Chapter 7

Which one of the following bonds is subject to the least interest rate risk?

5-year, 5 percent coupon

A corporate bond pays $45 in interest every six months and matures in 11 years. What is the yield to maturity if the bond currently sells for $1,213?

6.29 percent

You purchased a $5,000 face value corporate bond today at an asked bid of 98.76. The bond matures in 7.5 years and carries a 7 percent coupon. What annual rate of return will you earn if you hold the bond until maturity?

7.22 percent

Which one of these is the best description of a 5-year zero coupon bond?

A bond with a current value equal to its discounted par value

What is a zero coupon bond?

A zero coupon bond is sold at a steep discount and pays no semiannual interest payments.

Select all that apply You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply.

FV = 1,000 N = 10

You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply.

FV = 1,000 N = 10

Select all that apply A corporate bond matures in 11 years and carries a 6 percent coupon that pays semiannual interest. Which of these represent correct calculator input for computing the bond's current value at a discount rate of 5 percent? Select all that apply.

FV = 1,000; PMT = 30 N = 22

Select all that apply Which of the following may be financed with corporate bonds? Select all that apply.

Inventory Plant and equipment Research and development

You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond?

N = 14

A corporate bond matures in 11 years and carries a 6 percent coupon that pays semiannual interest. Which of these represent correct calculator input for computing the bond's current value at a discount rate of 5 percent? Select all that apply.

N = 22 FV = 1,000; PMT = 30

Where does the majority of trading volume in bonds in the secondary markets occur?

Over-the-counter

Which one of these represents correct calculator input for computing the current value of a 5 percent coupon compounded semi-annually? The corporate bond matures in 12.5 years. The current discount rate is 6.5 percent. Assume the face value of the bond as $1,000.

PMT = 25

Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent?

PV = $1,000/[1 + (0.08/2)]20 Reason: The formula shown is a future value, not a present value formula. Also, bond prices are computed based on semiannual compounding, unless a problem indicates otherwise.

For a typical corporate bond, which one of these applies to the calculation of the bond's yield to maturity? Assume the PMT is input as a positive amount.

PV = -(Current bond price)

Which of the following are commonly included in an indenture agreement? Select all that apply.

Par value Coupon rate Call premium

Which of these statements is correct?

The average daily trading volume of the U. S. bond market reached over $760 billion in 2017.

True or false: When computing the present value of a bond, both the par value and the interest payment amount are input as positive values in a financial calculator.

True

Which one of the following types of bonds is used to implement national monetary policy?

U. S. Treasury bonds

Which one of the following should be used to compare various corporate bonds if you plan to purchase a bond today, hold it until maturity, and want to select the bond with the highest rate of return?

Yield to maturity

Why might a corporation issue bonds?

bonds may offer a lower after tax cost than equity securities

What is an indenture agreement?

the legal contract between the issuer and the bondholders

A corporate bond matures in 14.5 years and pays a 6.75 percent coupon. What is its current value if the market rate of interest is 7.5 percent?

$934.38

Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.

-$13.43; -$47.45

What is the shortest maturity for a newly issued U. S. Treasury bond?

10 years

Which one of the following bonds is subject to the greatest interest rate risk?

10-year, zero coupon

Which of these is not the traditional bond issuers?

Agency bonds

Which one of these is the current yield formula?

Annual interest / Current value

Most secondary trades in the U. S. bond market occur between which two parties?

Bond dealers and large institutions

Which statement related to bonds is true?

Bonds have varying levels of risk.

Select all that apply Which of the following are commonly included in an indenture agreement? Select all that apply.

Call premium Par value Coupon rate

The funding of which one of these would be provided by a general obligation municipal bond?

City school

Select all that apply Which of the following securities pay income which is exempt from federal income taxes? Select all that apply.

County bond to build a school State bond to build a highway

The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply.

Credit quality of the bond Tax status of the bond

What does a bond rating measure?

Credit quality, or default risk

For a typical bond, which of the following values are expressed in semiannual terms when computing the yield to maturity? Select all that apply.

Discount rate, or rate of return, I Number of time periods, N Interest payments, PMT

A bond has a par value of $1,000, a call premium of one year's interest, a call provision after 5 years, a coupon rate of 5 percent, semiannual interest payments, and a maturity of 20 years. Which of these is (are) correct? Select all that apply.

Each interest payment will be $25. The bond can be paid off in year 6 for a price of $1,050 plus any unpaid interest.

What is a common means of reporting the daily direction of overall bond price movements?

Reporting the yield-to-maturity on the 10-year Treasury bonds

Which of these are common features of a corporate bond? Select all that apply.

Semi-annual interest payments Face value of $1,000 Publicly traded debt security

Select all that apply Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless the problem states otherwise?

Semiannual interest payments Face value = $1,000

Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless the problem states otherwise?

Semiannual interest payments Face value = $1,000

If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own?

Short-term, high coupon

Which one of the following types of bonds is used to finance projects such as public buildings, schools and roads?

State general obligation bond

Select all that apply Which of these statements correctly applies to the NYSE bond market? Select all that apply.

The NYSE operates the largest centralized U. S. bond market. Corporate bonds are the primary source of bond trading volume on the NYSE.

Select all that apply Which of the following are sources of information on the bond markets? Select all that apply.

The Wall Street Journal Merrill Lynch Internet

What is a call premium?

The additional amount an issuer pays in excess of par value if the issuer redeems a bond prior to maturity.

What is the definition of credit quality risk?

The chance that an issuer will either be late paying or will not pay an interest or principal payment

Which of these best explains the current value of a bond?

The current value is the present value of the bond's expected future cash flows discounted at the market rate of interest.

Select all that apply Which of the following correctly explains how a factor affects interest rate risk? Select all that apply.

The longer the term to maturity, the greater the interest rate risk will be. The lower the coupon rate, the greater the interest rate risk will be.

Which one of these correctly defines a bond feature?

The principal value of a bond is referred to as the par value, or face value.

What is the definition of yield to maturity?

The rate that will be earned if a bond is purchased today and held until maturity

What is the definition of current yield?

The return provided by the annual interest payments if the bond is purchased at the current price

Why are U. S. Treasury bonds considered to be safe?

They are secured by the full-faith-and-credit of the U. S. government.

A bond's life span is typically referred to as [blank] to [blank]

Time Maturity

What is the purpose of a call premium?

To compensate bondholders who have their bonds redeemed prior to maturity.