Question 1

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

Accepted Answer

A)  current yield 
B)  dividend yield 
C)  P/E ratio 
D)  yield to maturity 
E)  discount yield 
A)  current yield 
B)  dividend yield 
C)  P/E ratio 
D)  yield to maturity 
E)  discount yield

Question 2

Debt securities are often called fixed-income securities because

Accepted Answer

A)  the government fixes the maximum rate that can be paid on bonds. 
B)  they are held predominantly by older people who are living on fixed incomes. 
C)  they pay a fixed amount at maturity. 
D)  they promise either a fixed stream of income or a stream of income determined by a specific formula. 
E)  they were the first type of investment offered to the public which allowed them to "fix" their income at a higher level by investing in bonds. 
A)  the government fixes the maximum rate that can be paid on bonds. 
B)  they are held predominantly by older people who are living on fixed incomes. 
C)  they pay a fixed amount at maturity. 
D)  they promise either a fixed stream of income or a stream of income determined by a specific formula. 
E)  they were the first type of investment offered to the public which allowed them to "fix" their income at a higher level by investing in bonds.

Question 3

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. 
E)  have a call price that declines as time passes and are called when interest rates increase appreciably. 
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. 
E)  have a call price that declines as time passes and are called when interest rates increase appreciably.

Question 4

If a 7.75% coupon bond is trading for $1,019.00, it has a current yield of

Accepted Answer

A)  7.38%. 
B)  6.64%. 
C)  7.25%. 
D)  7.61%. 
E)  7.18%. 
A)  7.38%. 
B)  6.64%. 
C)  7.25%. 
D)  7.61%. 
E)  7.18%.

Question 5

A 7.5% coupon bond with an ask price of $100.00 pays interest every 182 days. If the bond paid interest 62 days ago, the invoice price of the bond would be

Accepted Answer

A)  $1,011.67. 
B)  $1,012.35. 
C)  $1,012.77. 
D)  $1,011.98. 
E)  $1,012.15. 
A)  $1,011.67. 
B)  $1,012.35. 
C)  $1,012.77. 
D)  $1,011.98. 
E)  $1,012.15.

Question 6

A CDO is a

Accepted Answer

A)  command duty officer. 
B)  collateralized debt obligation. 
C)  commercial debt originator. 
D)  collateralized debenture originator. 
E)  common debt officer. 
A)  command duty officer. 
B)  collateralized debt obligation. 
C)  commercial debt originator. 
D)  collateralized debenture originator. 
E)  common debt officer.

Question 7

One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Accepted Answer

A)  $60.00, $1,000 
B)  $42.00, $1,042 
C)  $60.00, $1,042 
D)  $62.52, $1,042 
E)  $102.00, $1,000 
A)  $60.00, $1,000 
B)  $42.00, $1,042 
C)  $60.00, $1,042 
D)  $62.52, $1,042 
E)  $102.00, $1,000

Question 8

A coupon bond pays interest semi-annually, matures in five years, has a par value of $1,000, a coupon rate of 12%, and an effective annual yield to maturity of 10.25%. The price the bond should sell for today is

Accepted Answer

A)  $922.77. 
B)  $924.16. 
C)  $1,075.80. 
D)  $1,077.20. 
E)  None of the options are correct. 
A)  $922.77. 
B)  $924.16. 
C)  $1,075.80. 
D)  $1,077.20. 
E)  None of the options are correct.

Question 9

A 10% coupon bond maturing in 10 years that requires annual payments is expected to make all coupon payments but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975?

Accepted Answer

A)  10.00% 
B)  6.68% 
C)  11.00% 
D)  8.68% 
E)  None of the options are correct. 
A)  10.00% 
B)  6.68% 
C)  11.00% 
D)  8.68% 
E)  None of the options are correct.

Question 10

SIVs are

Accepted Answer

A)  structured investment vehicles. 
B)  structured interest rate vehicles. 
C)  semi-annual investment vehicles. 
D)  riskless investments. 
E)  structured insured variable rate instruments. 
A)  structured investment vehicles. 
B)  structured interest rate vehicles. 
C)  semi-annual investment vehicles. 
D)  riskless investments. 
E)  structured insured variable rate instruments.

Question 11

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. 
E)  the bid price. 
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. 
E)  the bid price.

Question 12

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now, the price of this bond will be

Accepted Answer

A)  higher. 
B)  lower. 
C)  the same. 
D)  $1,000. 
E)  Cannot be determined. 
A)  higher. 
B)  lower. 
C)  the same. 
D)  $1,000. 
E)  Cannot be determined.

Question 13

You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell.

Accepted Answer

A)  10.00% 
B)  20.42% 
C)  13.8% 
D)  1.21% 
E)  None of the options are correct. 
A)  10.00% 
B)  20.42% 
C)  13.8% 
D)  1.21% 
E)  None of the options are correct.

Question 14

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be _________ if the coupon rate is 12%.

Accepted Answer

A)  $922.77 
B)  $924.16 
C)  $1,075.82 
D)  $1,077.20 
E)  None of the options 
A)  $922.77 
B)  $924.16 
C)  $1,075.82 
D)  $1,077.20 
E)  None of the options

Question 15

A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years has a yield of 6.2%. A bond issued by Ford due in 5 years has a yield of 7.5%; a bond issued by Shell Oil due in one year has a yield of 6.5%. The default risk premiums on the bonds issued by Shell and Ford, respectively, are

Accepted Answer

A)  1.0% and 1.2%. 
B)  0.7% and 1.5%. 
C)  1.2% and 1.0%. 
D)  0.8% and 1.3%. 
E)  None of the options are correct. 
A)  1.0% and 1.2%. 
B)  0.7% and 1.5%. 
C)  1.2% and 1.0%. 
D)  0.8% and 1.3%. 
E)  None of the options are correct.

Question 16

Using semi-annual compounding, a 15-year zero-coupon bond that has a par value of $1,000 and a required return of 8% would be priced at approximately

Accepted Answer

A)  $308. 
B)  $315. 
C)  $464. 
D)  $555. 
E)  None of the options are correct. 
A)  $308. 
B)  $315. 
C)  $464. 
D)  $555. 
E)  None of the options are correct.

Question 17

To earn a high rating from the bond-rating agencies, a firm should have

Accepted Answer

A)  a low times-interest-earned ratio. 
B)  a low debt-to-equity ratio. 
C)  a high quick ratio. 
D)  a low debt-to-equity ratio and a high quick ratio. 
E)  a low times-interest-earned ratio and a high quick ratio. 
A)  a low times-interest-earned ratio. 
B)  a low debt-to-equity ratio. 
C)  a high quick ratio. 
D)  a low debt-to-equity ratio and a high quick ratio. 
E)  a low times-interest-earned ratio and a high quick ratio.

Question 18

If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago, the accrued interest would be

Accepted Answer

A)  $5.67. 
B)  $7.35. 
C)  $6.35. 
D)  $6.15. 
E)  $7.12. 
A)  $5.67. 
B)  $7.35. 
C)  $6.35. 
D)  $6.15. 
E)  $7.12.

Question 19

You purchased an annual interest coupon bond one year ago that had six years remaining to maturity at that time. The coupon interest rate was 10%, and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been

Accepted Answer

A)  7.00%. 
B)  7.82%. 
C)  8.00%. 
D)  11.95%. 
E)  None of the options are correct. 
A)  7.00%. 
B)  7.82%. 
C)  8.00%. 
D)  11.95%. 
E)  None of the options are correct.

Question 20

A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are

Accepted Answer

A)  3.33% and 2.10%. 
B)  2.57% and 2.86%. 
C)  1.2% and 1.0%. 
D)  0.76% and 0.47%. 
E)  None of the options are correct. 
A)  3.33% and 2.10%. 
B)  2.57% and 2.86%. 
C)  1.2% and 1.0%. 
D)  0.76% and 0.47%. 
E)  None of the options are correct.

Exam 14: Bond Prices and Yields

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

Debt securities are often called fixed-income securities because

Callable bonds

If a 7.75% coupon bond is trading for $1,019.00, it has a current yield of

A 7.5% coupon bond with an ask price of $100.00 pays interest every 182 days. If the bond paid interest 62 days ago, the invoice price of the bond would be

A CDO is a

One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

A coupon bond pays interest semi-annually, matures in five years, has a par value of $1,000, a coupon rate of 12%, and an effective annual yield to maturity of 10.25%. The price the bond should sell for today is

A 10% coupon bond maturing in 10 years that requires annual payments is expected to make all coupon payments but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975?

SIVs are

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

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now, the price of this bond will be

You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell.

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be _________ if the coupon rate is 12%.

Using semi-annual compounding, a 15-year zero-coupon bond that has a par value of $1,000 and a required return of 8% would be priced at approximately

To earn a high rating from the bond-rating agencies, a firm should have

If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago, the accrued interest would be

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