Intermediate Fiance -- Chapter 6

If an investor purchases a 3%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years, what will be the real value of the principal at maturity? A. $1,000.00 B. $1,030.00 C. $1,060.90 D. $1,061.36

A. $1,000.00 The real value of the principal will remain constant at the par value.

Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments. She sold the bond after 6 months and earned a total return of 4.8% on this investment. At what price, did she sell the bond? A. $1,001.47 B. $974.28 C. $981.06 D. $1,003.18

A. $1,001.47 .048 = (Selling price + [(.07 × $1,000)/2] - $989)/$989 Selling price = $1,001.47

How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later? A. $19.93 B. $20.00 C. $23.93 D. $25.66

A. $19.93 Price = $1,000/1.1030 = $57.31 New price = $1,000/1.1229 = $37.38 Loss = $57.31 - 37.38 = $19.93

A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment? A. $50 B. $55 C. $100 D. $110

A. $50 Coupon payment = (.10 × $1,000)/2 = $50

How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually compounded yield of 7.5%? A. $895.78 B. $897.04 C. $938.40 D. $1,312.66

A. $895.78 Semiannual interest rate = .075/2 = .0375 Price = [(.06/2) × $1,000)] {(1/.0375) - [1/.0375(1.0375)10 × 2]} + $1,000/1.037510 × 2 Price = $895.78

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%? A. $927.90 B. $981.40 C. $1,000.00 D. $1,075.82

A. $927.90 Price = (.10 × $1,000) {(1/.12) - [1/.12(1.12)5]} + $1,000/1.125 Price = $927.90

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19? A. 4.53% B. 5.33% C. 5.16% D. 4.92%

A. 4.53% Rate of return = [$1,037.19 + (.065 × $1,000) - $1,054.47]/$1,054.47 = .0453, or 4.53%

An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the investor's rate of return? A. 5.71% B. 6.00% C. 6.67% D. 7.00%

A. 5.71% Rate of return = [$1,040 + (.07 × $1,000) - $1,050]/$1,050 = .0571, or 5.71%

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%, then the investor's real return is: A. 6.73%. B. 6.31%. C. 15.44%. D. 10.56%.

A. 6.73%. 1 + real return = 1.11/1.04 - 1 = .0673, or 6.73%

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity, then sells the bond after 1 year for $1,085? A. 6.82% B. 6.91% C. 7.64% D. 9.00%

A. 6.82% Total return = [$1,085 + (.09 × $1,000) - $1,100]/$1,100 = .0682, or 6.82%

How does a bond dealer generate profits when trading bonds? A. By maintaining bid prices lower than ask prices B. By maintaining bid prices higher than ask prices C. By retaining the bond's next coupon payment D. By lowering the bond's coupon rate upon resale

A. By maintaining bid prices lower than ask prices

The holder of which one of these securities has first claim on the assets of a firm? A. Senior debt B. Common stock C. Subordinated debt D. Preferred stock

A. Senior debt

Assume a bond is currently selling at par value. What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate? A. The price of the bond will increase. B. The coupon rate of the bond will increase. C. The par value of the bond will decrease. D. The coupon payments will be adjusted to the new discount rate.

A. The price of the bond will increase.

A "convertible bond" provides the option to convert: A. a bond into shares of common stock. B. fixed-rate coupon payments into variable-rate payments. C. a zero-coupon bond to a coupon-paying bond. D. a junk bond to a zero-coupon investment-grade bond.

A. a bond into shares of common stock.

When comparing a highly liquid bond with a comparable but less liquid bond, the highly liquid bond is most apt to have: A. a lower yield. B. a shorter maturity. C. a higher yield. D. a longer maturity.

A. a lower yield.

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the: A. bond is selling at a discount. B. bond has a high default premium. C. promised yield is not likely to materialize. D. bond must be a Treasury Inflation-Protected Security.

A. bond is selling at a discount.

When market interest rates exceed a bond's coupon rate, the bond will: A. sell for less than par value. B. sell for more than par value. C. decrease its coupon rate. D. increase its coupon rate.

A. sell for less than par value.

The current yield tends to overstate a bond's total return when the bond sells for a premium because: A. the bond's price will decline each year. B. coupon payments can change at any time. C. bonds selling for a premium have low default risk. D. taxes must be paid on the current yield.

A. the bond's price will decline each year.

If you purchase a 3-year, 9% annual coupon bond for $1,002.03, how much could it be sold for 2 years later if interest rates have remained stable? A. $999.29 B. $1,000.74 C. $998.97 D. $1,000.00

B. $1,000.74 n = 3; PV = -$1,002.03, PMT - $90; FV = $1,000; CPT i = 8.9199% n = 1; i = 8.9199; PMT = $90; FV = $1,000; CPT PV = $1,000.74

How much should you be prepared to pay for a 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%? A. $411.84 B. $897.04 C. $985.00 D. $1,000.00

B. $897.04 Price = (.06 × $1,000) {(1/.075) - [1/.075(1.075)10]} + $1,000/1.07510 Price = $897.04

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant? A. $904.90 B. $925.39 C. $947.93 D. $1,000.00

B. $925.39 Price = (.07 × $1,000) {(1/.10) - [1/.10(1.10)3]} + $1,000/1.103 Price = $925.39

Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds? A. $917.06 B. $928.84 C. $987.50 D. $1,000.00

B. $928.84 Price = (.07 × $1,000) {(1/.0825) - [1/.0825(1.0825)10 - 2]} + $1,000/1.082510 - 2

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84? A. 6.00% B. 7.14% C. 5.04% D. 6.38%

B. 7.14% Current yield = $60/(.84 × $1,000) = .0714, or 7.14%

What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%? Interest is paid annually. A. 6% B. 8% C. 10% D. 11%

B. 8% $1,053.46 = PMT {(1/.06) - [1/.06(1.16)3]} + $1,000/1.063 PMT = $80 Coupon rate = $80/$1,000 = .08, or 8%

Which one of the following must be correct for a bond currently selling at a premium? A. Its coupon rate is variable. B. Its current yield is lower than its coupon rate. C. Its yield to maturity is higher than its coupon rate. D. Its coupon rate is lower than the current market rate on similar bonds.

B. Its current yield is lower than its coupon rate.

Investors who buy which type of bond will be guaranteed a capital loss if they hold the bond to maturity? A. Discount bond B. Premium bond C. Zero-coupon bond D. Junk bond

B. Premium bond

An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%? A. The 5-year bond will decrease more in price. B. The 20-year bond will decrease more in price. C. Both bonds will decrease in price similarly. D. Neither bond will decrease in price, but their yields will increase.

B. The 20-year bond will decrease more in price.

What happens to a discount bond as the time to maturity decreases? A. The coupon rate increases. B. The bond price increases. C. The coupon rate decreases. D. The bond price decreases.

B. The bond price increases.

This morning, you purchased a TIPS. Which one of these should you expect to occur if you hold this bond during an inflationary period? A. The coupon payment will increase in real terms. B. The maturity value will increase in nominal terms. C. The market price will remain constant at par. D. The market price will decrease.

B. The maturity value will increase in nominal terms.

Which one of the following bond values will change when interest rates change? A. The expected cash flows B. The present value C. The coupon payment D. The maturity value

B. The present value

The coupon rate of a bond equals: A. its yield to maturity. B. a defined percentage of its face value. C. the yield to maturity when the bond sells at a discount. D. the annual interest divided by the current market price.

B. a defined percentage of its face value.

Investors who purchase bonds having lower credit ratings should expect: A. lower yields to maturity. B. higher default possibilities. C. lower coupon payments. D. higher purchase prices.

B. higher default possibilities.

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to: A. decline over time, reaching par value at maturity. B. increase over time, reaching par value at maturity. C. be less than the face value at maturity. D. exceed the face value at maturity.

B. increase over time, reaching par value at maturity.

If a bond is priced at par value, then: A. it has a very low level of default risk. B. its coupon rate equals its yield to maturity. C. it must be a zero-coupon bond. D. the bond is quite close to maturity.

B. its coupon rate equals its yield to maturity.

The current yield tends to understate a bond's total return when the bond sells for a discount because: A. increases in interest rates will increase the current yield. B. the bond's price will increase each year. C. current yields show only nominal returns. D. the bond may have a higher face value.

B. the bond's price will increase each year.

The discount rate that makes the present value of a bond's payments equal to its price is termed the: A. dividend yield. B. yield to maturity. C. current yield. D. coupon rate.

B. yield to maturity.

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%? A. $696.74 B. $1,075.82 C. $1,082.00 D. $1,123.01

C. $1,082.00 Price = (.09 × $1,000) {(1/.07) - [1/.07(1.07)5]} + $1,000/1.075 Price = $1,082.00

By how much will a bond increase in price over the next year if it currently sells for $925.16, has 5 years until maturity, and an annual coupon rate of 7%? (Do not round intermediate calculations.) A. $8.26 B. $8.92 C. $12.53 D. $11.98

C. $12.53 n = 5, PV = -$925.16, PMT = $70, FV = $1,000, CPT i = 8.92 n = 4, i = 8.92; PMT = $70; FV = $1,000; CPT PV = $937.69 Price increase = $937.69 - 925.16 = $12.53

A bond has an ask quote of 99.5625 and a bid quote of 99.5475. How much will the bond dealer make on the purchase and resell of a $100,000 bond? A. $150 B. $1,500 C. $15 D. $1.50

C. $15 Dealer profit = (.995625 - .995475) × $100,000 = $15

If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable? A. $848.12 B. $923.50 C. $862.92 D. $911.15

C. $862.92 $691.72 = $1,000/(1 + i)5 i = .0765 Price = $1,000/1.07652 Price = $862.92

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000? A. 6.0% B. 8.5% C. 10.0% D. 12.5%

C. 10.0% Since the bond is selling at par, the yield to maturity must equal the coupon rate which is: Coupon rate = $100/$1,000 = .10, or 10%

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000? A. 4.48% B. 6.15% C. 7.52% D. 6.07%

C. 7.52% Rate of return = [$1,015.16 + (.06 × $1,000) - $1,000]/$1,000 = .0752, or 7.52%

A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3 years. What is its yield to maturity? A. 4.78% B. 5.48% C. 9.57% D. 12.17%

C. 9.57% n = 6; PV = -$960; PMT = $40; FV = $1,000, CPT i = 4.7826% YTM = 2 × 4.7826% = 9.57%

What causes bonds to sell for a premium? A. Investment-quality ratings B. Long periods until maturity C. Coupon rates that exceed market rates D. Speculative-grade ratings

C. Coupon rates that exceed market rates

Which of the following would not be associated with a zero-coupon bond? A. Yield to maturity B. Discount bond C. Current yield D. Interest-rate risk

C. Current yield

Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield? Assume both bonds are selling at a premium. A. Real rate of return B. Inflation premium C. Default premium D. Loss of premium

C. Default premium

Which one of these statements is correct? A. Germany has the ability to print euros to pay off its national debt if need be. B. Italian bonds were less expensive to insure than German bonds during the period 2007-2013. C. Many investors were compensated by insurance when Greece defaulted on its bonds in 2012. D. It was impossible to insure Irish bonds during the period 2007-2013.

C. Many investors were compensated by insurance when Greece defaulted on its bonds in 2012.

Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond? A. The bond's current yield increased above the bond's coupon rate. B. The inflation rate increased. C. New bonds with similar characteristics have coupon rates of 6.5%. D. Market interest rates increased.

C. New bonds with similar characteristics have coupon rates of 6.5%.

What are the conditions imposed on a debt issuer that are designed to protect bondholders called? A. Collateral agreements B. Vanilla wrappers C. Protective covenants D. Default provisions

C. Protective covenants

Which one of the following is most apt to be correct for a CCC-rated bond, compared to a BBB-rated bond? A. The CCC bond will have a variable-coupon rate. B. The CCC bond will have a shorter term. C. The CCC bond will offer a higher promised yield to maturity. D. The CCC bond will have a higher price for the same term.

C. The CCC bond will offer a higher promised yield to maturity.

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%? A. The coupon rate increases to 10%. B. The coupon rate remains at 9%. C. The coupon rate remains at 8%. D. The coupon rate decreases to 8%.

C. The coupon rate remains at 8%.

The yield curve depicts the current relationship between: A. bond yields and default risk. B. bond maturity and bond ratings. C. bond yields and maturity. D. promised yields and default premiums.

C. bond yields and maturity.

A bond's yield to maturity takes into consideration: A. current yield but not any price changes. B. price changes but not the current yield. C. both the current yield and any price changes. D. neither the current yield nor any price changes.

C. both the current yield and any price changes.

Periodic receipts of interest by the bondholder are known as: A. the coupon rate. B. a zero-coupon. C. coupon payments. D. the default premium.

C. coupon payments

If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be: A. lower than current interest rates. B. equal to the coupon rate. C. higher than the coupon rate. D. lower than the coupon rate.

C. higher than the coupon rate.

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will: A. increase by $51.54. B. decrease by $51.54. C. increase by $53.46. D. decrease by $53.46.

C. increase by $53.46. Price = (.08 × $1,000) {(1/.06) - [1/.06(1.06)3]} + $1,000/1.063 Price = $1,053.46 This is a price increase of $53.46, since the bond had sold at par.

As the coupon rate of a bond increases, the bond's: A. face value increases. B. current price decreases. C. interest payments increase. D. maturity date is extended.

C. interest payments increase.

The existence of an upward-sloping yield curve suggests that: A. bonds should be selling at a discount to par value. B. bonds will not return as much as common stocks. C. interest rates will be increasing in the future. D. real interest rates will be increasing soon.

C. interest rates will be increasing in the future.

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor: A. receives 97.162% of the stated coupon payments. B. receives $971.62 upon the maturity date of the bond. C. pays 97.162% of face value for the bond. D. pays $10,971.62 for a $10,000 face value bond.

C. pays 97.162% of face value for the bond.

If a bond investor's rate of return for a particular period equaled the bond's coupon rate, then during that period, the bond's price: A. increased. B. decreased. C. remained constant. D. changed, but the direction of the change is irrelevant.

C. remained constant.

When the yield curve is upward-sloping, then: A. short-maturity bonds offer the highest coupon rates. B. long-maturity bonds are priced above par value. C. short-maturity bonds yield less than long-maturity bonds. D. long-maturity bonds increase in price when interest rates increase.

C. short-maturity bonds yield less than long-maturity bonds.

What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%? A. $98.64 B. $95.27 C. $101.38 D. $104.97

D. $104.97 $1,050 = PMT {(1/.0937) - [1/.0937(1.0937)6]} + $1,000/1.09376 PMT = $104.97

What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000? A. $100,135.41 B. $135,000.41 C. $136,269.38 D. $135,406.20

D. $135,406.20 Price = 1.354062 × $100,000 = $135,406.20

How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%? A. $209.91 B. $260.00 C. $760.00 D. $792.09

D. $792.09 $1,000/1.064 = $792.09

An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985. What was the investor's rate of return? A. 9.00% B. 9.23% C. 9.65% D. 10.26%

D. 10.26% Rate of return = [$985 + (.09 × $1,000) - $975]/$975 = .1026, or 10.26%

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%? A. 4.20% B. 8.64% C. 9.00% D. 9.20%

D. 9.20% Nominal return = (1.04 × 1.05) - 1 = .0920, or 9.20%

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk? A. A zero-coupon bond with 20 years until maturity B. A coupon-paying bond with 20 years until maturity C. A floating-rate bond with 20 years until maturity D. A zero-coupon bond with 30 years until maturity

D. A zero-coupon bond with 30 years until maturity

Which of these bond ratings is the lowest of Moody's investment-grade ratings? A. A B. Ba C. Aa D. Baa

D. Baa

Which one of the following is fixed for the life of a given bond? A. Current price B. Current yield C. Yield to maturity D. Coupon rate

D. Coupon rate

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of these may have caused this price increase? A. The bond's rating was downgraded. B. The issuing firm announced the next interest payment. C. The issuing firm announced that its annual earnings met investor expectations. D. Market interest rates decreased.

D. Market interest rates decreased.

Which one of the following is correct concerning real interest rates? A. Real interest rates are constant. B. Real interest rates must be positive. C. Real interest rates must be less than nominal interest rates. D. Real interest rates, if positive, increase purchasing power over time.

D. Real interest rates, if positive, increase purchasing power over time.

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%? A. The face value of the bond has decreased. B. The bond's maturity value exceeds the bond's price. C. The bond's internal rate of return is 7%. D. The bond's maturity value is lower than the bond's price.

D. The bond's maturity value is lower than the bond's price.

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures? A. The rate of return will be lower than the yield to maturity. B. The rate of return will be higher than the yield to maturity. C. The rate of return will equal the yield to maturity. D. There is no predetermined relationship between the rate of return and the yield to maturity.

D. There is no predetermined relationship between the rate of return and the yield to maturity.

A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years is called a: A. TIPS. B. Treasury bill. C. Treasury bond. D. Treasury note.

D. Treasury note.

Assume a bond has been owned by four different investors during its 20-year history. Which one of the following is most apt to have been different for each of these owners? A. Coupon rate B. Coupon frequency C. Par value D. Yield to maturity

D. Yield to maturity

The current yield of a bond can be calculated by: A. multiplying the price by the coupon rate. B. dividing the price by the annual coupon payments. C. dividing the price by the par value. D. dividing the annual coupon payments by the price.

D. dividing the annual coupon payments by the price.

A bond's par value can also be called its: A. coupon payment. B. present value. C. market value. D. face value.

D. face value.

Nominal U.S. Treasury bond yields: A. are constant over time. B. are equal to the real yields. C. include a default premium. D. include an inflation premium.

D. include an inflation premium.

Many investors may be drawn to municipal bonds because of the bonds': A. speculative grade ratings. B. high coupon payments. C. long periods until maturity. D. income exemption from federal taxes.

D. income exemption from federal taxes.

The purpose of a floating-rate bond is to: A. save interest expense for corporate issuers. B. avoid making interest payments until maturity. C. shift the yield curve. D. offer rates that adjust to current market conditions.

D. offer rates that adjust to current market conditions.