Question 1

What is the relationship between the price of a straight bond and the price of a callable bond?

Accepted Answer

A) The straight bond's price will be higher than the callable bond's price for low interest rates. 
B) The straight bond's price will be lower than the callable bond's price for low interest rates. 
C) The straight bond's price will change as interest rates change, but the callable bond's price will stay the same. 
D) The straight bond and the callable bond will have the same price. 
A) The straight bond's price will be higher than the callable bond's price for low interest rates. 
B) The straight bond's price will be lower than the callable bond's price for low interest rates. 
C) The straight bond's price will change as interest rates change, but the callable bond's price will stay the same. 
D) The straight bond and the callable bond will have the same price.

Question 2

Floating-rate bonds are designed to ___________, while convertible bonds are designed to __________.

Accepted Answer

A) minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
B) maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
C) minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes 
D) maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company 
A) minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
B) maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
C) minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes 
D) maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company

Question 3

At issue, coupon bonds typically sell

Accepted Answer

A) above par value. 
B) below par value. 
C) at or near par value. 
D) at a value unrelated to par. 
A) above par value. 
B) below par value. 
C) at or near par value. 
D) at a value unrelated to par.

Question 4

Which of the following is not a type of international bond?

Accepted Answer

A) Samurai bonds 
B) Yankee bonds 
C) Bulldog bonds 
D) Elton bonds 
A) Samurai bonds 
B) Yankee bonds 
C) Bulldog bonds 
D) Elton bonds

Question 5

A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in nine years, and is selling today at a $66 discount from par value.The yield to maturity on this bond is

Accepted Answer

A) 9.00%. 
B) 10.15%. 
C) 11.25%. 
D) 12.32%. 
A) 9.00%. 
B) 10.15%. 
C) 11.25%. 
D) 12.32%.

Question 6

A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in five years, and is selling today at a $72 discount from par value.The yield to maturity on this bond is

Accepted Answer

A) 6.00%. 
B) 8.33%. 
C) 12.00%. 
D) 60.00%. 
A) 6.00%. 
B) 8.33%. 
C) 12.00%. 
D) 60.00%.

Question 7

Consider the following $1,000-par-value zero-coupon bonds:   The yield to maturity on bond D is

Accepted Answer

A) 10%. 
B) 11%. 
C) 12%. 
D) 14%. 
A) 10%. 
B) 11%. 
C) 12%. 
D) 14%.

Question 8

A 10% coupon bond with annual payments and 10 years to maturity is callable in three years at a call price of $1,100.If the bond is selling today for $975, the yield to call is

Accepted Answer

A) 10.26%. 
B) 10.00%. 
C) 9.25%. 
D) 13.98%. 
A) 10.26%. 
B) 10.00%. 
C) 9.25%. 
D) 13.98%.

Question 9

Subordination clauses in bond indentures

Accepted Answer

A) may restrict the amount of additional borrowing the firm can undertake. 
B) are always bad for investors. 
C) provide higher priority to senior creditors in the event of bankruptcy. 
D) may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy. 
A) may restrict the amount of additional borrowing the firm can undertake. 
B) are always bad for investors. 
C) provide higher priority to senior creditors in the event of bankruptcy. 
D) may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

Question 10

The invoice price of a bond that a buyer would pay is equal to

Accepted Answer

A) the asked price plus accrued interest. 
B) the asked price less accrued interest. 
C) the bid price plus accrued interest. 
D) the bid price less accrued interest. 
A) the asked price plus accrued interest. 
B) the asked price less accrued interest. 
C) the bid price plus accrued interest. 
D) the bid price less accrued interest.

Question 11

A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%.The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.

Accepted Answer

A) $712.99 
B) $960.14 
C) $1,123.01 
D) $886.28 
A) $712.99 
B) $960.14 
C) $1,123.01 
D) $886.28

Question 12

Mortgage bonds are:

Accepted Answer

A) subordinated debt obligations 
B) bonds issued with a property as collateral behind them 
C) a type of convertible bond 
D) safer than regular bonds 
A) subordinated debt obligations 
B) bonds issued with a property as collateral behind them 
C) a type of convertible bond 
D) safer than regular bonds

Question 13

Which one of the following statements about convertibles is true?

Accepted Answer

A) The longer the call protection on a convertible, the less the security is worth. 
B) The more volatile the underlying stock, the greater the value of the conversion feature. 
C) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. 
D) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. 
A) The longer the call protection on a convertible, the less the security is worth. 
B) The more volatile the underlying stock, the greater the value of the conversion feature. 
C) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. 
D) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

Question 14

The yield to maturity on a bond is

Accepted Answer

A) below the coupon rate when the bond sells at a discount and equal to the coupon rate when the bond sells at a premium. 
B) the discount rate that will set the present value of the payments equal to the bond price. 
C) based on the assumption that any payments received are reinvested at the coupon rate. 
D) None of the options are correct. 
A) below the coupon rate when the bond sells at a discount and equal to the coupon rate when the bond sells at a premium. 
B) the discount rate that will set the present value of the payments equal to the bond price. 
C) based on the assumption that any payments received are reinvested at the coupon rate. 
D) None of the options are correct.

Question 15

Callable bonds

Accepted Answer

A) are called when interest rates decline appreciably. 
B) have a call price that declines as time passes. 
C) are called when interest rates increase appreciably. 
D) are more likely to be called when interest rates decline and have a call price that declines as time passes. 
A) are called when interest rates decline appreciably. 
B) have a call price that declines as time passes. 
C) are called when interest rates increase appreciably. 
D) are more likely to be called when interest rates decline and have a call price that declines as time passes.

Question 16

A bond will sell at a discount when

Accepted Answer

A) the coupon rate is greater than the current yield, and the current yield is greater than yield to maturity. 
B) the coupon rate is greater than yield to maturity. 
C) the coupon rate is less than the current yield, and the current yield is greater than the yield to maturity. 
D) the coupon rate is less than the current yield, and the current yield is less than yield to maturity. 
A) the coupon rate is greater than the current yield, and the current yield is greater than yield to maturity. 
B) the coupon rate is greater than yield to maturity. 
C) the coupon rate is less than the current yield, and the current yield is greater than the yield to maturity. 
D) the coupon rate is less than the current yield, and the current yield is less than yield to maturity.

Question 17

A convertible bond has a par value of $1,000 and a current market value of $850.The current price of the issuing firm's stock is $27, and the conversion ratio is 30 shares.The bond's conversion premium is

Accepted Answer

A) $40. 
B) $150. 
C) $190. 
D) $200. 
A) $40. 
B) $150. 
C) $190. 
D) $200.

Question 18

A convertible bond has a par value of $1,000 and a current market price of $975.The current price of the issuing firm's stock is $42, and the conversion ratio is 22 shares.The bond's market conversion value is

Accepted Answer

A) $729. 
B) $924. 
C) $870. 
D) $1,000. 
A) $729. 
B) $924. 
C) $870. 
D) $1,000.

Question 19

The ________ is used to calculate the present value of a bond.

Accepted Answer

A) nominal yield 
B) current yield 
C) yield to maturity 
D) yield to call 
A) nominal yield 
B) current yield 
C) yield to maturity 
D) yield to call

Question 20

If a 7.25% coupon bond is trading for $982.00, it has a current yield of

Accepted Answer

A) 7.38%. 
B) 6.53%. 
C) 7.25%. 
D) 8.53%. 
A) 7.38%. 
B) 6.53%. 
C) 7.25%. 
D) 8.53%.

Exam 14: Bond Prices and Yields

What is the relationship between the price of a straight bond and the price of a callable bond?

Floating-rate bonds are designed to ___________, while convertible bonds are designed to __________.

At issue, coupon bonds typically sell

Which of the following is not a type of international bond?

A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in nine years, and is selling today at a $66 discount from par value.The yield to maturity on this bond is

A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in five years, and is selling today at a $72 discount from par value.The yield to maturity on this bond is

Consider the following $1,000-par-value zero-coupon bonds: The yield to maturity on bond D is

A 10% coupon bond with annual payments and 10 years to maturity is callable in three years at a call price of $1,100.If the bond is selling today for $975, the yield to call is

Subordination clauses in bond indentures

The invoice price of a bond that a buyer would pay is equal to

A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%.The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.

Mortgage bonds are:

Which one of the following statements about convertibles is true?

The yield to maturity on a bond is

Callable bonds

A bond will sell at a discount when

A convertible bond has a par value of $1,000 and a current market value of $850.The current price of the issuing firm's stock is $27, and the conversion ratio is 30 shares.The bond's conversion premium is

A convertible bond has a par value of $1,000 and a current market price of $975.The current price of the issuing firm's stock is $42, and the conversion ratio is 22 shares.The bond's market conversion value is

The ________ is used to calculate the present value of a bond.

If a 7.25% coupon bond is trading for $982.00, it has a current yield of

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Floating-rate bonds are designed to _, while convertible bonds are designed to .