Chapter 10 Sample Questions

A collateral trust bond is _______. A) secured by other securities held by the firm B) secured by equipment owned by the firm C) secured by property owned by the firm D) unsecured

A)

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A) Eurobonds B) Yankee bonds C) Samurai bonds D) foreign bonds

A)

The ___________ is the document that defines the contract between the bond issuer and the bondholder. A) indenture B) covenant agreement C) trustee agreement D) collateral statement

A)

The primary difference between Treasury notes and bonds is ________. A) maturity at issue B) default risk C) coupon rate D) tax status

A)

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________. A) $581.97 B) $1,170.33 C) $2,327.87 D) $3,000

B) Sol: Accrued interest = 100,000(0.06/2)(71/182) = 1170.33

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) A) $13.21 B) $12.57 C) $15.44 D) $16.32

B) Sol: Accrued interest= (75/2)X(61/182) = 12.57

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A)$999.55 B)$1,002.01 C)$1,007.45 D)$1,012.13

B) Sol: Invoice price = 985 + 69(90/365) = 1002.01

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A) Asset-backed bonds B) TIPS C) Catastrophe D) Pay-in-kind

C)

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________. A) high grade B) intermediate grade C) investment grade D) junk bonds

D)

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A) $97.22 B) $104.49 C) $364.08 D) $732.14

A) Sol: FV= 1000, N= 40, I/Y = 6, compute PV

1. You can be sure that a bond will sell at a premium to par when _________. A) its coupon rate is greater than its yield to maturity B) its coupon rate is less than its yield to maturity C) its coupon rate is equal to its yield to maturity D) its coupon rate is less than its conversion value

A)

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. A) callable B) coupon C) puttable D) Treasury

A)

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A) lower than B) slightly higher than C) identical to D) twice as high as

A)

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A) $458.11 B) $641.11 C) $789.11 D) $1,100.11

A) Sol: FV=1000, N= 16, I/Y=5, compute PV

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A) 6% B) 6.58% C) 7.2% D) 8%

A) Sol: PV= -1055.84, N= 10, PMT=60, FV= 1100, compute I/Y

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A) 4.3% B) 4.5% C) 5.2% D) 5.5%

A) a bond sells at premium when coupon rate > YTM

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. A) $1,000 B) $1,062.81 C) $1,081.82 D) $1,100.03

B)

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes. A) longer; higher B) longer; lower C) shorter; higher D) shorter; lower

B)

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. A) nominal yield B) current yield C) yield to maturity D) yield to call

B)

Which one of the following statements is correct? A) invoice price = flat price - accrued interest B) invoice price = flat price + accrued interest C) flat price = invoice price + accrued interest D) invoice price = settlement price - accrued interest

B)

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year? A) .72% B) 1.85% C) 2.58% D) 3.42%

B) Sol: Calculator entries to find the YTM are N = 10, PV = −750, PMT = 80, FV = 1,000, CPT = I/Y →12.52 The current yield = 80/750 = 10.67% Then we use the relationship YTM = Current yield + Capital gain yield 12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%

1. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A) 4.8% B) 4.85% C) 9.6% D) 9.7%

B) Sol: current yield = 48/989.40 =0.0485 or 4.85%

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A) Both bonds are examples of Eurobonds. B) The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond. C) The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond. D) Neither bond is a Eurobond.

C)

A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. A) callable B) coupon C) puttable D) Treasury

C)

A mortgage bond is _______. A) secured by other securities held by the firm B) secured by equipment owned by the firm C) secured by property owned by the firm D) unsecured

C)

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A) asset-backed bonds B) convertible bonds C) inverse floaters D) index bonds

C)

Floating-rate bonds have a __________ that is adjusted with current market interest rates. A) maturity date B) coupon payment date C) coupon rate D) dividend yield

C)

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A) capital gain; capital loss B) capital gain; capital gain C) capital loss; capital gain D) capital loss; capital loss

C)

Inflation-indexed Treasury securities are commonly called ____. A) PIKs B) CARs C) TIPS D) STRIPS

C)

Sinking funds are commonly viewed as protecting the _______ of the bond. A) issuer B) underwriter C) holder D) dealer

C)

Which type of risk is most significant for bonds? A) maturity risk B) default risk C) interest rate risk D) reinvestment rate risk

C)

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A) marketability B) risk C) taxation D) call protection

C)

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A) $1,140 B) $1,170 C) $1,180 D) $1,200

C) Sol: Invoice price = 1.17(1000) + 30(2/6) =1180

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________. A) 6% B) 7.23% C) 8.12% D) 9.45%

C) Sol: PV = 1000-84.52 = 915.48 (-915.48), N=5, PMT = 60, FV= 1000, compute I/Y

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A)both bonds will increase in value but bond A will increase more than bond B B)both bonds will increase in value but bond B will increase more than bond A C)both bonds will decrease in value but bond A will decrease more than bond B D)both bonds will decrease in value but bond B will decrease more than bond A

D)

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A) callable feature B) convertible feature C) subordination clause D) sinking fund

D)

You would typically find all but which one of the following in a bond contract? A) a dividend restriction clause B) a sinking fund clause C) a requirement to subordinate any new debt issued D) a price-earnings ratio

D)

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A) 7.24% B) 8.82% C) 9.12% D) 9.62%

D) Sol: PV= -785, N= 5, PMT= 40, FV= 1000, compute I/Y