Question 1

Which of the following is true regarding U.S. Government Agency Securities?

Accepted Answer

A)  They carry the federal government's full faith and credit guarantee. 
B)  They do not carry the federal government's full faith and credit guarantee. 
C)  They are insured by the FDIC. 
D)  They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee. 
A)  They carry the federal government's full faith and credit guarantee. 
B)  They do not carry the federal government's full faith and credit guarantee. 
C)  They are insured by the FDIC. 
D)  They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee. B

Question 2

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Accepted Answer

A)  credit quality risk 
B)  interest rate risk 
C)  liquidity rate risk 
D)  reinvestment rate risk 
A)  credit quality risk 
B)  interest rate risk 
C)  liquidity rate risk 
D)  reinvestment rate risk B

Question 3

Which of the following is NOT true about EE savings bonds?

Accepted Answer

A)  Interest payments are received annually but are tax deductible. 
B)  About one in six Americans owns a savings bond. 
C)  These are tax deferred investments. 
D)  Paper bonds sell for one-half of their face value. 
A)  Interest payments are received annually but are tax deductible. 
B)  About one in six Americans owns a savings bond. 
C)  These are tax deferred investments. 
D)  Paper bonds sell for one-half of their face value. A

Question 4

Many bonds are not callable, but for those that are, which of following is a common feature?

Accepted Answer

A)  called any time after 2 years of issuance 
B)  called any time after 2 years from the time an investor buys the bond 
C)  called any time after 10 years of issuance 
D)  called any time after 10 years from the time an investor buys the bond 
A)  called any time after 2 years of issuance 
B)  called any time after 2 years from the time an investor buys the bond 
C)  called any time after 10 years of issuance 
D)  called any time after 10 years from the time an investor buys the bond

Question 5

Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

Accepted Answer

A)  call premium 
B)  maturity date 
C)  par or face value 
D)  time to maturity value 
A)  call premium 
B)  maturity date 
C)  par or face value 
D)  time to maturity value

Question 6

If a bond is selling at a premium, then

Accepted Answer

A)  its coupon rate must be greater than its yield. 
B)  its coupon rate must be less than its yield. 
C)  its coupon rate must be equal to its yield. 
D)  its coupon rate must be equal to one-half the yield to maturity for a 5-year bond. 
A)  its coupon rate must be greater than its yield. 
B)  its coupon rate must be less than its yield. 
C)  its coupon rate must be equal to its yield. 
D)  its coupon rate must be equal to one-half the yield to maturity for a 5-year bond.

Question 7

A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity. You believe that in one year, the yield to maturity will be 8 percent. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

Accepted Answer

A)  $97.75 
B)  $101.50 
C)  $129.25 
D)  $137.75 
A)  $97.75 
B)  $101.50 
C)  $129.25 
D)  $137.75

Question 8

Determine the semi-annual interest payment for the following three bonds: 5.5 percent coupon corporate bond, 6.45 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Accepted Answer

A)  $5.50, $6.45, $0, respectively 
B)  $27.50, $32.25, $0, respectively 
C)  $27.50, $32.25, $100, respectively 
D)  $55.00, $64.50, $0, respectively 
A)  $5.50, $6.45, $0, respectively 
B)  $27.50, $32.25, $0, respectively 
C)  $27.50, $32.25, $100, respectively 
D)  $55.00, $64.50, $0, respectively

Question 9

A 6 percent corporate coupon bond is callable in 10 years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

A)  $60 
B)  $600 
C)  $1,000 
D)  $1,060 
A)  $60 
B)  $600 
C)  $1,000 
D)  $1,060

Question 10

Possible shapes for the yield curve include all of the following EXCEPT

Accepted Answer

A)  humped. 
B)  downward-sloping. 
C)  flat. 
D)  All of these choices are correct. 
A)  humped. 
B)  downward-sloping. 
C)  flat. 
D)  All of these choices are correct.

Question 11

Which of the following statements is correct?

Accepted Answer

A)  All else the same, an investor will require less return to invest in a callable bond than one that is not callable. 
B)  All else the same, an investor will require more return to invest in a callable bond than one that is not callable. 
C)  The call feature does not impact the return that investors demand. 
D)  We would need to know the current level of interest rates to answer this question. 
A)  All else the same, an investor will require less return to invest in a callable bond than one that is not callable. 
B)  All else the same, an investor will require more return to invest in a callable bond than one that is not callable. 
C)  The call feature does not impact the return that investors demand. 
D)  We would need to know the current level of interest rates to answer this question.

Question 12

Reconsider a 2.75 percent TIPS that was issued with CPI reference of 191.7. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.5. For the interest in the middle of the year, the CPI was 205.2. Now, at the end of the year, the CPI is 204.4 and the interest payment has been made. What is the total return of the TIPS in percentage terms for the year? (Assume semiannual interest payments and $1,000 par value.)

Accepted Answer

A)  2.75 percent 
B)  5.60 percent 
C)  6.35 percent 
D)  6.80 percent 
A)  2.75 percent 
B)  5.60 percent 
C)  6.35 percent 
D)  6.80 percent

Question 13

A 30-year bond with an 8 percent coupon has a yield to maturity of 6 percent. The bond could be called in seven years and if called would generate a yield to call of 5.75 percent. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.

Accepted Answer

A)  $219.73 
B)  $152.64 
C)  $106.29 
D)  $301.76 
A)  $219.73 
B)  $152.64 
C)  $106.29 
D)  $301.76

Question 14

An 8 percent coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in six years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semiannually and a par value of $5,000.

Accepted Answer

A)  4.68 percent; Yes, the bond will be called. 
B)  9.36 percent; Yes, the bond will be called. 
C)  9.36 percent; No, the bond will not be called. 
D)  10.71 percent; No, the bond will not be called. 
A)  4.68 percent; Yes, the bond will be called. 
B)  9.36 percent; Yes, the bond will be called. 
C)  9.36 percent; No, the bond will not be called. 
D)  10.71 percent; No, the bond will not be called.

Question 15

Which of the following determines the dollar amount of interest paid to bondholders?

Accepted Answer

A)  original issue discount 
B)  call premium 
C)  coupon rate 
D)  market rate 
A)  original issue discount 
B)  call premium 
C)  coupon rate 
D)  market rate

Question 16

A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

A)  1 year, 6 months 
B)  8 years 
C)  8 years, 6 months 
D)  10 years 
A)  1 year, 6 months 
B)  8 years 
C)  8 years, 6 months 
D)  10 years

Question 17

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 7.20 percent. Bond B is a corporate bond that yields 10.00 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

Accepted Answer

A)  Sally should select Bond A because its interest income is not taxable. 
B)  Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B. 
C)  Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B. 
D)  Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B. 
A)  Sally should select Bond A because its interest income is not taxable. 
B)  Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B. 
C)  Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B. 
D)  Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

Question 18

Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

Accepted Answer

A)  JM bond, TC bond, B&O bond, IB bond 
B)  IB bond, B&O bond, TC bond, JM bond 
C)  TC bond, B&O bond, IB bond, JM bond 
D)  JM bond, IB bond, B&O bond, TC bond 
A)  JM bond, TC bond, B&O bond, IB bond 
B)  IB bond, B&O bond, TC bond, JM bond 
C)  TC bond, B&O bond, IB bond, JM bond 
D)  JM bond, IB bond, B&O bond, TC bond

Question 19

A bond's main characteristics include?

Accepted Answer

A)  The date the principal will be paid 
B)  The par value of each bond 
C)  The coupon rate 
D)  All of the above 
A)  The date the principal will be paid 
B)  The par value of each bond 
C)  The coupon rate 
D)  All of the above

Question 20

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.75 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

Accepted Answer

A)  Sally should select Bond A because its interest income is not taxable. 
B)  Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B. 
C)  Sally should select Bond A because its TEY is greater than the yield of Bond B. 
D)  Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B. 
A)  Sally should select Bond A because its interest income is not taxable. 
B)  Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B. 
C)  Sally should select Bond A because its TEY is greater than the yield of Bond B. 
D)  Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B.

Which of the following is true regarding U.S. Government Agency Securities?

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Which of the following is NOT true about EE savings bonds?

Many bonds are not callable, but for those that are, which of following is a common feature?

Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

If a bond is selling at a premium, then

Determine the semi-annual interest payment for the following three bonds: 5.5 percent coupon corporate bond, 6.45 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A 6 percent corporate coupon bond is callable in 10 years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Possible shapes for the yield curve include all of the following EXCEPT

Which of the following statements is correct?

A 30-year bond with an 8 percent coupon has a yield to maturity of 6 percent. The bond could be called in seven years and if called would generate a yield to call of 5.75 percent. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.

Which of the following determines the dollar amount of interest paid to bondholders?

A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 7.20 percent. Bond B is a corporate bond that yields 10.00 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

A bond's main characteristics include?

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.75 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 7: Valuing Bonds

Which of the following is true regarding U.S. Government Agency Securities?

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Which of the following is NOT true about EE savings bonds?

Many bonds are not callable, but for those that are, which of following is a common feature?

Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

If a bond is selling at a premium, then

Determine the semi-annual interest payment for the following three bonds: 5.5 percent coupon corporate bond, 6.45 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A 6 percent corporate coupon bond is callable in 10 years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Possible shapes for the yield curve include all of the following EXCEPT

Which of the following statements is correct?

A 30-year bond with an 8 percent coupon has a yield to maturity of 6 percent. The bond could be called in seven years and if called would generate a yield to call of 5.75 percent. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.

Which of the following determines the dollar amount of interest paid to bondholders?

A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 7.20 percent. Bond B is a corporate bond that yields 10.00 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

A bond's main characteristics include?

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.75 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters