Question 1

Which one of the following risks is associated with investing a coupon payment at a rate that is lower than the bond's yield to maturity?

Accepted Answer

A) reinvestment rate risk 
B) current rate risk 
C) payment risk 
D) current yield risk 
E) maturity risk 
A) reinvestment rate risk 
B) current rate risk 
C) payment risk 
D) current yield risk 
E) maturity risk

Question 2

A bond pays semiannual interest payments of $27.55. What is the coupon rate if the par value is $1,000?

Accepted Answer

A) 2.75% 
B) 5.51% 
C) 7.05% 
D) 8.50% 
E) 9.38% 
A) 2.75% 
B) 5.51% 
C) 7.05% 
D) 8.50% 
E) 9.38%

Question 3

What is the annual interest divided by the market price of a bond called?

Accepted Answer

A) coupon rate 
B) effective annual yield 
C) current yield 
D) yield to maturity 
E) yield to market 
A) coupon rate 
B) effective annual yield 
C) current yield 
D) yield to maturity 
E) yield to market

Question 4

A 6%, semiannual coupon bond has a yield to maturity of 7.4% and a Macaulay duration of 5.7. The bond has a modified duration of ________ and will have a ________ percentage increase in price in response to a 25 basis point decrease in the yield to maturity.

Accepted Answer

A) 5.4829; 1.35 
B) 5.4966; 1.32 
C) 5.4966; 1.37 
D) 5.3073; 1.33 
E) 5.3073; 1.38 
A) 5.4829; 1.35 
B) 5.4966; 1.32 
C) 5.4966; 1.37 
D) 5.3073; 1.33 
E) 5.3073; 1.38

Question 5

A bond has a Macaulay duration of 4.5, a yield to maturity of 5.1%, a coupon rate of 6.0%, and semiannual interest payments. What is the bond's modified duration?

Accepted Answer

A) 6.11 years 
B) 6.39 years 
C) 6.92 years 
D) 7.06 years 
E) 7.26 years 
A) 6.11 years 
B) 6.39 years 
C) 6.92 years 
D) 7.06 years 
E) 7.26 years

Question 6

The yield to maturity assumes which one of the following?

Accepted Answer

A) The bond is purchased at par value. 
B) All interest payments earn the latest rate of market interest. 
C) The bond is called on the earliest possible date. 
D) The bond is a pure discount bond. 
E) All coupon payments are reinvested at the yield to maturity rate. 
A) The bond is purchased at par value. 
B) All interest payments earn the latest rate of market interest. 
C) The bond is called on the earliest possible date. 
D) The bond is a pure discount bond. 
E) All coupon payments are reinvested at the yield to maturity rate.

Question 7

Will owns a bond with a make-whole call provision. The bond matures in 13 years but is being called today. The coupon rate is 8.25% with interest paid semiannually. What is the current call price if the applicable discount rate is 7.75% and the make-whole call provision applies?

Accepted Answer

A) $932.84 
B) $957.11 
C) $1,040.51 
D) $1,110.28 
E) $1,128.66 
A) $932.84 
B) $957.11 
C) $1,040.51 
D) $1,110.28 
E) $1,128.66

Question 8

A $1,000 face value bond is selling for $1,042.23. The bond pays interest semiannually and has 3 years to maturity. The yield to maturity is 5.86%. The current yield is ________% and the coupon rate is ________%.

Accepted Answer

A) 6.86; 6.90 
B) 7.12; 7.42 
C) 7.12; 7.24 
D) 7.42; 7.12 
E) 7.42; 7.24 
A) 6.86; 6.90 
B) 7.12; 7.42 
C) 7.12; 7.24 
D) 7.42; 7.12 
E) 7.42; 7.24

Question 9

Which one of the following statements is correct concerning discount bonds?

Accepted Answer

A) The current yield is less than the yield to maturity. 
B) The bonds will be redeemed at maturity for less than face value. 
C) The coupon rate is greater than the current yield. 
D) The clean price is greater than the dirty price. 
E) Only zero coupon bonds sell at a discount. 
A) The current yield is less than the yield to maturity. 
B) The bonds will be redeemed at maturity for less than face value. 
C) The coupon rate is greater than the current yield. 
D) The clean price is greater than the dirty price. 
E) Only zero coupon bonds sell at a discount.

Question 10

A bond has a Macaulay duration of 5.5, a yield to maturity of 6.2%, a coupon rate of 6.5%, and semiannual interest payments. What is the bond's modified duration?

Accepted Answer

A) 4.29 years 
B) 4.39 years 
C) 4.92 years 
D) 5.33 years 
E) 5.46 years 
A) 4.29 years 
B) 4.39 years 
C) 4.92 years 
D) 5.33 years 
E) 5.46 years

Question 11

Hallmark's Furniture Outlet is issuing 15-year, 7.5% callable bonds. These bonds are callable in 5 years with a call premium of $37.50. The bonds are being issued at par and pay interest semiannually. What is the yield to call?

Accepted Answer

A) 7.94% 
B) 8.12% 
C) 9.00% 
D) 9.47% 
E) 10.08% 
A) 7.94% 
B) 8.12% 
C) 9.00% 
D) 9.47% 
E) 10.08%

Question 12

Which one of the following involves creating a portfolio in a manner that minimizes the uncertainty of the portfolio's maturity target date value?

Accepted Answer

A) duration 
B) reinvestment 
C) immunization 
D) modification 
E) call protection 
A) duration 
B) reinvestment 
C) immunization 
D) modification 
E) call protection

Question 13

A callable bond:

Accepted Answer

A) can be paid off early at either the issuer's or the bondholder's request. 
B) can be redeemed early if the bondholder so requests. 
C) can have its maturity date extended by the issuer. 
D) can be redeemed by the issuer prior to maturity. 
E) is a bond that pays a variable interest payment. 
A) can be paid off early at either the issuer's or the bondholder's request. 
B) can be redeemed early if the bondholder so requests. 
C) can have its maturity date extended by the issuer. 
D) can be redeemed by the issuer prior to maturity. 
E) is a bond that pays a variable interest payment.

Question 14

Which one of the following will decrease the current yield of a bond?

Accepted Answer

A) increase in the face value 
B) change from semiannual to annual coupon payments 
C) decrease in the call premium 
D) decrease in the coupon rate 
E) decrease in the bond price 
A) increase in the face value 
B) change from semiannual to annual coupon payments 
C) decrease in the call premium 
D) decrease in the coupon rate 
E) decrease in the bond price

Question 15

A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments is referred to as which one of the following?

Accepted Answer

A) pure discount bond 
B) premium bond 
C) inflation bond 
D) straight bond 
E) conversion bond 
A) pure discount bond 
B) premium bond 
C) inflation bond 
D) straight bond 
E) conversion bond

Question 16

A bond has a modified duration of 7.22 and a yield to maturity of 8.1%. If interest rates increase by 75 basis points, the bond's price will decrease by ________%.

Accepted Answer

A) −.46 
B) −.54 
C) −4.60 
D) −5.42 
E) −6.18 
A) −.46 
B) −.54 
C) −4.60 
D) −5.42 
E) −6.18

Question 17

The yield to maturity is the:

Accepted Answer

A) discount rate that equates a bond's price with the present value of the bond's future cash flows. 
B) rate you will earn if your bond is called on the earliest possible date. 
C) rate computed by dividing the annual interest by the par value. 
D) rate used to compute the amount of each interest payment. 
E) rate computed as the annual interest divided by the market value. 
A) discount rate that equates a bond's price with the present value of the bond's future cash flows. 
B) rate you will earn if your bond is called on the earliest possible date. 
C) rate computed by dividing the annual interest by the par value. 
D) rate used to compute the amount of each interest payment. 
E) rate computed as the annual interest divided by the market value.

Question 18

Ted owns a bond which is callable in 2.5 years. The bond has a 6% coupon, pays interest semiannually, has a par value of $1,000, and has a yield to call of 6.3%. What is the call premium if the bond currently sells for $1,044.54?

Accepted Answer

A) $50 
B) $60 
C) $70 
D) $75 
E) $80 
A) $50 
B) $60 
C) $70 
D) $75 
E) $80

Question 19

Which one of the following statements is correct concerning Macaulay duration?

Accepted Answer

A) The duration of a zero coupon bond is equal to the time to maturity. 
B) Most bonds have durations in excess of 15 years. 
C) The duration of a coupon bond is a linear function between the time to maturity and the duration. 
D) The duration of a coupon bond is greater than that of a zero coupon bond given equal maturity dates. 
E) The percentage change in a bond's price is approximately equal to the change in the yield to maturity multiplied by (−1 × Macaulay duration). 
A) The duration of a zero coupon bond is equal to the time to maturity. 
B) Most bonds have durations in excess of 15 years. 
C) The duration of a coupon bond is a linear function between the time to maturity and the duration. 
D) The duration of a coupon bond is greater than that of a zero coupon bond given equal maturity dates. 
E) The percentage change in a bond's price is approximately equal to the change in the yield to maturity multiplied by (−1 × Macaulay duration).

Question 20

All else constant, which of the following will decrease the Macaulay duration of a straight bond?
I. reducing the coupon payment
II. shortening the time to maturity
III. lowering the yield to maturity

Accepted Answer

A) I only 
B) II only 
C) II and III only 
D) I and II only 
E) I and III only 
A) I only 
B) II only 
C) II and III only 
D) I and II only 
E) I and III only

Exam 10: Bond Prices and Yields

Which one of the following risks is associated with investing a coupon payment at a rate that is lower than the bond's yield to maturity?

A bond pays semiannual interest payments of $27.55. What is the coupon rate if the par value is $1,000?

What is the annual interest divided by the market price of a bond called?

A 6%, semiannual coupon bond has a yield to maturity of 7.4% and a Macaulay duration of 5.7. The bond has a modified duration of ________ and will have a ________ percentage increase in price in response to a 25 basis point decrease in the yield to maturity.

A bond has a Macaulay duration of 4.5, a yield to maturity of 5.1%, a coupon rate of 6.0%, and semiannual interest payments. What is the bond's modified duration?

The yield to maturity assumes which one of the following?

Will owns a bond with a make-whole call provision. The bond matures in 13 years but is being called today. The coupon rate is 8.25% with interest paid semiannually. What is the current call price if the applicable discount rate is 7.75% and the make-whole call provision applies?

A $1,000 face value bond is selling for $1,042.23. The bond pays interest semiannually and has 3 years to maturity. The yield to maturity is 5.86%. The current yield is ________% and the coupon rate is ________%.

Which one of the following statements is correct concerning discount bonds?

A bond has a Macaulay duration of 5.5, a yield to maturity of 6.2%, a coupon rate of 6.5%, and semiannual interest payments. What is the bond's modified duration?

Hallmark's Furniture Outlet is issuing 15-year, 7.5% callable bonds. These bonds are callable in 5 years with a call premium of $37.50. The bonds are being issued at par and pay interest semiannually. What is the yield to call?

Which one of the following involves creating a portfolio in a manner that minimizes the uncertainty of the portfolio's maturity target date value?

A callable bond:

Which one of the following will decrease the current yield of a bond?

A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments is referred to as which one of the following?

A bond has a modified duration of 7.22 and a yield to maturity of 8.1%. If interest rates increase by 75 basis points, the bond's price will decrease by ________%.

The yield to maturity is the:

Ted owns a bond which is callable in 2.5 years. The bond has a 6% coupon, pays interest semiannually, has a par value of $1,000, and has a yield to call of 6.3%. What is the call premium if the bond currently sells for $1,044.54?

Which one of the following statements is correct concerning Macaulay duration?

All else constant, which of the following will decrease the Macaulay duration of a straight bond? I. reducing the coupon payment II. shortening the time to maturity III. lowering the yield to maturity

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A 6%, semiannual coupon bond has a yield to maturity of 7.4% and a Macaulay duration of 5.7. The bond has a modified duration of and will have a percentage increase in price in response to a 25 basis point decrease in the yield to maturity.

A $1,000 face value bond is selling for $1,042.23. The bond pays interest semiannually and has 3 years to maturity. The yield to maturity is 5.86%. The current yield is % and the coupon rate is %.