Finance chapter 7 practice questions

You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?

$1108.58

A newly issued 10-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? Assume semiannual compounding.

$38.53

A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?

$5073.11

You purchase a bond with a coupon rate of 9.3 percent and a clean price of $880. Assume a par value of $1,000. If the next semiannual coupon payment is due in two months, what is the invoice price?

$911.00

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 yield to maturity is less than the coupon rate

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?

Default risk

You purchase a bond with an invoice price of $1,052. The bond has a coupon rate of 7.5 percent, and there are four months to the next semiannual coupon date. Assume a par value of $1,000. What is the clean price of the bond?

$1039.50

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?

12.53 years

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 $1,022. Interest is paid semiannually. What is the yield to maturity?

5.18 percent

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?

5.84 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 $987. What is the yield to maturity?

7.22 percent

Global Exporters wants to raise $31.3 million to expand its business. To accomplish this, it plans to sell 15-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 5.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? Assume semiannual compounding.

73,225

Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

8.62 percent

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a current price of $1,108.60. At this price, the bonds yield 7.5 percent. What is the coupon rate?

8.78 percent

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

A Discount Less than

The taxability risk premium compensates bondholders for which one of the following?

A bonds unfavorable tax status

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 real rate of return has minimal, if any, effect on the slope of the term structure of interest rates. E. 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 $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:

Call premium

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

A bond is quoted at a price of $1,011. This price is referred to as the:

Clean price

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption

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:

Greater than 7 percent

Real rates are defined as nominal rates that have been adjusted for which of the following?

Inflation

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity

Interest rates that include an inflation premium are referred to as:

Nominal rates

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:

Protective covenants

The pure time value of money is known as the:

The term structure of interest rates

A Treasury yield curve plots Treasury interest rates relative to:

Time to maturity

A note is generally defined as

an unsecured bond with an initial maturity of 10 years or less.

Bonds issued by the U.S. government:

are considered to be free of default risk

Protective covenants...

are primarily designed to protect bondholders

U.S treasury bonds are quoted as what

are quoted as a percentage of par.

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form

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?

debenture

Callable bonds generally

have a sinking fund provision

Which bond would you generally expect to have the highest yield?

long-term, taxable junk bond

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