Fin 1- ch7

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: Select one: a. 3.5 percent. b. greater than 3.5 percent but less than 7 percent. c. 7 percent. d. greater than 7 percent. e. less than 3.5 percent.

greater than 7%

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

yield to maturity

Which one of the following bonds is the least sensitive to interest rate risk? Select one: a. 3-year; 4 percent coupon b. 3-year; 6 percent coupon c. 5-year; 6 percent coupon d. 7-year; 6 percent coupon e. 7-year; 4 percent coupon

3-year, 6% coupon

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 e. Coupon rate > Current yield > Yield to maturity

Coupon rate = yield rate = YTM

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. e. coupon rate and time to maturity both increase.

Coupon rate decreases and the time to maturity increases

Which one of the following relationships is stated correctly? Select one: 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. e. Increasing the coupon rate decreases the current yield, all else constant.

Decreasing the time to maturity increases the price of a discount bond, all else held constant

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? Select one: a. Coupon b. Face value c. Discount d. Yield e. Dirty price

Face Value

A discount bond's coupon rate is equal to the annual interest divided by the:

Face value

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. e. decreases at a decreasing rate.

Increases at a decreasing rate

The current yield is defined as the annual interest on a bond divided by... a. coupon rate. b. face value. c. market price. d. call price. e. par value.

Market price

A bond's principal is repaid on the ______ date

Maturity

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. e. The final payment will be in the amount of $1,060.

The bonds will be set at a premium if the market rate is 5.5%

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? 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. e. The coupon rate has increased to 7 percent.

The current yield exceeds the coupon rate

Which one of these equations applies to a bond that currently has a market price that exceeds par value? a. Market value < Face value b. Yield to maturity = Current yield c. Market value = Face value d. Current yield > Coupon rate e. Yield to maturity < Coupon rate

Yield to maturity < coupon rate

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 e. par; less than

a discount; less than

Allison just received the 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

coupon

Which one of the following applies to a premium bond? Select one: 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 < Yield to maturity < Current yield e. Coupon rate > Current yield > Yield to maturity

coupon rate> current yield > yield to maturity

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? Select one: a. Short-term; low coupon b. Short-term; high coupon c. Long-term; zero coupon d. Long-term; low coupon e. Long-term; high coupon

long-term, zero coupon

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the: Select one: 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. e. coupon payment will increase.

market price of the bond will decrease

You own a bond that pays an annual coupon of 6 percent that 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? Select one: 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. The bond is currently valued at one-half of its issue price. e. You will realize a capital gain on the bond if you sell it today.

you will realize a capital gain on the bond if you sell it today