Question 1

Bond ratings measure a bond's credit risk.

Accepted Answer

A) True 
 B)False

Question 2

Which one of the following is fixed for the life of a given bond?

Accepted Answer

A)  current price 
B)  current yield 
C)  yield to maturity 
D)  coupon rate 
A)  current price 
B)  current yield 
C)  yield to maturity 
D)  coupon rate

Question 3

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 4

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%

Question 5

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 6

What is the coupon rate for a bond with 3 years until maturity,a price of $1,053.46,and a yield to maturity of 6%? Interest is paid annually.

Accepted Answer

A)  6% 
B)  8% 
C)  10% 
D)  11% 
A)  6% 
B)  8% 
C)  10% 
D)  11%

Question 7

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%?

Accepted Answer

A)  4.20% 
B)  8.64% 
C)  9.00% 
D)  9.20% 
A)  4.20% 
B)  8.64% 
C)  9.00% 
D)  9.20%

Question 8

Bonds with a rating of Ba or below by Moody's are referred to as speculative grade,high-yield,or junk bonds.

Accepted Answer

A) True 
 B)False

Question 9

Which one of the following is most apt to be correct for a CCC-rated bond,compared to a BBB-rated bond?

Accepted Answer

A)  the CCC bond will have a variable-coupon rate. 
B)  the CCC bond will have a shorter term. 
C)  the CCC bond will offer a higher promised yield to maturity. 
D)  the CCC bond will have a higher price for the same term. 
A)  the CCC bond will have a variable-coupon rate. 
B)  the CCC bond will have a shorter term. 
C)  the CCC bond will offer a higher promised yield to maturity. 
D)  the CCC bond will have a higher price for the same term.

Question 10

Assume a bond has been owned by four different investors during its 20-year history.Which one of the following is most apt to have been different for each of these owners?

Accepted Answer

A)  Coupon rate 
B)  Coupon frequency 
C)  Par value 
D)  Yield to maturity 
A)  Coupon rate 
B)  Coupon frequency 
C)  Par value 
D)  Yield to maturity

Question 11

How much should you be prepared to pay for a $1,000 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?

Accepted Answer

A)  $411.84 
B)  $897.04 
C)  $985.00 
D)  $1,000.00 
A)  $411.84 
B)  $897.04 
C)  $985.00 
D)  $1,000.00

Question 12

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 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 an investor 11% in nominal return during a year in which the rate of inflation is 4%,then the investor's real return is:

Accepted Answer

A)  6.73%. 
B)  6.31%. 
C)  15.44%. 
D)  10.56%. 
A)  6.73%. 
B)  6.31%. 
C)  15.44%. 
D)  10.56%.

Question 15

A bond has an ask quote of 99.5625 and a bid quote of 99.5475.How much will the bond dealer make on the purchase and resell of a $100,000 bond if they earn a 10% commission?

Accepted Answer

A)  $150 
B)  $1,500 
C)  $15 
D)  $1.50 
A)  $150 
B)  $1,500 
C)  $15 
D)  $1.50

Question 16

Assume a bond is currently selling at par value.What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

Accepted Answer

A)  The price of the bond will increase. 
B)  The coupon rate of the bond will increase. 
C)  The par value of the bond will decrease. 
D)  The coupon payments will be adjusted to the new discount rate. 
A)  The price of the bond will increase. 
B)  The coupon rate of the bond will increase. 
C)  The par value of the bond will decrease. 
D)  The coupon payments will be adjusted to the new discount rate.

Question 17

If an investor purchases a 3%,5-year bond at its par value of $1,000 and the CPI increases 3% over each of the next 5 years,what will be the real value of the principal at maturity?

Accepted Answer

A)  $1,000.00 
B)  $1,030.00 
C)  $1,060.90 
D)  $1,061.36 
A)  $1,000.00 
B)  $1,030.00 
C)  $1,060.90 
D)  $1,061.36

Question 18

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

Accepted Answer

A)  the coupon rate increases to 10%. 
B)  the coupon rate remains at 9%. 
C)  the coupon rate remains at 8%. 
D)  the coupon rate decreases to 8%. 
A)  the coupon rate increases to 10%. 
B)  the coupon rate remains at 9%. 
C)  the coupon rate remains at 8%. 
D)  the coupon rate decreases to 8%.

Question 19

What happens to a discount bond as the time to maturity decreases?

Accepted Answer

A)  the coupon rate increases. 
B)  the bond price increases. 
C)  the coupon rate decreases. 
D)  the bond price decreases. 
A)  the coupon rate increases. 
B)  the bond price increases. 
C)  the coupon rate decreases. 
D)  the bond price decreases.

Question 20

The current yield tends to understate a bond's total return when the bond sells for a discount because:

Accepted Answer

A)  increases in interest rates will increase the current yield. 
B)  the bond's price will increase each year. 
C)  current yields show only nominal returns. 
D)  the bond may have a higher face value. 
A)  increases in interest rates will increase the current yield. 
B)  the bond's price will increase each year. 
C)  current yields show only nominal returns. 
D)  the bond may have a higher face value.

Exam 6: Valuing Bonds

Bond ratings measure a bond's credit risk.

Which one of the following is fixed for the life of a given bond?

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

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?

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?

What is the coupon rate for a bond with 3 years until maturity,a price of $1,053.46,and a yield to maturity of 6%? Interest is paid annually.

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%?

Bonds with a rating of Ba or below by Moody's are referred to as speculative grade,high-yield,or junk bonds.

Which one of the following is most apt to be correct for a CCC-rated bond,compared to a BBB-rated bond?

Assume a bond has been owned by four different investors during its 20-year history.Which one of the following is most apt to have been different for each of these owners?

How much should you be prepared to pay for a $1,000 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?

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?

A "convertible bond" provides the option to convert:

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%,then the investor's real return is:

A bond has an ask quote of 99.5625 and a bid quote of 99.5475.How much will the bond dealer make on the purchase and resell of a $100,000 bond if they earn a 10% commission?

Assume a bond is currently selling at par value.What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

If an investor purchases a 3%,5-year bond at its par value of $1,000 and the CPI increases 3% over each of the next 5 years,what will be the real value of the principal at maturity?

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

What happens to a discount bond as the time to maturity decreases?

The current yield tends to understate a bond's total return when the bond sells for a discount because:

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 and Payout 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

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