Question 1

The holder of which one of these securities has first claim on the assets of a firm?

Accepted Answer

A) senior debt 
B) common stock 
C) subordinated debt 
D) preferred stock 
A) senior debt 
B) common stock 
C) subordinated debt 
D) preferred stock

Question 2

A nominal Canadian Treasury bond yields:

Accepted Answer

A) are constant over time. 
B) are equal to the real yields. 
C) include a default premium. 
D) include an inflation premium. 
A) are constant over time. 
B) are equal to the real yields. 
C) include a default premium. 
D) include an inflation premium.

Question 3

The yield curve depicts the current relationship between:

Accepted Answer

A) bond yields and default risk. 
B) bond maturity and bond ratings. 
C) bond yields and maturity. 
D) promised yields and default premiums. 
A) bond yields and default risk. 
B) bond maturity and bond ratings. 
C) bond yields and maturity. 
D) promised yields and default premiums.

Question 4

Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.

Accepted Answer

A) True 
 B)False

Question 5

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

Accepted Answer

A) decline over time, reaching par value at maturity. 
B) increase over time, reaching par value at maturity. 
C) be less than the face value at maturity. 
D) exceed the face value at maturity. 
A) decline over time, reaching par value at maturity. 
B) increase over time, reaching par value at maturity. 
C) be less than the face value at maturity. 
D) exceed the face value at maturity.

Question 6

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday.Which one of these may have caused this price increase?

Accepted Answer

A) the bond's rating was downgraded. 
B) the issuing firm announced the next interest payment. 
C) the issuing firm announced that its annual earnings met investor expectations. 
D) market interest rates decreased. 
A) the bond's rating was downgraded. 
B) the issuing firm announced the next interest payment. 
C) the issuing firm announced that its annual earnings met investor expectations. 
D) market interest rates decreased.

Question 7

Which of these bond ratings is the lowest of Moody's investment-grade ratings?

Accepted Answer

A) A 
B) Ba 
C) Aa 
D) Baa 
A) A 
B) Ba 
C) Aa 
D) Baa

Question 8

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?

Accepted Answer

A) a zero-coupon bond with 20 years until maturity 
B) a coupon-paying bond with 20 years until maturity 
C) a floating-rate bond with 20 years until maturity 
D) a zero-coupon bond with 30 years until maturity 
A) a zero-coupon bond with 20 years until maturity 
B) a coupon-paying bond with 20 years until maturity 
C) a floating-rate bond with 20 years until maturity 
D) a zero-coupon bond with 30 years until maturity

Question 9

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with a coupon rate of 6.5% and sells the bond 1 year later for $1,037.19?

Accepted Answer

A) 4.53% 
B) 5.33% 
C) 5.16% 
D) 4.92% 
A) 4.53% 
B) 5.33% 
C) 5.16% 
D) 4.92%

Question 10

How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later?

Accepted Answer

A) $19.93 
B) $20.00 
C) $23.93 
D) $25.66 
A) $19.93 
B) $20.00 
C) $23.93 
D) $25.66

Question 11

What causes bonds to sell for a premium?

Accepted Answer

A) investment-quality ratings 
B) long periods until maturity 
C) coupon rates that exceed market rates 
D) speculative-grade ratings 
A) investment-quality ratings 
B) long periods until maturity 
C) coupon rates that exceed market rates 
D) speculative-grade ratings

Question 12

An investor buys a 5-year $1,000, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985.What was the investor's rate of return?

Accepted Answer

A) 9.00% 
B) 9.23% 
C) 9.65% 
D) 10.26% 
A) 9.00% 
B) 9.23% 
C) 9.65% 
D) 10.26%

Question 13

A "convertible bond" provides the option to convert:

Accepted Answer

A) a bond into shares of common stock. 
B) fixed-rate coupon payments into variable-rate payments. 
C) a zero-coupon bond to a coupon-paying bond. 
D) a junk bond to a zero-coupon investment-grade bond. 
A) a bond into shares of common stock. 
B) fixed-rate coupon payments into variable-rate payments. 
C) a zero-coupon bond to a coupon-paying bond. 
D) a junk bond to a zero-coupon investment-grade bond.

Question 14

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:

Accepted Answer

A) bond is selling at a discount. 
B) bond has a high default premium. 
C) promised yield is not likely to materialize. 
D) bond must be a Treasury Inflation-Protected Security. 
A) bond is selling at a discount. 
B) bond has a high default premium. 
C) promised yield is not likely to materialize. 
D) bond must be a Treasury Inflation-Protected Security.

Question 15

If a bond investor's rate of return for a particular period equaled the bond's coupon rate, then during that period, the bond's price:

Accepted Answer

A) increased. 
B) decreased. 
C) remained constant. 
D) changed, but the direction of the change is irrelevant. 
A) increased. 
B) decreased. 
C) remained constant. 
D) changed, but the direction of the change is irrelevant.

Question 16

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

Accepted Answer

A) the rate of return will be lower than the yield to maturity. 
B) the rate of return will be higher than the yield to maturity. 
C) the rate of return will equal the yield to maturity. 
D) there is no predetermined relationship between the rate of return and the yield to maturity. 
A) the rate of return will be lower than the yield to maturity. 
B) the rate of return will be higher than the yield to maturity. 
C) the rate of return will equal the yield to maturity. 
D) there is no predetermined relationship between the rate of return and the yield to maturity.

Question 17

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

Accepted Answer

A) $696.74 
B) $1,075.82 
C) $1,082.00 
D) $1,123.01 
A) $696.74 
B) $1,075.82 
C) $1,082.00 
D) $1,123.01

Question 18

If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable?

Accepted Answer

A) $848.12 
B) $923.50 
C) $862.92 
D) $911.15 
A) $848.12 
B) $923.50 
C) $862.92 
D) $911.15

Question 19

How does a bond dealer generate profits when trading bonds?

Accepted Answer

A) by maintaining bid prices lower than ask prices 
B) by maintaining bid prices higher than ask prices 
C) by retaining the bond's next coupon payment 
D) by lowering the bond's coupon rate upon resale 
A) by maintaining bid prices lower than ask prices 
B) by maintaining bid prices higher than ask prices 
C) by retaining the bond's next coupon payment 
D) by lowering the bond's coupon rate upon resale

Question 20

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity, then sells the bond after 1 year for $1,085?

Accepted Answer

A) 6.82% 
B) 6.91% 
C) 7.64% 
D) 9.00% 
A) 6.82% 
B) 6.91% 
C) 7.64% 
D) 9.00%

Exam 6: Valuing Bonds

The holder of which one of these securities has first claim on the assets of a firm?

A nominal Canadian Treasury bond yields:

The yield curve depicts the current relationship between:

Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday.Which one of these may have caused this price increase?

Which of these bond ratings is the lowest of Moody's investment-grade ratings?

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with a coupon rate of 6.5% and sells the bond 1 year later for $1,037.19?

How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later?

What causes bonds to sell for a premium?

An investor buys a 5-year $1,000, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985.What was the investor's rate of return?

A "convertible bond" provides the option to convert:

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:

If a bond investor's rate of return for a particular period equaled the bond's coupon rate, then during that period, the bond's price:

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable?

How does a bond dealer generate profits when trading bonds?

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity, then sells the bond after 1 year for $1,085?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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