Question 1

All of the following items would need to be included in the bond's indenture agreement except _____.

Accepted Answer

A)  The coupon rate 
B)  The call feature 
C)  The credit rating 
D)  Steps that the bondholder can take in the event that the issuer fails to pay the interest or principal 
A)  The coupon rate 
B)  The call feature 
C)  The credit rating 
D)  Steps that the bondholder can take in the event that the issuer fails to pay the interest or principal

Question 2

Investment grade bonds include those bonds with ratings _____________.

Accepted Answer

A)  From AAA to BB 
B)  From AAA to BBB 
C)  From AAA to B 
D)  From AAA to A 
A)  From AAA to BB 
B)  From AAA to BBB 
C)  From AAA to B 
D)  From AAA to A

Question 3

An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 102.0. The bond can be called in 6 years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.

Accepted Answer

A)  4.31%; yes, the bond will be called 
B)  8.62%; yes, the bond will be called 
C)  8.62%; no, the bond will not be called 
D)  11.21%; no the bond will not be called 
A)  4.31%; yes, the bond will be called 
B)  8.62%; yes, the bond will be called 
C)  8.62%; no, the bond will not be called 
D)  11.21%; no the bond will not be called

Question 4

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25%. Bond B is a corporate bond that yields 7.75%. If Sally is in the 30% tax bracket, which bond should she select and why?

Accepted Answer

A)  Sally should select Bond A because its interest income is not taxable. 
B)  Sally should select Bond B is better because it has lower risk. 
C)  Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B. 
D)  Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B. 
A)  Sally should select Bond A because its interest income is not taxable. 
B)  Sally should select Bond B is better because it has lower risk. 
C)  Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B. 
D)  Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

Question 5

TIPS Capital Return Consider a 3.75% TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A)  3.75% 
B)  4.62% 
C)  7.10% 
D)  8.80% 
A)  3.75% 
B)  4.62% 
C)  7.10% 
D)  8.80%

Question 6

Junk bonds are those bonds with a credit rating of _____________.

Accepted Answer

A)  BB and lower 
B)  B and lower 
C)  BBB and lower 
D)  None of these. 
A)  BB and lower 
B)  B and lower 
C)  BBB and lower 
D)  None of these.

Question 7

Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

A)  1 year, 6 months 
B)  8 years 
C)  8 years, 6 months 
D)  10 years 
A)  1 year, 6 months 
B)  8 years 
C)  8 years, 6 months 
D)  10 years

Question 8

Which of the following statements is true?

Accepted Answer

A)  Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level. 
B)  Interest payments paid to corporate bond holders are not taxed at the federal level. 
C)  Interest payments paid to corporate bond holders are not taxed at the state level. 
D)  Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued. 
A)  Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level. 
B)  Interest payments paid to corporate bond holders are not taxed at the federal level. 
C)  Interest payments paid to corporate bond holders are not taxed at the state level. 
D)  Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

Question 9

The bond's annual coupon rate divided by its market price is referred to as the __________.

Accepted Answer

A)  Yield to Call 
B)  Yield to Maturity 
C)  Current Yield 
D)  Term Structure of Interest Rates 
A)  Yield to Call 
B)  Yield to Maturity 
C)  Current Yield 
D)  Term Structure of Interest Rates

Question 10

Which of the following statements is correct?

Accepted Answer

A)  Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators. 
B)  Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times. 
C)  Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them. 
D)  All of these statements are correct. 
A)  Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators. 
B)  Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times. 
C)  Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them. 
D)  All of these statements are correct.

Question 11

Bond prices are quoted in terms of which of the following?

Accepted Answer

A)  original issue discount 
B)  percent of par value 
C)  coupon rate in dollars 
D)  market rate in dollars 
A)  original issue discount 
B)  percent of par value 
C)  coupon rate in dollars 
D)  market rate in dollars

Question 12

Yields of a Bond A 4.75 percent coupon municipal bond has 20 years left to maturity and has a price quote of 98.9. The bond can be called in 5 years. The call premium is one year of coupon payments. Compute and discuss the bond's current yield, yield to maturity, taxable equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call. (Assume interest payments are paid semi-annually and a par value of $5,000.)

Accepted Answer

Current yield = 4.75 / 98.9 = 4.80%
YTM:

Question 13

TIPS Capital Return Consider a 2.75% TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars?

Accepted Answer

A)  $5.10 
B)  $11.20 
C)  $16.30 
D)  $27.69 
A)  $5.10 
B)  $11.20 
C)  $16.30 
D)  $27.69

Question 14

Calculate the price of a 6.5% coupon bond with 27 years left to maturity and a market interest rate of 5%. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

Accepted Answer

A)  $982.03; discount 
B)  $1,010.59; discount 
C)  $1,220.93; premium 
D)  $1,315.62; premium 
A)  $982.03; discount 
B)  $1,010.59; discount 
C)  $1,220.93; premium 
D)  $1,315.62; premium

Question 15

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

Accepted Answer

A)  They are able to avoid interest rate risk. 
B)  They are able to avoid reinvestment rate risk. 
C)  They are able to offer reduced credit risk as they are backed by the federal government. 
D)  They are tax exempt-at least at the federal level. 
A)  They are able to avoid interest rate risk. 
B)  They are able to avoid reinvestment rate risk. 
C)  They are able to offer reduced credit risk as they are backed by the federal government. 
D)  They are tax exempt-at least at the federal level.

Question 16

A 6.75% coupon bond with 13 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.

Accepted Answer

A)  12.14% 
B)  7.27% 
C)  14.54% 
D)  8.29% 
A)  12.14% 
B)  7.27% 
C)  14.54% 
D)  8.29%

Question 17

Bond Prices and Interest Rate Changes A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in percent? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A)  3.5% 
B)  5.3% 
C)  7.0% 
D)  7.15% 
A)  3.5% 
B)  5.3% 
C)  7.0% 
D)  7.15%

Question 18

What actions taken by the Federal Reserve preceded and possibly helped precipitate the recent financial crisis?

Accepted Answer

From 2000 to early 2004, the Federal Res

Question 19

Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

Accepted Answer

A)  The amount of uncertainty about whether the company will be able to make all the payments. 
B)  The term of the loan. 
C)  The level of interest rates in the overall economy at the time. 
D)  All of these are factors that determine the coupon rate of a company's bonds. 
A)  The amount of uncertainty about whether the company will be able to make all the payments. 
B)  The term of the loan. 
C)  The level of interest rates in the overall economy at the time. 
D)  All of these are factors that determine the coupon rate of a company's bonds.

Question 20

A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond's annual coupon rate?

Accepted Answer

A)  7.45% 
B)  8.03% 
C)  9.39% 
D)  10.82% 
A)  7.45% 
B)  8.03% 
C)  9.39% 
D)  10.82%

All of the following items would need to be included in the bond's indenture agreement except _____.

Investment grade bonds include those bonds with ratings _____________.

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25%. Bond B is a corporate bond that yields 7.75%. If Sally is in the 30% tax bracket, which bond should she select and why?

TIPS Capital Return Consider a 3.75% TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

Junk bonds are those bonds with a credit rating of _____________.

Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Which of the following statements is true?

The bond's annual coupon rate divided by its market price is referred to as the __________.

Which of the following statements is correct?

Bond prices are quoted in terms of which of the following?

TIPS Capital Return Consider a 2.75% TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars?

Calculate the price of a 6.5% coupon bond with 27 years left to maturity and a market interest rate of 5%. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

A 6.75% coupon bond with 13 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.

What actions taken by the Federal Reserve preceded and possibly helped precipitate the recent financial crisis?

Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond's annual coupon rate?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 7: Valuing Bonds

All of the following items would need to be included in the bond's indenture agreement except _____.

Investment grade bonds include those bonds with ratings _____________.

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25%. Bond B is a corporate bond that yields 7.75%. If Sally is in the 30% tax bracket, which bond should she select and why?

TIPS Capital Return Consider a 3.75% TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

Junk bonds are those bonds with a credit rating of _____________.

Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Which of the following statements is true?

The bond's annual coupon rate divided by its market price is referred to as the __________.

Which of the following statements is correct?

Bond prices are quoted in terms of which of the following?

TIPS Capital Return Consider a 2.75% TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars?

Calculate the price of a 6.5% coupon bond with 27 years left to maturity and a market interest rate of 5%. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

A 6.75% coupon bond with 13 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.

What actions taken by the Federal Reserve preceded and possibly helped precipitate the recent financial crisis?

Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond's annual coupon rate?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, Equity, and Capital Structure

Sharing Firm Wealth: Dividends, Share Repurchases, and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters