Question 1

The increase you realize in buying power as a result of owning a bond is referred to as the ________ rate of return.

Accepted Answer

A) inflated 
B) market 
C) nominal 
D) real 
E) risk-free 
A) inflated 
B) market 
C) nominal 
D) real 
E) risk-free

Question 2

Assume an investor has a tax rate of 33 percent.What municipal bond rate is equivalent to a corporate rate of 7.8 percent for this investor?

Accepted Answer

A) 5.86% 
B) 4.37% 
C) 5.23% 
D) 6.08% 
E) 3.64% 
A) 5.86% 
B) 4.37% 
C) 5.23% 
D) 6.08% 
E) 3.64%

Question 3

The parts of an indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called

Accepted Answer

A) deferred call provisions. 
B) sinking funds provisions. 
C) protective covenants. 
D) trustee relationships. 
E) bond ratings. 
A) deferred call provisions. 
B) sinking funds provisions. 
C) protective covenants. 
D) trustee relationships. 
E) bond ratings.

Question 4

Last year,Theo purchased a fixed-rate,7-year bond at par that has a coupon rate of 6.5 percent.If the current market rate for this type and quality of bond is 6.8 percent,then he should expect

Accepted Answer

A) his interest payments to increase. 
B) the bond's yield to maturity to remain constant. 
C) the current yield today to be less than 6.5 percent. 
D) the bond's current market price to exceed its face value. 
E) to realize a capital loss if he sold the bond at today's market price. 
A) his interest payments to increase. 
B) the bond's yield to maturity to remain constant. 
C) the current yield today to be less than 6.5 percent. 
D) the bond's current market price to exceed its face value. 
E) to realize a capital loss if he sold the bond at today's market price.

Question 5

TJ Machine bonds have a coupon rate of 5.3 percent,a face value of $1,000,and pay interest semiannually.The bonds mature in 23 years and have a yield to maturity of 5.4 percent.What will be the percentage change in the bond's price if the market rate increases by 1 percent to 6.4 percent?

Accepted Answer

A) 13.32% 
B) 12.02% 
C) -11.96% 
D) -12.00% 
E) -13.13% 
A) 13.32% 
B) 12.02% 
C) -11.96% 
D) -12.00% 
E) -13.13%

Question 6

Bonds issued by the U.S.government

Accepted Answer

A) are considered to be default-free. 
B) are exempt from interest-rate risk. 
C) provide totally tax-free income. 
D) pay interest that is exempt from federal income tax. 
E) are taxed the same as municipal bonds. 
A) are considered to be default-free. 
B) are exempt from interest-rate risk. 
C) provide totally tax-free income. 
D) pay interest that is exempt from federal income tax. 
E) are taxed the same as municipal bonds.

Question 7

The yield to maturity on a bond is the rate

Accepted Answer

A) computed as the annual interest divided by the bond's market price. 
B) an investor earns if the bond is sold prior to the maturity date. 
C) of annual interest initially offered when the bond was issued. 
D) of return currently required by the market. 
E) of annual interest paid on the bond. 
A) computed as the annual interest divided by the bond's market price. 
B) an investor earns if the bond is sold prior to the maturity date. 
C) of annual interest initially offered when the bond was issued. 
D) of return currently required by the market. 
E) of annual interest paid on the bond.

Question 8

Assume you purchase a bond with a quoted price of 98.6208 on June 30.The bond pays interest on February 1 and August 1.The invoice price you pay for this purchase will equal the

Accepted Answer

A) clean price. 
B) asked price. 
C) dirty price. 
D) par value. 
E) bid price. 
A) clean price. 
B) asked price. 
C) dirty price. 
D) par value. 
E) bid price.

Question 9

The U.S.corporate bond market

Accepted Answer

A) provides end-of-day values for all privately and publicly issued bonds. 
B) is the largest securities market in the world based on trading volume. 
C) is based on bond dealers who trade in a face-to-face market. 
D) is more transparent than it was in the 1990s. 
E) provides daily price quotes through BDEX,the bond dealers exchange. 
A) provides end-of-day values for all privately and publicly issued bonds. 
B) is the largest securities market in the world based on trading volume. 
C) is based on bond dealers who trade in a face-to-face market. 
D) is more transparent than it was in the 1990s. 
E) provides daily price quotes through BDEX,the bond dealers exchange.

Question 10

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

Accepted Answer

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

Question 11

Assume a discount bond has a few years until maturity and a positive yield.All else constant,the bond's yield to maturity is

Accepted Answer

A) directly related to the time to maturity. 
B) equal to the coupon rate. 
C) inversely related to the bond's market price. 
D) unrelated to the time to maturity. 
E) less than its coupon rate. 
A) directly related to the time to maturity. 
B) equal to the coupon rate. 
C) inversely related to the bond's market price. 
D) unrelated to the time to maturity. 
E) less than its coupon rate.

Question 12

LIAS Inc.bonds have a face value of $1,000,mature in 17 years,pay interest semiannually,and have a coupon rate of 6.35 percent.The next interest payment will be paid 4 months from today.What is the clean price of this bond if the market rate of return is 6.5 percent?

Accepted Answer

A) $995.28 
B) $993.40 
C) $989.55 
D) $979.45 
E) $984.70 
A) $995.28 
B) $993.40 
C) $989.55 
D) $979.45 
E) $984.70

Question 13

A bond that pays interest annually yields a rate of return of 8.74 percent.The inflation rate for the same period is 2.48 percent.What is the actual real rate of return on this bond?

Accepted Answer

A) 5.79% 
B) 5.87% 
C) 6.11% 
D) 6.04% 
E) 5.91% 
A) 5.79% 
B) 5.87% 
C) 6.11% 
D) 6.04% 
E) 5.91%

Question 14

The overall level of interest rates is primarily affected by the

Accepted Answer

A) real rate. 
B) inflation rate. 
C) interest rate risk premium. 
D) liquidity premium. 
E) default risk premium. 
A) real rate. 
B) inflation rate. 
C) interest rate risk premium. 
D) liquidity premium. 
E) default risk premium.

Question 15

A "make-whole" call provision on a bond provides for

Accepted Answer

A) call prices that vary with the funds available in a sinking fund. 
B) a call price equal to the bond's approximate market value at the time of call. 
C) decreasing call prices as interest rates decrease. 
D) a call price equal to the face value plus all accrued interest to date. 
E) a call price equal to the face value. 
A) call prices that vary with the funds available in a sinking fund. 
B) a call price equal to the bond's approximate market value at the time of call. 
C) decreasing call prices as interest rates decrease. 
D) a call price equal to the face value plus all accrued interest to date. 
E) a call price equal to the face value.

Question 16

Which formula computes the actual real rate of return on an investment?

Accepted Answer

A) r = (1 + R )- (1 + h) 
B) r = (1 + R )/ (1 + h) 
C) r = (1 + R )- (1 + h)- 1 
D) r = (1 + R )/ (1 + h)- 1 
E) R = (1 + r)× (1 + h)- 1 
A) r = (1 + R )- (1 + h) 
B) r = (1 + R )/ (1 + h) 
C) r = (1 + R )- (1 + h)- 1 
D) r = (1 + R )/ (1 + h)- 1 
E) R = (1 + r)× (1 + h)- 1

Question 17

Long-term debt securities that are issued but not offered to the general public are referred to as

Accepted Answer

A) privately placed. 
B) zero coupon bonds. 
C) internal debt. 
D) equity securities. 
E) unfunded debt. 
A) privately placed. 
B) zero coupon bonds. 
C) internal debt. 
D) equity securities. 
E) unfunded debt.

Question 18

An upward sloping yield curve indicates

Accepted Answer

A) interest rates are declining. 
B) lower quality bonds have higher yields. 
C) short-term rates will rise sharply in the near future. 
D) an inverse relationship between bond prices and yields. 
E) long-term rates are higher than medium-term rates. 
A) interest rates are declining. 
B) lower quality bonds have higher yields. 
C) short-term rates will rise sharply in the near future. 
D) an inverse relationship between bond prices and yields. 
E) long-term rates are higher than medium-term rates.

Question 19

Which one of these definitions is correct?

Accepted Answer

A) Negative covenant: a "thou shalt" agreement 
B) Premium bond: bond that sells for less than face value 
C) Dirty price: market price,excluding accrued interest 
D) Call provision: issuer's right to repurchase a bond prior to maturity 
E) Unfunded debt: long-term corporate debt 
A) Negative covenant: a "thou shalt" agreement 
B) Premium bond: bond that sells for less than face value 
C) Dirty price: market price,excluding accrued interest 
D) Call provision: issuer's right to repurchase a bond prior to maturity 
E) Unfunded debt: long-term corporate debt

Question 20

A U.S.Treasury bond has a face value of $5,000,a coupon rate of 3 percent compounded semiannually,a yield to maturity of 2.97 percent,and 7 years until maturity.What is the clean price quote of this bond?

Accepted Answer

A) $5,001.46 
B) $5,013.33 
C) $4,991.08 
D) $4,996.72 
E) $5,009.42 
A) $5,001.46 
B) $5,013.33 
C) $4,991.08 
D) $4,996.72 
E) $5,009.42

Exam 5: Interest Rates and Bond Valuation

The increase you realize in buying power as a result of owning a bond is referred to as the ________ rate of return.

Assume an investor has a tax rate of 33 percent.What municipal bond rate is equivalent to a corporate rate of 7.8 percent for this investor?

The parts of an indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called

Last year,Theo purchased a fixed-rate,7-year bond at par that has a coupon rate of 6.5 percent.If the current market rate for this type and quality of bond is 6.8 percent,then he should expect

TJ Machine bonds have a coupon rate of 5.3 percent,a face value of $1,000,and pay interest semiannually.The bonds mature in 23 years and have a yield to maturity of 5.4 percent.What will be the percentage change in the bond's price if the market rate increases by 1 percent to 6.4 percent?

Bonds issued by the U.S.government

The yield to maturity on a bond is the rate

Assume you purchase a bond with a quoted price of 98.6208 on June 30.The bond pays interest on February 1 and August 1.The invoice price you pay for this purchase will equal the

The U.S.corporate bond market

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

Assume a discount bond has a few years until maturity and a positive yield.All else constant,the bond's yield to maturity is

LIAS Inc.bonds have a face value of $1,000,mature in 17 years,pay interest semiannually,and have a coupon rate of 6.35 percent.The next interest payment will be paid 4 months from today.What is the clean price of this bond if the market rate of return is 6.5 percent?

A bond that pays interest annually yields a rate of return of 8.74 percent.The inflation rate for the same period is 2.48 percent.What is the actual real rate of return on this bond?

The overall level of interest rates is primarily affected by the

A "make-whole" call provision on a bond provides for

Which formula computes the actual real rate of return on an investment?

Long-term debt securities that are issued but not offered to the general public are referred to as

An upward sloping yield curve indicates

Which one of these definitions is correct?

A U.S.Treasury bond has a face value of $5,000,a coupon rate of 3 percent compounded semiannually,a yield to maturity of 2.97 percent,and 7 years until maturity.What is the clean price quote of this bond?

Introduction to Corporate Finance

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Financial Statements Analysis and Financial Models

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Making Capital Investment Decisions

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Risk and Return: Lessons From Market History

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Efficient Capital Markets and Behavioral Challenges

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