Question 1

What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

Accepted Answer

A)  5.9 percent 
B)  6.0 percent 
C)  6.1 percent 
D)  10.2 percent 
A)  5.9 percent 
B)  6.0 percent 
C)  6.1 percent 
D)  10.2 percent

Question 2

A corporate bond with a 5 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9 percent. What will be the change in the bond's price in dollars? Assume interest payments are paid semiannually and par value is $1,000.

Accepted Answer

A)  −$43.61 
B)  −$51.07 
C)  −$62.43 
D)  −$56.31 
A)  −$43.61 
B)  −$51.07 
C)  −$62.43 
D)  −$56.31

Question 3

Which of the following statements is correct?

Accepted Answer

A)  Bonds with short-term maturities will have very little interest rate risk. 
B)  Bonds with lower coupon payments will have very little interest rate risk. 
C)  Bonds with higher credit ratings will have very little interest rate risk. 
D)  All of these choices are correct. 
A)  Bonds with short-term maturities will have very little interest rate risk. 
B)  Bonds with lower coupon payments will have very little interest rate risk. 
C)  Bonds with higher credit ratings will have very little interest rate risk. 
D)  All of these choices are correct.

Question 4

Under which conditions will an investor demand a larger return (yield) on a bond?

Accepted Answer

A)  The bond issue is upgraded from A to AA. 
B)  The bond issue is downgraded from A to BBB. 
C)  Interest rates decrease due to decline in inflation. 
D)  None of the conditions will cause an increase in the bond's yield. 
A)  The bond issue is upgraded from A to AA. 
B)  The bond issue is downgraded from A to BBB. 
C)  Interest rates decrease due to decline in inflation. 
D)  None of the conditions will cause an increase in the bond's yield.

Question 5

A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are made semiannually and par value is $1,000.

Accepted Answer

A)  $19.73 
B)  $81.87 
C)  $41.20 
D)  $66.03 
A)  $19.73 
B)  $81.87 
C)  $41.20 
D)  $66.03

Question 6

A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $1,000.)

Accepted Answer

A)  3.41 percent 
B)  3.45 percent 
C)  3.51 percent 
D)  6.90 percent 
A)  3.41 percent 
B)  3.45 percent 
C)  3.51 percent 
D)  6.90 percent

Question 7

Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)

Accepted Answer

A)  $90.29 
B)  $195.62 
C)  $1,195.62 
D)  $995.62 
A)  $90.29 
B)  $195.62 
C)  $1,195.62 
D)  $995.62

Question 8

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 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 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 should select Bond B because it has lower risk. 
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 should select Bond B because it has lower risk. 
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 9

Investment grade bonds include those bonds with ratings

Accepted Answer

A)  from AAA to BB. 
B)  from AAA to BBB. 
C)  from AAA to B. 
D)  from AAA to A. 
A)  from AAA to BB. 
B)  from AAA to BBB. 
C)  from AAA to B. 
D)  from AAA to A.

Question 10

A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $5,000.)

Accepted Answer

A)  4.5 percent 
B)  4.78 percent 
C)  7.13 percent 
D)  14.48 percent 
A)  4.5 percent 
B)  4.78 percent 
C)  7.13 percent 
D)  14.48 percent

Question 11

Which of the following is an important advantage to the issuer of a bond with a call provision?

Accepted Answer

A)  They are able to avoid interest rate risk. 
B)  They are able to avoid reinvestment rate risk. 
C)  They are able to reduce their credit risk. 
D)  They allow for refinancing opportunities. 
A)  They are able to avoid interest rate risk. 
B)  They are able to avoid reinvestment rate risk. 
C)  They are able to reduce their credit risk. 
D)  They allow for refinancing opportunities.

Question 12

Rank from highest credit risk to lowest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 6.55 percent, IBM bond with yield of 10.95 percent, Trump Casino bond with a yield of 9.15 percent, and Banc Ono bond with a yield of 9.46 percent.

Accepted Answer

A)  Treasury, Trump Casino, Banc Ono, IBM 
B)  Banc Ono, Trump Casino, IBM, Treasury 
C)  Trump Casino, Treasury, Banc Ono, IBM 
D)  IBM, Banc Ono, Trump Casino, Treasury 
A)  Treasury, Trump Casino, Banc Ono, IBM 
B)  Banc Ono, Trump Casino, IBM, Treasury 
C)  Trump Casino, Treasury, Banc Ono, IBM 
D)  IBM, Banc Ono, Trump Casino, Treasury

Question 13

A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 percent yield. Which bond will give the client more profit after taxes?

Accepted Answer

A)  the municipal bond. 
B)  the corporate bond. 
C)  Both give the client equal profits after taxes. 
D)  There is not enough information given to determine the answer. 
A)  the municipal bond. 
B)  the corporate bond. 
C)  Both give the client equal profits after taxes. 
D)  There is not enough information given to determine the answer.

Question 14

A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?

Accepted Answer

A)  the municipal bond. 
B)  the corporate bond. 
C)  Both give the client equal profits after taxes. 
D)  There is not enough information given to determine the answer. 
A)  the municipal bond. 
B)  the corporate bond. 
C)  Both give the client equal profits after taxes. 
D)  There is not enough information given to determine the answer.

Question 15

Reconsider a 3.25 percent TIPS that was issued with CPI reference of 186.7. 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 201.1. Now, at the end of the year, the CPI is 202.4 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)  1.6 percent 
B)  2.4 percent 
C)  5.8 percent 
D)  9.1 percent 
A)  1.6 percent 
B)  2.4 percent 
C)  5.8 percent 
D)  9.1 percent

What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

Which of the following statements is correct?

Under which conditions will an investor demand a larger return (yield) on a bond?

A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are made semiannually and par value is $1,000.

A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $1,000.)

Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)

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 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent tax bracket, which bond should she select and why?

Investment grade bonds include those bonds with ratings

Which of the following is an important advantage to the issuer of a bond with a call provision?

A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 percent yield. Which bond will give the client more profit after taxes?

A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?

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

What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

Which of the following statements is correct?

Under which conditions will an investor demand a larger return (yield) on a bond?

A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are made semiannually and par value is $1,000.

A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $1,000.)

Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)

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 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent tax bracket, which bond should she select and why?

Investment grade bonds include those bonds with ratings

Which of the following is an important advantage to the issuer of a bond with a call provision?

A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 percent yield. Which bond will give the client more profit after taxes?

A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?

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