Question 1

Municipal bonds:

Accepted Answer

A)  are totally risk free. 
B)  generally have higher coupon rates than corporate bonds. 
C)  pay interest that is federally tax free. 
D)  are rarely callable. 
E)  are free of default risk. 
A)  are totally risk free. 
B)  generally have higher coupon rates than corporate bonds. 
C)  pay interest that is federally tax free. 
D)  are rarely callable. 
E)  are free of default risk.

Question 2

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Accepted Answer

A)  No difference 
B)  One months' interest 
C)  Two months' interest 
D)  Four months' interest 
E)  Five months' interest 
A)  No difference 
B)  One months' interest 
C)  Two months' interest 
D)  Four months' interest 
E)  Five months' interest

Question 3

You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

Accepted Answer

A)  The current yield to maturity is greater than 6 percent. 
B)  The current yield is 6 percent. 
C)  The next interest payment will be $30. 
D)  The bond is currently valued at one-half of its issue price. 
E)  You will realize a capital gain on the bond if you sell it today. 
A)  The current yield to maturity is greater than 6 percent. 
B)  The current yield is 6 percent. 
C)  The next interest payment will be $30. 
D)  The bond is currently valued at one-half of its issue price. 
E)  You will realize a capital gain on the bond if you sell it today.

Question 4

The zero coupon bonds of JK Industries have a market price of $318.46, a face value of $1,000, and a yield to maturity of 6.69 percent. How many years is it until these bonds mature? Assume semiannual compounding.

Accepted Answer

A)  34.78 years 
B)  32.28 years 
C)  17.39 years 
D)  24.01 years 
E)  16.14 years 
A)  34.78 years 
B)  32.28 years 
C)  17.39 years 
D)  24.01 years 
E)  16.14 years

Question 5

Which one of the following relationships applies to a par value bond?

Accepted Answer

A)  Yield to maturity > Current yield > Coupon rate 
B)  Coupon rate > Yield to maturity > Current yield 
C)  Coupon rate = Current yield = Yield to maturity 
D)  Coupon rate  Current yield > Yield to maturity 
A)  Yield to maturity > Current yield > Coupon rate 
B)  Coupon rate > Yield to maturity > Current yield 
C)  Coupon rate = Current yield = Yield to maturity 
D)  Coupon rate  Current yield > Yield to maturity

Question 6

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Accepted Answer

A)  Market value  Coupon rate 
E)  Yield to maturity < Coupon rate 
A)  Market value  Coupon rate 
E)  Yield to maturity < Coupon rate

Question 7

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

Accepted Answer

A)  Clean price 
B)  Dirty price 
C)  Asked price 
D)  Quoted price 
E)  Bid price 
A)  Clean price 
B)  Dirty price 
C)  Asked price 
D)  Quoted price 
E)  Bid price

Question 8

Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000?

Accepted Answer

A)  $949.70 
B)  $929.42 
C)  $936.48 
D)  $902.60 
E)  $913.48 
A)  $949.70 
B)  $929.42 
C)  $936.48 
D)  $902.60 
E)  $913.48

Question 9

The collar of a floating-rate bond refers to the minimum and maximum:

Accepted Answer

A)  call periods. 
B)  maturity dates. 
C)  market prices. 
D)  coupon rates. 
E)  yields to maturity. 
A)  call periods. 
B)  maturity dates. 
C)  market prices. 
D)  coupon rates. 
E)  yields to maturity.

Question 10

Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 3.5 years. How much will you receive for your bond if the market yield to maturity is currently 6.19 percent? Ignore any accrued interest. Assume semiannual compounding.

Accepted Answer

A)  $896.60 
B)  $798.09 
C)  $741.08 
D)  $756.14 
E)  $807.86 
A)  $896.60 
B)  $798.09 
C)  $741.08 
D)  $756.14 
E)  $807.86

Question 11

Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still wishes that he could share in the firm's success along with the shareholders. Which one of the following bond features will help him fulfill his wish?

Accepted Answer

A)  Put provision 
B)  Positive covenant 
C)  Warrant 
D)  Crossover rating 
E)  Call provision 
A)  Put provision 
B)  Positive covenant 
C)  Warrant 
D)  Crossover rating 
E)  Call provision

Question 12

Do-Well bonds have a face value of $1,000 and are currently quoted at 867.25. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?

Accepted Answer

A)  7.45 percent 
B)  7.67 percent 
C)  7.49 percent 
D)  8.03 percent 
E)  8.47 percent 
A)  7.45 percent 
B)  7.67 percent 
C)  7.49 percent 
D)  8.03 percent 
E)  8.47 percent

Question 13

Hot Foods has an investment-grade bond issue outstanding that pays $30 semiannual interest payments. The bonds sell at par and are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus .50 percent. Which one of the following correctly describes this bond?

Accepted Answer

A)  The bond rating is B. 
B)  Market value is less than face value. 
C)  The coupon rate is 3 percent. 
D)  The bond has a "make whole" call price. 
E)  The interest payments are variable. 
A)  The bond rating is B. 
B)  Market value is less than face value. 
C)  The coupon rate is 3 percent. 
D)  The bond has a "make whole" call price. 
E)  The interest payments are variable.

Question 14

A note is generally defined as:

Accepted Answer

A)  a secured bond with an initial maturity of 10 years or more. 
B)  a secured bond that initially matures in less than 10 years. 
C)  any bond secured by a blanket mortgage. 
D)  an unsecured bond with an initial maturity of 10 years or less. 
E)  any bond maturing in 10 years or more. 
A)  a secured bond with an initial maturity of 10 years or more. 
B)  a secured bond that initially matures in less than 10 years. 
C)  any bond secured by a blanket mortgage. 
D)  an unsecured bond with an initial maturity of 10 years or less. 
E)  any bond maturing in 10 years or more.

Question 15

A bond's principal is repaid on the ________ date.

Accepted Answer

A)  coupon 
B)  yield 
C)  maturity 
D)  dirty 
E)  clean 
A)  coupon 
B)  yield 
C)  maturity 
D)  dirty 
E)  clean

Question 16

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

Accepted Answer

A)  Coupon 
B)  Face value 
C)  Discount 
D)  Call premium 
E)  Yield 
A)  Coupon 
B)  Face value 
C)  Discount 
D)  Call premium 
E)  Yield

Question 17

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20?

Accepted Answer

A)  The bond is currently selling at a premium. 
B)  The current yield exceeds the coupon rate. 
C)  The bond is selling at par value. 
D)  The current yield exceeds the yield to maturity. 
E)  The coupon rate has increased to 7 percent. 
A)  The bond is currently selling at a premium. 
B)  The current yield exceeds the coupon rate. 
C)  The bond is selling at par value. 
D)  The current yield exceeds the yield to maturity. 
E)  The coupon rate has increased to 7 percent.

Question 18

A sinking fund is managed by a trustee for which one of the following purposes?

Accepted Answer

A)  Paying bond interest payments 
B)  Early bond redemption 
C)  Converting bonds into equity securities 
D)  Paying preferred dividends 
E)  Reducing bond coupon rates 
A)  Paying bond interest payments 
B)  Early bond redemption 
C)  Converting bonds into equity securities 
D)  Paying preferred dividends 
E)  Reducing bond coupon rates

Question 19

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

Accepted Answer

A)  interest rate risk and taxes. 
B)  taxes and default risk. 
C)  default and interest rate risks. 
D)  liquidity and inflation rate risks. 
E)  default, inflation, and interest rate risks. 
A)  interest rate risk and taxes. 
B)  taxes and default risk. 
C)  default and interest rate risks. 
D)  liquidity and inflation rate risks. 
E)  default, inflation, and interest rate risks.

Question 20

An investment offers a total return of 13.8 percent over the coming year. You believe the total real return will be only 9.4 percent. What do you believe the exact inflation rate will be for the next year?

Accepted Answer

A)  3.52 percent 
B)  3.67 percent 
C)  4.02 percent 
D)  3.89 percent 
E)  4.14 percent 
A)  3.52 percent 
B)  3.67 percent 
C)  4.02 percent 
D)  3.89 percent 
E)  4.14 percent

Exam 7: Interest Rates and Bond Valuation

Municipal bonds:

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

You own a bond that pays an annual coupon of 6 percent that matures five years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

The zero coupon bonds of JK Industries have a market price of $318.46, a face value of $1,000, and a yield to maturity of 6.69 percent. How many years is it until these bonds mature? Assume semiannual compounding.

Which one of the following relationships applies to a par value bond?

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000?

The collar of a floating-rate bond refers to the minimum and maximum:

Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 3.5 years. How much will you receive for your bond if the market yield to maturity is currently 6.19 percent? Ignore any accrued interest. Assume semiannual compounding.

Do-Well bonds have a face value of $1,000 and are currently quoted at 867.25. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?

A note is generally defined as:

A bond's principal is repaid on the ________ date.

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20?

A sinking fund is managed by a trustee for which one of the following purposes?

The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

An investment offers a total return of 13.8 percent over the coming year. You believe the total real return will be only 9.4 percent. What do you believe the exact inflation rate will be for the next year?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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