Exam 7: Interest Rates and Bond Valuation

Dexter Mills issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price?

A deferred call provision:

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

The current yield is defined as the annual interest on a bond divided by the:

The yield to maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a coupon bond with 9 percent annual interest for $1,000. The bond has 12 years to maturity. Three years from now, the yield to maturity has declined to 7 percent and you decide to sell. What is your holding period yield?

A bond is quoted at a price of $1,011. This price is referred to as the:

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Which one of the following bonds is the least sensitive to interest rate risk?

You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars?

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

Protective covenants:

You are purchasing a 15-year, zero-coupon bond. The yield to maturity is 6.85 percent and the face value is $1,000. What is the current market price? Assume semiannual compounding.

The taxability risk premium compensates bondholders for which one of the following?

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Interest rates that include an inflation premium are referred to as:

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

A bond that pays interest annually yielded 7.37 percent last year. The inflation rate for the same period was 2.4 percent. What was the actual real rate of return?