Question 1

An investor buys a ten-year, 7 percent coupon bond for $1,050, holds it for one year and then sells it for $1,040.What was the investor's rate of return?

Accepted Answer

A) 5.71 percent 
B) 6.00 percent 
C) 6.67 percent 
D) 7.00 percent 
A) 5.71 percent 
B) 6.00 percent 
C) 6.67 percent 
D) 7.00 percent A

Question 2

What is meant by "default risk" in bonds, and how do investors respond to it?

Accepted Answer

Default risk refers to the probability of default by bond issuers.In the case of default, cash payments to bond investors may be delayed or omitted.Thus, investors walk a tightrope between wanting to receive as much yield as possible while still willing to bear the possibility of default.Rating agencies such as Standard & Poor's or Moody's evaluate the creditworthiness of bond issuers, and offer ratings of each issue.The lower the rating, the higher the likelihood of default and, therefore, the more of a default premium will be demanded by investors.Although bond ratings can change dramatically, it is often a case of gradual change such that investors have the opportunity of being forewarned.

Question 3

What price will be paid for a Canadian government bond with an ask price of 122.28?

Accepted Answer

A) $1,122.28 
B) $1,228.88 
C) $1,280.00 
D) $1,222.80 
A) $1,122.28 
B) $1,228.88 
C) $1,280.00 
D) $1,222.80 D

Question 4

Which of the following is correct when a bond investor's rate of return for a particular period exceeds the bond's coupon rate?

Accepted Answer

A) The bond increased in price during the period 
B) The bond decreased in price during the period 
C) The coupon payment increased during the period 
D) It is not possible for a bondholder's rate of return to exceed the bond's coupon rate 
A) The bond increased in price during the period 
B) The bond decreased in price during the period 
C) The coupon payment increased during the period 
D) It is not possible for a bondholder's rate of return to exceed the bond's coupon rate

Question 5

There is a negative relationship between interest rates and bond prices.

Accepted Answer

A) True 
 B)False

Question 6

What price was quoted to an investor who paid $982.50 for a $1,000 par value bond?

Accepted Answer

A) 82.500 
B) 97.250 
C) 98.250 
D) 98.080 
A) 82.500 
B) 97.250 
C) 98.250 
D) 98.080

Question 7

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

Accepted Answer

A) 5.00% 
B) 5.33% 
C) 6.46% 
D) 7.00% Rate of Return =
1054.47 - 1037.19 = 17.28
($70.00 - $17.28)/$1,054.47 
A) 5.00% 
B) 5.33% 
C) 6.46% 
D) 7.00% Rate of Return =
1054.47 - 1037.19 = 17.28
($70.00 - $17.28)/$1,054.47

Question 8

Bid and ask prices differ by the degree to which financial intermediaries profit from their role as financial middlemen.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

Accepted Answer

A) Increasing interest rates; bonds held to maturity 
B) Decreasing interest rates; bonds held to maturity 
C) Stable interest rates; bonds sold before maturity 
D) Increasing interest rates; bonds sold before maturity 
A) Increasing interest rates; bonds held to maturity 
B) Decreasing interest rates; bonds held to maturity 
C) Stable interest rates; bonds sold before maturity 
D) Increasing interest rates; bonds sold before maturity

Question 10

Periodic receipts of interest by the bondholder are known as:

Accepted Answer

A) The coupon rate 
B) A zero-coupon 
C) Coupon payments 
D) The default premium 
A) The coupon rate 
B) A zero-coupon 
C) Coupon payments 
D) The default premium

Question 11

Most Government of Canada bonds have a rating of 'C' that indicates that these bonds pay a coupon.

Accepted Answer

A) True 
 B)False

Question 12

Suppose a 20-year maturity bond currently selling for $1,050 is callable in 5 years at a call price of $1,060.If its yield to maturity is 8.25%, its yield to call is:

Accepted Answer

A) Less than 8.14%. 
B) 8.14%. 
C) More than 8.14% 
D) Could be any of these Using the BAII Plus calculator: 
A) Less than 8.14%. 
B) 8.14%. 
C) More than 8.14% 
D) Could be any of these Using the BAII Plus calculator:

Question 13

Which one of the following identifies the distinction between a Canada bond and a corporate bond?

Accepted Answer

A) Canada bonds make coupon payments; corporate bonds do not 
B) Corporate bonds have default risk; Canada bonds do not 
C) Corporate bonds have longer terms 
D) Canada bonds have higher yields 
A) Canada bonds make coupon payments; corporate bonds do not 
B) Corporate bonds have default risk; Canada bonds do not 
C) Corporate bonds have longer terms 
D) Canada bonds have higher yields

Question 14

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

Accepted Answer

A) 6.73 percent 
B) 7.00 percent 
C) 8.75 percent 
D) 10.56 percent 1 + real return = 1.11/1.04 
A) 6.73 percent 
B) 7.00 percent 
C) 8.75 percent 
D) 10.56 percent 1 + real return = 1.11/1.04

Question 15

If you purchase a three-year, 9% coupon bond for $950, how much could it be sold for two years later if interest rates have remained stable?

Accepted Answer

A) $964.95 
B) $981.56 
C) $983.33 
D) $1,000.00 Using the BAII Plus calculator: 
A) $964.95 
B) $981.56 
C) $983.33 
D) $1,000.00 Using the BAII Plus calculator:

Question 16

Many investors may be drawn to Canada bonds because of the bonds':

Accepted Answer

A) speculative-grade ratings 
B) High coupon payments 
C) Long periods until maturity 
D) Low default risk 
A) speculative-grade ratings 
B) High coupon payments 
C) Long periods until maturity 
D) Low default risk

Question 17

Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7 percent coupon.If interest rates for that grade of bond are currently 8.25 percent, what will be the market price of these bonds?

Accepted Answer

A) $917.06 
B) $928.84 
C) $987.50 
D) $1,000.00 Using the BAII Plus calculator: 
A) $917.06 
B) $928.84 
C) $987.50 
D) $1,000.00 Using the BAII Plus calculator:

Question 18

Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's:

Accepted Answer

A) Face value increases 
B) Current price decreases 
C) Interest payments increase 
D) Maturity date is extended 
A) Face value increases 
B) Current price decreases 
C) Interest payments increase 
D) Maturity date is extended

Question 19

Explain why it is necessary for bond prices to fluctuate in response to changing interest rates?

Accepted Answer

Bonds are long-term debt instruments tha

Question 20

What is the yield to maturity for a bond paying $100 annually that has six years until maturity and sells for $1,000?

Accepted Answer

A) 6.0 percent 
B) 8.5 percent 
C) 10.0 percent 
D) 12.5 percent Using the BAII Plus calculator: 
A) 6.0 percent 
B) 8.5 percent 
C) 10.0 percent 
D) 12.5 percent Using the BAII Plus calculator:

Exam 6: Valuing Bonds

An investor buys a ten-year, 7 percent coupon bond for $1,050, holds it for one year and then sells it for $1,040.What was the investor's rate of return?

What is meant by "default risk" in bonds, and how do investors respond to it?

What price will be paid for a Canadian government bond with an ask price of 122.28?

Which of the following is correct when a bond investor's rate of return for a particular period exceeds the bond's coupon rate?

There is a negative relationship between interest rates and bond prices.

What price was quoted to an investor who paid $982.50 for a $1,000 par value bond?

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19?

Bid and ask prices differ by the degree to which financial intermediaries profit from their role as financial middlemen.

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

Periodic receipts of interest by the bondholder are known as:

Most Government of Canada bonds have a rating of 'C' that indicates that these bonds pay a coupon.

Suppose a 20-year maturity bond currently selling for $1,050 is callable in 5 years at a call price of $1,060.If its yield to maturity is 8.25%, its yield to call is:

Which one of the following identifies the distinction between a Canada bond and a corporate bond?

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

If you purchase a three-year, 9% coupon bond for $950, how much could it be sold for two years later if interest rates have remained stable?

Many investors may be drawn to Canada bonds because of the bonds':

Two years ago bonds were issued with 10 years until maturity, selling at par, and a 7 percent coupon.If interest rates for that grade of bond are currently 8.25 percent, what will be the market price of these bonds?

Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond's:

Explain why it is necessary for bond prices to fluctuate in response to changing interest rates?

What is the yield to maturity for a bond paying $100 annually that has six years until maturity and sells for $1,000?

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

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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