Chapter 7 Interest Rates And Bond Valuation
If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive? A. Call Price B. Par Value C. Bid Price D. Ask Price
C. Bid Price
You purchase a bond with an invoice price of $1,319. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are two months to the next semiannual coupon date. What is the clean price of this bond? A. $1,298.17 B. $1,352.17 C. $1,314.14 D. $1,408.13
A. $1,298.17
You will receive $5,000 a year in real terms for the next 5 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 10.725 percent and the inflation rate is 3 percent. What are your winnings worth today in real dollars? A. $20,229 B. $17,367 C. $17,401 D. $21,500
A. $20,229
You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? A. $106.67 B. $108.18 C. $182.80 D. $221.50
C. $182.80
Allison just received her semiannual payment of $35 on a bond she owns. Which term refers to this payment? A. Coupon B. Face value C. Discount D. Call premium E. Yield
A. Coupon
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. A. A premium; less than B. A premium; equal to C. A discount; less than D. A discount; higher than
C. A discount; less than
Luxury Properties offers bond with a coupon rate of 9.5 percent paid semiannually. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000? A. $893.99 B. $896.67 C. $941.20 D. $946.18
A. $893.99
A call-protected bond is a bond that: A. Is guaranteed to be called B. Can never be called C. Is currently being called D. Cannot be called at this point in time
D. Cannot be called at this point in time
A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $5,000? A. $0.30 B. $1.50 C. $3.00 D. $15.00
B. $1.50
A newly issued 20-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? A. $17.72 B. $18.70 C. $18.47 D. $17.63
B. $18.70
World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? A. 12.26 years B. 12.53 years C. 18.49 years D. 24.37 years
B. 12.53 years
A Treasury bond is quoted at a price of 105.4620. What is the market price of this bond if the face value is $5,000? A. $5,005.46 B. $5,105.46 C. $5273.10 D. $5,264.44
C. $5273.10
Bonds issued by the U.S. government: A. Are considered to be free of interest rate risk B. Generally have higher coupons then comparable bonds issued by a corporation C. Are considered to be free of default risk D. Are called "munis"
C. Are considered to be free of default risk
A bond that is payable to whomever has physical possession of the bond is said to be in: A. New-issue Condition B. Registered Form C. Bearer Form D. Debenture Status
C. Bearer Form
The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent? A. The bond price will increase by 1.14 percent B. The bond price will increase by 2.29 percent C. The bond price will increase by 1.74 percent D. The bond price will decrease by 1.92 percent
D. The bond price will decrease by 1.92 percent
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. The real rate must be less than the nominal rate given a positive rate of inflation
D. The real rate must be less than the nominal rate given a positive rate of inflation
Real rates are defined as nominal rates that have been adjusted for which of the following? A. Inflation B. Default Risk C. Accrued Interest D. Interest Rate Risk
A. Inflation
U.S. Treasury bonds: A. Are highly illiquid B. Are quoted as a percentage of par C. Are quoted at a dirty price D, Pay interest that is federally tax exempt
B. Are quoted as a percentage of par
A bond is quoted at a price of $1,011. This price is referred to as the: A. Call Price B. Face Value C. Clean Price D. Dirty Price
C. Clean Price
A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today? A. $987.00 B. $994.50 C. $1,002.00 D. $1,011.25
A. $987.00
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: A. .05 / (1-t*) = .07 B. .05 - (1-t*) = .07 C. .07 + (1-t*) = .05 D. .05 x (1-t*) = .07
A. .05 / (1-t*) = .07
A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent? A. 1.79 percent decrease B. 1 percent decrease C. 1.6 percent decrease D. 1.9 percent increase
A. 1.79 percent decrease
You own a bond that pays $64 in interest annually. The face value is $1,000 and the current market price is $1,062.50. The bond matures in 11 years. What is the yield to maturity? A. 5.62 percent B. 6.22 percent C. 6.46 percent D.. 6.71 percent
A. 5.62 percent
Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $742. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature? A. 5.73 years B. 4.19 years C. 7.41 years D. 6.16 years
A. 5.73 years
The yield to maturity on a bond is currently 9.84 percent. The real rate of return is 3.29 percent. What is the rate of inflation? A. 6.34 percent B. 5.64 percent C. 6.24 percent D. 6.53 percent
A. 6.34 percent
Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate? A. 6.40 percent B. 6.33 percent C. 6.60 percent D. 6.67 percent
A. 6.40 percent
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected? A. Default Risk B. Taxability C. Liquidity D. Inflation
A. Default Risk
You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 9.897 percent and the inflation rate is 2.9 percent. What is the present value of these payments in real dollars? A. $21,720 B. $21,072 C. $22,511 D. $25,112
B. $21,072
The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? A. $41.50 B. $42.25 C. $43.15 D. $85.00
B. $42.25
The 7 percent, semiannual coupon bonds offered by House Renovators are callable in two years at $1,054. What is the amount of the call premium on a $1,000 par value bond? A. $52 B. $54 C. $72 D. $84
B. $54
Oil Wells offers 6.5 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? A. $989.70 B. $975.93 C. $996.48 D. $902.60
B. $975.93
Which one of the following bonds is the least sensitive to interest rate risk? A. 3-year; 4 percent coupon B. 3-year; 6 percent coupon C. 5-year; 6 percent coupon D. 7-year; 6 percent coupon
B. 3-year; 4 percent coupon
A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield? A. 4.24 percent B. 4.85 percent C. 5.36 percent D. 5.62 percent
B. 4.85 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
B. 5 year TIPS
Bare Trees United issued 15-year bonds 2 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 98.6 percent of par value, what is the YTM? A. 8.98 percent B. 8.68 percent C. 9.13 percent D. 9.27 percent
B. 8.68 percent
Which one of the following is the price at which a dealer will sell a bond? A. Call Price B> Ask Price C. Bid Price D. Bid-Ask Spread
B. Ask Price
Which one of these statements is correct? A. Most long term bond issues are referred to as unfunded debt B. Bonds provide tax benefits to issuers C. The risk of a firm financially falling decreases when a firm issues bonds D. All bonds are treated equally in a bankruptcy proceeding
B. Bonds provide tax benefits to issuers
A bond can be paid off early at the issuer's discretion is referred to as being which type of bond? A. Par Value B. Callable C. Senior D. Unsecured
B. Callable
The interest rate risk premium is the: A. Additional compensation paid to investors to offset rising prices B. Compensation investors demand for accepting interest rate risk C. Difference between the yield to maturity and the current yield D. Difference between the market interest rate and the coupon rate
B. Compensation investors demand for accepting the interest rate risk
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
B. Convert the bond into equity shares
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. Ask Price D. Quoted price
B. Dirty price
A sinking fund is managed by a trustee for which one of the following purposes? A. Paying bond interest payments B. Early bond redemption C. Converting bonds into equity securities D. Paying preferred dividends
B. Early bond redemption
Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? A. Coupon B. Face Value C. Discount D. Call Premium E. Yield
B. Face Value
Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued: A. At Par B. In Registered Form C. In Street Form D. At debentures
B. In Registered Form
As a bond's time to maturity increases; the bond's sensitivity to interest rate risk: A. Increases at an increasing rate B. Increases at a decreasing rate C. Increases at a constant rate D. Decreases at an increasing rate
B. Increases at a decreasing rate
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
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
B. Taxes and default risks
Which one of these is a negative covenant that might be found in a bond indenture? A. The company shall maintain a current ratio of 1.1 or higher B. The company cannot lease any major assets without bondholder approval C. The company must maintain the loan collateral in good working order D. The company shall provide audited financial statements in a timely manner
B. The company cannot lease any major assets without bondholder approval
A corporate bond with a 6 percent coupon was issued last year. Which one of these would apply to this bond today if the current yield to maturity is 7 percent? A. The bond is currently selling at a premium B. The current yield exceeds the coupon rate C. The bond is selling at par value D. The current yield exceeds the yield to maturity
B. The current yield exceeds the coupon rate
You want to have $2 million in real dollars in an account when you retire in 43 years. The nominal return on your investment is 9.939 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal? A. $10,403 B. $10,878 C. $9,210 D. $8,887
C. $9,210
An investment offers a total return of 12.4 percent over the coming year. You believe the total real return will be only 9.7 percent. What do you believe the exact inflation rate will be for the next year? A. 2.52 percent B. 2.67 percent C. 2.46 percent D. 2.70 percent
C. 2.46 percent
The zero coupon bonds of JK Industries have a market price of $211.16, a face value of $1,000, and a yield to maturity of 7.39 percent. How many years is it until these bonds mature? A. 23.92 years B. 22.28 years C. 21.43 years D. 44.01 years
C. 21.43 years
A 3.25 percent Treasury bond is quoted at a price of 101.16. The bond pays interest semiannually. What is the current yield? A. 3.06 percent B. 3.17 percent C. 3.21 percent D, 3.33 percent
C. 3.21 percent
A bond that pays interest annually yielded 6.48 percent last year. The inflation rate for the same period was 2.5 percent. What was the actual real rate of return? A. 4.19 percent B. 4.25 percent C. 3.88 percent D. 3.41 percent
C. 3.88 percent
Suppose the real rate is 2.45 percent and the inflation rate is 1.8 percent. What rate would you expect to see on a Treasury bill? A. 3.35 percent B. 3.30 percent C. 4.29 percent D. 3.56 percent
C. 4.29 percent
The $1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current price quote of 101.23. What is the current yield? A. 6.60 percent B. 6.37 percent C. 6.42 percent D. 6.49 percent
C. 6.42 percent
Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have a 7 percent coupon rate. What is the current yield on these bonds? A. 7.42 percent B. 7.67 percent C. 8.07 percent D. 9.03 percent
C. 8.07 percent
A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the: A. Dirty Price B. Redemption Value C. Call Premium D. Original-issue Discount
C. Call Premium
Which one of the following relationships applies to a par value bond? A. Yield to maturity > current yield > coupon rate B. Coupon rate > yield to maturity > current yield C. Coupon rate = current yield = yield to maturity D. Coupon rate < yield to maturity < current yield
C. Coupon rate = current yield = yield to maturity
The price sensitivity of a bond increases in response to a change in the market rate of interest as the: A. Coupon rate increases B. Time to maturity decreases C. Coupon rate decreases and the time to maturity increases D. Time to maturity and coupon rate both decrease
C. Coupon rate decreases and the time to maturity increases
A bond's coupon rate is equal to the annual interest divided by which one of the following? A. Call Price B. Current Price C. Face Value D. Clean Price E. Dirty Price
C. Face Value
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? A. Default Risk B. Taxability C. Liquidity D. Inflation
C. Liquidity
Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued? A. Current yield B. Written record of all the current bond holders C. List of collateral used as bond security D. Current market price
C. List of collateral used as bond security
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? A. Short-term; low coupon B. Short-term; high coupon C. Long-term; zero coupon D. Long-term; low coupon
C. Long-term; zero coupon
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 changes 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
C. Maintained a fixed real rate of return
The current yield is defined as the annual interest on a bond divided by which one of the following? A. Coupon Rate B. Face Value C. Market Price D. Call Price
C. Market Price
The bond principal is repaid on which of these dates? A. Coupon Date B. Yield Date? C. Maturity Date D. Dirty Date E. Clean Date
C. Maturity Date
Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? A. Semiannual coupon B. Discount bond C. Note D. Trust deed
C. Note
Municipal bonds: A. Are totally risk free B. Generally have higher coupon rates than corporate bonds C. Pay interest that is federally tax free D. Are rarely callable
C. Pay interest that is federally tax free
Which one of the following statements concerning bond ratings is correct? A. Investment grade bonds are rated BB or higher by Standard AMP; Poor's B. Bond ratings assess both interest rate risk and default risk C. Split-rater bonds are called crossover bonds D. The highest rating issued by Moody's is AAA.
C. Split-rated bonds are called crossover bonds
The pure time value of money is known as the: A. Liquidity Effect B. Fisher Effect C. Term structure of interest rates D. Inflation Factor
C. Term structure of interest 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? A. The bonds will become discount bonds if the market rate of interest declines B. The bonds will pay 10 interest payments of $60 each C. The bonds will sell at a premium if the market rate is 5.5 percent D. The bonds will initially sell for $1,030 each
C. The bonds will sell at premium if the market rate is 5.5 percent
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 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
A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today? A. The face value of the bond today is greater than it was when the bond was issued B. The bond is worth less today then when it was issued C. The yield-to-maturity is less than the coupon rate D. The coupon rate is greater than the current yield
C. The yield-to-maturity is less than the coupon rate
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
C. Two month's interest
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
C. Warrant
Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 9.2 percent, what is the current bond price? A. $985.44 B. $991.90 C. $1,042.16 D. $1,089.03
D. $1,089.03
A Treasury bond is quoted as 99.6325 asked and 99.1250 bid. What is the bid-ask spread in dollars on a $5,000 face value bond? A. $.508 B. $.675 C. $17,500 D. $25,375
D. $25,375
Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 3.5 years. How much will you receive for your bond if the market yield to maturity is currently 6.19 percent? Ignore any accrued interest. A. $896.60 B. $798.09 C. $741.08 D. $807.86
D. $807.86
Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent? A. $899.80 B. $899.85 C. $903.42 D. $967.24
D. $967.24
A bond has a coupon rate of 8 percent, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what will be the percentage change in the bond price? A. -10.16 percent B. -9.87 percent C. -9.56 percent D. -10.02 percent
D. -10.02 percent
The outstanding bonds of Winter Tires Inc. provide a real rate of return of 5.6 percent. If the current rate of inflation is 4.68 percent, what is the actual nominal rate of return on these bonds? A. 8.58 percent B. 9.33 percent C. 9.71 percent D. 10.54 percent
D. 10.54 percent
Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate? A. 8.00 percent B. 8.50 percent C. 9.00 percent D. 12.00 percent
D. 12.00 percent
The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a 9 percent annual coupon bond for $1,000. The bond has 12 years to maturity. Three years from now, the yield-to-maturity has declined to 7 percent and you decide to sell. What is your holding period yield? A. 8.84 percent B. 9.49 percent C. 10.96 percent D. 12.83 percent
D. 12.83 percent
Global Exporters wants to raise $29.6 million to expand its business. To accomplish this, it plans to sell 20-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 7.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? A. 110,411 B. 139,800 C. 154,907 D. 135,436
D. 135,436
A $1,000 face value bond has a coupon rate of 7 percent, a market price of $911.02, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.8 percent, what is the yield-to-maturity when expressed in real terms? A. 5.50 percent B. 4.68 percent C. 4.92 percent D. 5.38 percent
D. 5.38 percent
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 $972. Interest is paid semiannually. What is the yield to maturity? A. 6.36 percent B. 6.42 percent C. 5.61 percent D. 5.92 percent
D. 5.92 percent
A Treasury bond is quoted at a price of 101.6533 with a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond? A. 7.20 percent B. 6.48 percent C. 6.41 percent D. 6.38 percent
D. 6.38 percent
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
D. 6.48 percent
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-coupni, put bond B. 5-year TIPS C. 10 year AAA coupon bond D. 7-year income bond
D. 7-year income bond
Sunset Sales has 7.2 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield? A. 7.34 percent B. 7.39 percent C. 7.93 percent D. 7.52 percent
D. 7.52 percent
A bond has a yield to maturity of 11.68 percent. If the inflation rate is 3.2 percent, what is the real rate of return on the bond? A. 8.86 percent B. 15.90 percent C. 15.04 percent D. 8.22 percent
D. 8.22 percent
Bonner Metals wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8.5 percent bonds on the market that sell for $959, make semiannual payments, and mature in 16 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par? A. 8.75 percent B. 9.23 percent C. 8.41 percent D. 8.99 percent
D. 8.99 percent
The taxability risk premium compensates bondholders for which one of the following? A. Yield decreases in reprise to market changes B. Lack of coupon payments C. Possibility of default D. A bonds unfavorable tax status
D. A bonds unfavorable tax status
A note is generally defined as: A. A secured bong with an initial maturity of 10 years or more B. A secured bond that initially matures in less than 10 years C. Any bond secured by a blanket mortgage D. An unsecured bond with an initial maturity of 10 years or less
D. An unsecured bond with an initial maturity of 10 years or less
Protective covenants: A. Apply to short-term debt issues but not to long-term debt issues. B. Only apply to privately issued bonds. C. Are a feature found only in government issued bond indentures D. Are primarily designed to protect bondholders
D. Are primarily designed to protect bondholders
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
D. Comparable real rate
Which of the following applies to a premium bond? A. Yield to maturity > Current yield > coupon rate B. Coupon rate = current yield = yield to maturity C. Coupon rate > yield to maturity > current yield D. Coupon rate > current yield > yield to maturity
D. Coupon rate > current yield > yield to maturity
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
D. Coupon rates
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? A. Note B. Discounted C. Zero-Coupon D. Debenture
D. Debenture
Which one of the following relationships is stated correctly? A. The coupon rate exceeds the current yield when a bond sells at a discount B. The call price must equal the par value C. An increase in market rates increases the market price of a bond D. Decreasing the time to maturity increases the price of a discount bond, all else constant
D. Decreasing the time to maturity increases the price of a discount bond, all else held constant
Rosita paid a total of $1,189 to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the: A. Quoted Price B. Spread Price C. Clean Price D. Dirty Price
D. Dirty Price
Treasury bonds are: A. Issued by any government agency in the U.S. B. Issued only on the first day of rich fiscal year by the U.S. Department of Treasury C. Bonds that offer the best tax benefits of any bonds currently available D. Generally issued as semiannual coupon bonds
D. Generally issued as semiannual coupon bonds
A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: A. 3.5 percent B. Greater than 3.5 percent but less than 7 percent C. 7 percent D. Greater than 7 percent
D. Greater than 7 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
D. Has more interest rate risk than a comparable coupon bond
Callable bonds generally: A. Grant the bondholder the option to call the bond anytime after the deferment period B. Are callable at par as soon as the call-protection period ends C. Are called when market interest rates increase D. Have a sinking fund provision
D. Have a sinking fund provision
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
D. Inflation
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. Insurance companies fund excessive claims
D. Insurance companies fund excessive claims
A "fallen angel" is a bond that has moved from: A. Being publicly traded to being privately traded B. Being a long-term obligation to being a short-term obligation C. Being a premium bond to being a discount bond D. Investment grade to speculative grade
D. Investment grade to speculative grade
Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond? A. The bond rating is B B. Market value is less than face value C. The coupon rate is 3 percent D. It has a "make whole" call price
D. It has a "make whole" call price
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: A. Coupon rate will also increase B. Current yield will decrease C. Yield to maturity will be less than the coupon rate D. Market price of the bond will decrease
D. Market price of the bond will decrease
A Treasury yield curve plots Treasury interest rates relative to which one of the following? A. Market rates B. Comparable corporate bond rates C. The risk-free rate D. Maturity
D. Maturity
Interest rates that include an inflation premium are referred to as: A. Annual percentage rates B. Stripped rates C. Effective annual rates D. Nominal Rates
D. Nominal Rates
A deferred call provision is which one of the following? A. Requirement that a bond issuer pay the current market price, plus accused interest, should the firm decide to call the bond B. Ability pf a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt C. Prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity D. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
D. Prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the: A. Trustee Relationships B. Bylaws C. Legal Bounds D. Protective Covenants
D. Protective Covenants
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
D. Real Rate
The Fisher effect is defined as the relationship between which of the following variables? A. Default risk premium, inflation risk premium, and real rates B. Nominal rates, real rates, and interest rate risk premium C. Interest rate risk premium, real rates, and default risk premium D. Real rates, inflation rates, and nominal rates
D. Real rates, inflation rtes, and nominal rates
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. Equilibrium B. Premium C. Discount D. Spread
D. Spread
The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which one of the following? A. Coupon Rate B. Face Rate C. Call Rate D. Yield to Maturity
D. Yield to Maturity
A bond has a market price that exceeds its face value. Which one of these features currently applies to this bond? A. Discount bond B. Yield to maturity equal to the current yield C. Currently selling at par D. Yield to maturity less than the coupon rate
D. Yield to maturity less than the coupon rate
You own a bond that has a 6 percent annual coupon and matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? A. The current yield to maturity is greater than 6 percent B. The current yield is 6 percent C. The next interest payment will be $30 D. You will realize a capital gain on the bond if you sell it today
D. You will realize a capital gain on the bond if you sell it today
A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? A. Debenture B. Callable C. Floating-Rate D. Zero Coupon
D. Zero Coupon
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
D. structured note