Question 1

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

Accepted Answer

A)  .05/(1 − t*) = .07. 
B)  .05 − (1 − t*) = .07. 
C)  .07 + (1 − t*) = .05. 
D)  .05 (1 − t*) = .07. 
E)  .05 (1 + t*) = .07. 
A)  .05/(1 − t*) = .07. 
B)  .05 − (1 − t*) = .07. 
C)  .07 + (1 − t*) = .05. 
D)  .05 (1 − t*) = .07. 
E)  .05 (1 + t*) = .07.

Question 2

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity.

Accepted Answer

A)  a premium; less than 
B)  a premium; equal to 
C)  a discount; less than 
D)  a discount; higher than 
E)  par; less than 
A)  a premium; less than 
B)  a premium; equal to 
C)  a discount; less than 
D)  a discount; higher than 
E)  par; less than

Question 3

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

Accepted Answer

A)  default 
B)  market movements 
C)  interest rate changes 
D)  inflation 
E)  the time to maturity 
A)  default 
B)  market movements 
C)  interest rate changes 
D)  inflation 
E)  the time to maturity

Question 4

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

Accepted Answer

A)  coupon rate will also increase. 
B)  current yield will decrease. 
C)  yield to maturity will be less than the coupon rate. 
D)  market price of the bond will decrease. 
E)  coupon payment will increase. 
A)  coupon rate will also increase. 
B)  current yield will decrease. 
C)  yield to maturity will be less than the coupon rate. 
D)  market price of the bond will decrease. 
E)  coupon payment will increase.

Question 5

Which one of the following relationships is stated correctly?

Accepted Answer

A)  The coupon rate exceeds the current yield when a bond sells at a discount. 
B)  The call price must equal the par value. 
C)  An increase in market rates increases the market price of a bond. 
D)  Decreasing the time to maturity increases the price of a discount bond, all else constant. 
E)  Increasing the coupon rate decreases the current yield, all else constant. 
A)  The coupon rate exceeds the current yield when a bond sells at a discount. 
B)  The call price must equal the par value. 
C)  An increase in market rates increases the market price of a bond. 
D)  Decreasing the time to maturity increases the price of a discount bond, all else constant. 
E)  Increasing the coupon rate decreases the current yield, all else constant.

Question 6

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Accepted Answer

A)  Debenture 
B)  Callable 
C)  Floating-rate 
D)  Junk 
E)  Zero coupon 
A)  Debenture 
B)  Callable 
C)  Floating-rate 
D)  Junk 
E)  Zero coupon

Question 7

Samantha owns a reverse convertible bond. At maturity, the principal amount will be repaid in:

Accepted Answer

A)  shares of stock. 
B)  cash while the interest is paid in shares of stock. 
C)  the form of a newly issued bond. 
D)  either shares of stock or a newly issued bond. 
E)  either cash or shares of stock. 
A)  shares of stock. 
B)  cash while the interest is paid in shares of stock. 
C)  the form of a newly issued bond. 
D)  either shares of stock or a newly issued bond. 
E)  either cash or shares of stock.

Question 8

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:

Accepted Answer

A)  force the issuer to repurchase the bond prior to maturity. 
B)  convert the bond into equity shares. 
C)  defer all taxable income until the bond matures. 
D)  convert the bond into a perpetuity paying 5 percent. 
E)  have the principal amount adjusted for inflation. 
A)  force the issuer to repurchase the bond prior to maturity. 
B)  convert the bond into equity shares. 
C)  defer all taxable income until the bond matures. 
D)  convert the bond into a perpetuity paying 5 percent. 
E)  have the principal amount adjusted for inflation.

Question 9

Which one of the following applies to a premium bond?

Accepted Answer

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

Question 10

The yield to maturity on a bond is currently 8.76 percent. The real rate of return is 4.48 percent. What is the rate of inflation?

Accepted Answer

A)  4.10 percent 
B)  5.64 percent 
C)  7.24 percent 
D)  12.04 percent 
E)  13.63 percent 
A)  4.10 percent 
B)  5.64 percent 
C)  7.24 percent 
D)  12.04 percent 
E)  13.63 percent

Question 11

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Accepted Answer

A)  Default risk 
B)  Taxability 
C)  Liquidity 
D)  Inflation 
E)  Interest rate risk 
A)  Default risk 
B)  Taxability 
C)  Liquidity 
D)  Inflation 
E)  Interest rate risk

Question 12

Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

Accepted Answer

A)  $1,199.80 
B)  $999.85 
C)  $903.42 
D)  $1,091.00 
E)  $1,007.52 
A)  $1,199.80 
B)  $999.85 
C)  $903.42 
D)  $1,091.00 
E)  $1,007.52

Question 13

The 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value and matures in 12 years. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 4 months from today?

Accepted Answer

A)  $987.00 
B)  $994.50 
C)  $1,002.00 
D)  $1,011.25 
E)  $1,022.50 
A)  $987.00 
B)  $994.50 
C)  $1,002.00 
D)  $1,011.25 
E)  $1,022.50

Question 14

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Accepted Answer

A)  Note 
B)  Discounted 
C)  Zero-coupon 
D)  Callable 
E)  Debenture 
A)  Note 
B)  Discounted 
C)  Zero-coupon 
D)  Callable 
E)  Debenture

Question 15

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?

Accepted Answer

A)  Decreased in value due to the change in inflation rates 
B)  Experienced an increase in its bond rating 
C)  Maintained a fixed real rate of return 
D)  Increased in value in response to the change in market rates 
E)  Increased in value due to a decrease in time to maturity 
A)  Decreased in value due to the change in inflation rates 
B)  Experienced an increase in its bond rating 
C)  Maintained a fixed real rate of return 
D)  Increased in value in response to the change in market rates 
E)  Increased in value due to a decrease in time to maturity

Question 16

Which one of these statements is correct?

Accepted Answer

A)  Most long-term bond issues are referred to as unfunded debt. 
B)  Bonds often provide tax benefits to issuers. 
C)  The risk of a company financially failing decreases when the company issues bonds. 
D)  All bonds are treated equally in a bankruptcy proceeding. 
E)  A debenture is a senior secured debt. 
A)  Most long-term bond issues are referred to as unfunded debt. 
B)  Bonds often provide tax benefits to issuers. 
C)  The risk of a company financially failing decreases when the company issues bonds. 
D)  All bonds are treated equally in a bankruptcy proceeding. 
E)  A debenture is a senior secured debt.

Question 17

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

Accepted Answer

A)  Coupon 
B)  Face value 
C)  Discount 
D)  Yield 
E)  Dirty price 
A)  Coupon 
B)  Face value 
C)  Discount 
D)  Yield 
E)  Dirty price

Question 18

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

Accepted Answer

A)  coupon rate. 
B)  face rate. 
C)  call rate. 
D)  yield to maturity. 
E)  current yield. 
A)  coupon rate. 
B)  face rate. 
C)  call rate. 
D)  yield to maturity. 
E)  current yield.

Question 19

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

Accepted Answer

A)  quoted price. 
B)  spread price. 
C)  clean price. 
D)  dirty price. 
E)  call price. 
A)  quoted price. 
B)  spread price. 
C)  clean price. 
D)  dirty price. 
E)  call price.

Question 20

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

Accepted Answer

A)  dirty price. 
B)  redemption value. 
C)  call premium. 
D)  original-issue discount. 
E)  redemption discount. 
A)  dirty price. 
B)  redemption value. 
C)  call premium. 
D)  original-issue discount. 
E)  redemption discount.

Exam 7: Interest Rates and Bond Valuation

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity.

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

Which one of the following relationships is stated correctly?

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Samantha owns a reverse convertible bond. At maturity, the principal amount will be repaid in:

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:

Which one of the following applies to a premium bond?

The yield to maturity on a bond is currently 8.76 percent. The real rate of return is 4.48 percent. What is the rate of inflation?

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

The 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value and matures in 12 years. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 4 months from today?

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?

Which one of these statements is correct?

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

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

Filters

All else constant, a bond will sell at when the coupon rate is the yield to maturity.