indenture agreement? I. terms of repayment II. names of registered shareholders III. protective covenants IV. total amount of the bond issue

D. I, III, and IV only

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

D. Sinking fund

The call premium is the amount by which the:

D. call price exceeds the par value.

A bond has a make-whole call provision. Given this, you know that the:

D. call price is inversely related to the market rate of interest.

A bond for which no specific property has been pledged as security is classified as a:

D. debenture.

Dexter, Inc. has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision.

D. deferred call

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:

D. downward-sloping.

Which of the following combinations is assured to decrease the interest rate sensitivity of a bond?

Decrease in the time to maturity and an increase in the coupon rate

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Default risk premium

A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $27.50 each and matures in 6 years. What is the coupon rate?

E. 5.50 percent

Which one of the following is the quoted price of a bond?

E. Clean price

The term structure of interest rates represents the relationship between which of the following?

E. Nominal rates on default-free, pure discount bonds and time to maturity

The price at which a dealer will purchase a bond is called the _____ price.

E. bid

The inflation premium:

E. compensates investors for expected price increases.

An unexpected decrease in market interest rates will cause a:

E. coupon bond's yield-to-maturity to decrease.

A call provision grants the bond issuer the:

E. option of repurchasing the bonds prior to maturity at a pre-specified price.

What is the principal amount of a bond that is repaid at the end of the loan term called?

Face value

In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?

Fallen angel

Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA?

Fallen angel

Which one of the following individuals is most apt to purchase a municipal bond?

Highly-compensated business owner

The term structure of interest rates is affected by which of the following? I. interest rate risk premium II. real rate of interest III. default risk premium IV. inflation premium

I, II, and IV only

Which one of the following statements is correct regarding mortgage backed securities (MBSs)?

Investors in MBSs are subject to real estate deflation risk.

What is the primary purpose of bond covenants?

Lender protection

Which one of the following might be included in a bond's list of negative covenants?

Limiting cash dividends to $1 per share or less

On which date is the principal amount of a bond repaid?

Maturity Date

Zero-coupon bonds:

create annual taxable income to individual bondholders.

Which one of the following statements concerning sinking funds is correct?

Sinking funds may be used to purchase bonds in the open market.

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

TIPS

Which one of the following premiums is paid on a corporate bond due to its tax status?

Taxability premium

Which one of the following terms refers to a bond's rate of return that is required by the market place?

Yield to maturity

A "floater" bond frequently has a:

a put provision.

A bond dealer sells at the _____ price and buys at the _____ price.

asked; bid

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:

call protected

The value of a bond is dependent upon the:

coupon rate and the yield to maturity.

The annual interest divided by the face value of a bond is referred to as the:

coupon rate.

Municipal bonds are:

generally callable.

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

humped

The yield to maturity on a discount bond is:

is greater than both the current yield and the coupon rate.

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

is selling at a premium.

A protective covenant:

limits the actions of the borrower.

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10- year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?

liquidity premium

A callable bond:

may be structured to pay bondholders the current value of the bond on the date of call.

Which one of the following is the rate of return an investor earns on a bond before adjusting for inflation?

nominal rate

The "R" in the Fisher effect formula represents the:

nominal return.

The primary purpose of protective covenants is to help:

protect bondholders from issuer actions.

An upward-sloping term structure of interest rates indicates:

the nominal rate is increasing even though the real rate is constant as the time to maturity increases.

A note is:

unsecured debt that is generally payable within the next ten years.