Interest Rates and Bond Valuation

What is the price of a $1,000 face value bond if the quoted price is 1021? A) $1210 B) $100210 C) $102001 D) $102010 E) $102100

$1,020.1

Which one of the following bonds is the most sensitive to changes in market interest rates? A) 5-year, zero coupon B) 5-year, 5 percent coupon C) 5-year, 8 percent coupon D) 10-year, zero coupon E) 10-year, 5 percent coupon

10-year, zero coupon

Of these choices, a risk-adverse investor who prefers to minimize interest rate risk is most apt to invest in: A) 5-year, 7 percent coupon bonds B) 20-year, 6 percent coupon bonds C) 20-year, zero coupon bonds D) 2-year, 7 percent coupon bonds E) 3-year, zero coupon bonds

2-year, 7 percent coupon bonds

Which one of the following statements is true? A) The current yield on a par value bond will exceed the bond's yield to maturity B) The yield to maturity on a premium bond exceeds the bond's coupon rate C) The current yield on a premium bond is equal to the bond's coupon rate D) A premium bond has a current yield that exceeds the bond's coupon rate E) A discount bond has a coupon rate that is less than the bond's yield to maturity

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

Which statement is true? A) Bonds are generally called at par value B) A current list of all bondholders is maintained whenever a firm issues bearer bonds C) An indenture is a contract between a bond's issuer and its holders D) Collateralized bonds are called debentures E) A bondholder has the right to determine when his or her bond is called

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

A debenture is: A) an unsecured bond B) a bearer form bond C) a bond with a call provision D) a bond with a sinking fund provision E) a bond secured by a blanket mortgage

An unsecured bond

This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following? A) Debenture B) Note C) Registered-form bond D) Bearer-form bond E) Callable bond

Bearer-form bond - NO OWNER ON RECORD

Which statement is correct? A) Bond markets have less daily trading volume than equity markets B) There are fewer bond issues outstanding 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

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be: A) subject to a sinking fund provision B) a debenture C) a "fallen angel" D) call protected E) unrated

Call protected

A bond's annual interest divided by its face value is referred to as the: A) market rate B) call rate C) coupon rate D) current yield E) yield-to-maturity

Coupon rate

The current yield on a bond is equal to the annual interest divided by the: A) issue price B) maturity value C) face amount D) current market price

Current market price

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a: A) note B) bearer form bond C) debenture D) registered form bond E) call protected bond

Debenture

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? A) Interest rate risk premium B) Inflation premium C) Liquidity premium D) Taxability premium E) Default risk premium

Default risk premium

Russell's has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance. This provision is referred to as the ________ provision. A) safeguard B) market C) liquidity D) deferred call E) sinking fund

Deferred call

What is the principal amount of a bond that is repaid at the end of the loan term called? A) Coupon B) Market price C) Accrued price D) Dirty price E) Face value

Face value

Which one of the following terms applies to a junk bond that was originally issued with a bond rating of AA? A) Debenture B) Covenant C) Fallen angel D) Sinking ship E) Trust deed

Fallen angel

The relationship between nominal returns, real returns, and inflation is referred to as the: A) call premium B) Fisher effect C) conversion ratio D) spread E) current yield

Fisher effect

Which one of the following individuals is most apt to purchase a municipal bond? A) Minimum-wage employee B) Retired individual with minimal current income C) Recent college graduate D) Tax-exempt organization E) Highly compensated business owner

Highly compensated business owner

The term structure of interest rates is primarily based on which three of the following? I Interest rate risk premium II Real rate of interest III Default risk premium IV Inflation premium V Liquidity premium A) I, II, and V B) I, III, and V C) II, III, and IV D) I, II, and IV E) II, IV, and V

I, II, and IV

The written agreement that contains the specific details related to a bond issue is called the bond: A) indenture B) debenture C) document D) registration statement E) issue paper

Indenture

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? A) Taxability risk premium B) Default risk premium C) Interest rate risk premium D) Real rate of return E) Bond premium

Interest rate risk premium

A protective covenant: A) protects the borrower from unscrupulous practices by the lender B) guarantees the interest and principal payments will be paid in full on a timely basis C) prevents a bond from being called D) limits the actions of the borrower E) guarantees the market price of a bond will never be less than par value

Limits the actions of the borrower

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value? A) Interest rate risk premium B) Inflation premium C) Liquidity premium D) Taxability premium E) Default risk premium

Liquidity premium

A bond's indenture agreement generally includes all of the following except the: A) terms of repayment B) details of protective covenants C) total amount of the bond issue D) names of registered shareholders E) description of property used as security

Names of registered shareholders

The term structure of interest rates represents the relationship between which of the following? A) Nominal rates on risk-free and risky bonds B) Real rates on risk-free and risky bonds C) Nominal and real rates on default-free, pure discount bonds D) Market and coupon rates on default-free, pure discount bonds E) Nominal rates on default-free, pure discount bonds and time to maturity

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

A registered-form bond is defined as a bond that: A) is a bearer bond B) is held in street name C) pays coupon payments directly to the owner of record D) is listed with the Securities and Exchange Commission (SEC) E) is unsecured

Pays coupon payments directly to the owner of record

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early? A) Registered account B) Bearer account C) Call account D) Sinking fund E) Premium fund

Sinking fund

Which one of the following statements concerning sinking funds is correct? A) Bond issuers must fund a sinking fund at the time the bonds are issued B) Sinking funds must include at least one "balloon payment" C) Sinking funds must be funded annually, starting on the issue date D) Sinking funds may be used to purchase bonds in the open market E) Sinking funds can be used only to call bonds

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? A) OTC B) Death C) CAT D) PETS E) TIPS

TIPS

Which one of the following premiums is paid on a corporate bond due to its tax status? A) Interest rate risk premium B) Inflation premium C) Liquidity premium D) Taxability premium E) Default risk premium

Taxability premium

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. A) The clean price of the bond must equal the bond's dirty price B) The bond must be a zero coupon bond and mature in exactly one year C) The market price must exceed the par value by the value of one year's interest D) The bond must be priced at par E) There is no condition under which this can occur

The bond must be priced at par

On which one of the following dates is the principal amount of a semiannual coupon bond repaid? A) A portion of the principal is repaid on each coupon date B) The entire bond is repaid on the issue date C) Half of the principal is repaid evenly over each coupon period with the remainder paid on the issue date D) The entire bond is repaid on the maturity date E) Half of the principal is repaid evenly over each coupon period with the remainder paid on the maturity date

The entire bond is repaid on the maturity date

Which one of the following bonds is most apt to have the smallest liquidity premium? A) Treasury bill B) Corporate bond issued by a new firm C) Municipal bond issued by the State of New York D) Municipal bond issued by a rural city in Alaska E) Corporate bond issued by General Motors (GM)

Treasury bill

The market-required rate of return on a bond that is held for its entire life is called the: A) coupon rate B) yield to maturity C) dirty yield D) call premium E) current yield

Yield to maturity

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders? A) Callable B) Income C) Zero coupon D) Convertible E) Tax-free

Zero coupon

The price at which an investor can purchase in the bond market is called the ________ price. A) asked B) coupon C) call D) face E) bid

asked

A bond dealer sells at the ________ price and buys at the ________ price A) clean; dirty B) dirty; clean C) bid; asked D) asked; bid E) asked; asked

asked; bid

The price at which a dealer will purchase a bond is referred to as the ________ price. A) asked B) face C) call D) put E) bid

bid

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: A) market yield B) yield-to-call C) bid-ask spread D) current yield E) bond premium

bid-ask spread

The call premium is the amount by which the: A) market price exceeds the par value B) market price exceeds the call price C) face value exceeds the market price D) call price exceeds the par value E) call price exceeds the market price

call price exceeds the par value

Which one of the following is the quoted price of a bond? A) Par value B) Discount price C) Face value D) Dirty price E) Clean price

clean price

The inflation premium: A) increases the real return B) is inversely related to the time to maturity C) remains constant over time D) rewards investors for accepting interest rate risk E) compensates investors for expected price increases

compensates investors for expected price increases

A company originally issued bonds that were rated investment grade. These bonds have now been downgraded to junk status. These bonds are referred to as: A) called bonds B) converted bonds C) unprotected bonds D) fallen angels E) floaters

converted bonds

An unexpected decrease in market interest rates will cause a: A) coupon bond's current yield to increase B) zero coupon bond's price to decrease C) fixed-rate bond's coupon rate to decrease D) zero coupon bond's current yield to decrease E) coupon bond's yield to maturity to decrease

coupon bond's yield to maturity to decrease

Bond ratings classify bonds based on: A) liquidity, market, and default risk B) liquidity, interest rate, and default risk C) default risk only D) interest rate, inflation rate, and default risk E) default and liquidity risks

default risk only

Which one of the following is the price that an investor pays to purchase an outstanding bond? A) Dirty price B) Face value C) Call price D) Bid price E) Clean price

dirty price

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be: A) upward sloping B) flat C) humped D) downward sloping E) double-humped

downward-sloping

Municipal bonds are: A) generally purchased by tax-exempt investors B) risk-free C) issued by federal, state, and local governmental bodies D) zero coupon bonds E) generally callable

generally callable

The yield to maturity on a discount bond is: A) equal to both the coupon rate and the current yield B) equal to the current yield but greater than the coupon rate C) greater than both the current yield and the coupon rate D) less than the current yield but greater than the coupon rate E) less than both the current yield and the coupon rate

greater than both the current yield and the coupon rate

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: A) upward sloping B) flat C) humped D) downward sloping E) double-humped

humped

A real rate of return is defined as a rate that has been adjusted for which one of the following? A) Inflation B) Interest rate risk C) Taxes D) Liquidity E) Default risk

inflation

When a bond's yield to maturity is less than the bond's coupon rate, the bond: A) had to be recently issued B) is selling at a premium C) has reached its maturity date D) is priced at par E) is selling at a discount

is selling at a premium

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? A) Real rate B) Liquidity premium C) Interest rate risk premium D) Inflation premium E) Taxability premium

liquidity premium

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ________ of those securities. A) face value B) market price C) maturity D) coupon rate E) issue date

maturity

A callable bond: A) is generally call protected during the entire term of the bond issue B) generally will have a call protection period during the final three years prior to maturity C) may be structured to pay bondholders the current value of the bond on the date of call D) is prohibited from having a sinking fund also E) is frequently called at a price that is less than par value

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

The rate of return an investor earns on a bond prior to adjusting for inflation is called the: A) nominal rate B) real rate C) dirty rate D) coupon rate E) clean rate

nominal rate

The R in the Fisher effect formula represents the: A) current yield B) real return C) coupon rate D) inflation rate E) nominal return

nominal return

A call provision grants the bond issuer the: A) right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds B) option to exchange the bonds for equity securities C) right to automatically extend the bond's maturity date D) right to repurchase the bonds on the open market prior to maturity E) option of repurchasing the bonds prior to maturity at a prespecified price

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

The primary purpose of protective covenants is to help: A) reduce interest rate risk B) the issuer in case of default C) protect bondholders from issuer actions D) bondholders whose bonds are called E) convert bearer bonds into registered form

protect bondholders from issuer actions

The primary purpose of bond covenants is to: A) meet regulatory requirements B) define the bond's repayment terms C) protect the bondholders D) identify the bond's rating E) protect the bond issuer from lawsuits

protect the bondholders

The purpose of a bond sinking fund is to: A) accumulate funds needed to pay the tax liability on the bond proceeds B) accumulate funds to pay the regular interest payments C) hold the bond proceeds until the funds need disbursed D) repay bonds early either through purchases or calls E) repay bondholders from a trust fund if the issuer defaults

repay bonds early either through purchases or calls

Generally speaking, bonds issued in the U.S. pay interest on a(n) ________ basis. A) annual B) semiannual C) quarterly D) monthly E) daily

semiannual

An upward-sloping term structure of interest rates indicates: A) the real rate of return is lower for short-term bonds than for long-term bonds B) there is an indirect relationship between real interest rates and time to maturity C) there is an indirect relationship between nominal interest rates and time to maturity D) the nominal rate is declining as the real rate rises as the time to maturity increases E) the nominal rate is increasing even though the real rate is constant as the time to maturity increases

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

All else held constant, the present value of a bond increases when the: A) coupon rate decreases B) yield to maturity decreases C) current yield increases D) time to maturity of a premium bond decreases E) time to maturity of a zero coupon bond increases

yield to maturity decreases