Question 1

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%. A

Question 2

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. A

Question 3

When a financial calculator or spreadsheet program finds a bond's yield to maturity, it uses a trial-and-error process.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

Accepted Answer

A)  The face value of the bond has decreased. 
B)  The bond's maturity value exceeds the bond's price. 
C)  The bond's internal rate of return is 7%. 
D) The bond's maturity value is lower than the bond's price. 
A)  The face value of the bond has decreased. 
B)  The bond's maturity value exceeds the bond's price. 
C)  The bond's internal rate of return is 7%. 
D) The bond's maturity value is lower than the bond's price.

Question 5

Which one of the following must be correct for a bond currently selling at a premium?

Accepted Answer

A)  Its coupon rate is variable. 
B)  Its current yield is lower than its coupon rate. 
C)  Its yield to maturity is higher than its coupon rate. 
D) Its coupon rate is lower than the current market rate on similar bonds. 
A)  Its coupon rate is variable. 
B)  Its current yield is lower than its coupon rate. 
C)  Its yield to maturity is higher than its coupon rate. 
D) Its coupon rate is lower than the current market rate on similar bonds.

Question 6

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 7

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

Accepted Answer

A) True 
 B)False

Question 8

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 9

How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%?

Accepted Answer

A)  $209.91 
B)  $260.00 
C)  $760.00 
D) $792.09 
A)  $209.91 
B)  $260.00 
C)  $760.00 
D) $792.09

Question 10

Why are long-term bonds more sensitive to changes in interest rates than short-term bonds?

Accepted Answer

A long-term bond is more sensitive to ch

Question 11

An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the investor's rate of return?

Accepted Answer

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

Question 12

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 13

A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment?

Accepted Answer

A)  $50 
B)  $55 
C)  $100 
D) $110 
A)  $50 
B)  $55 
C)  $100 
D) $110

Question 14

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

Accepted Answer

A)  6.0% 
B)  8.5% 
C)  10.0% 
D) 12.5% 
A)  6.0% 
B)  8.5% 
C)  10.0% 
D) 12.5%

Question 15

The current yield of a bond can be calculated by:

Accepted Answer

A)  multiplying the price by the coupon rate. 
B)  dividing the price by the annual coupon payments. 
C)  dividing the price by the par value. 
D) dividing the annual coupon payments by the price. 
A)  multiplying the price by the coupon rate. 
B)  dividing the price by the annual coupon payments. 
C)  dividing the price by the par value. 
D) dividing the annual coupon payments by the price.

Question 16

Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity.

Accepted Answer

A) True 
 B)False

Question 17

What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%?

Accepted Answer

A)  $98.64 
B)  $95.27 
C)  $101.38 
D) $104.97 
A)  $98.64 
B)  $95.27 
C)  $101.38 
D) $104.97

Question 18

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

Accepted Answer

A)  speculative grade ratings. 
B)  high coupon payments. 
C)  long periods until maturity. 
D) income exemption from federal taxes. 
A)  speculative grade ratings. 
B)  high coupon payments. 
C)  long periods until maturity. 
D) income exemption from federal taxes.

Question 19

What might cause investors to rationally stay away from long-term bonds even when the yield curve is upward-sloping?

Accepted Answer

Even when the yield curve is upward-slop

Question 20

Describe two bond characteristics that increase a bond's price sensitivity to changes in market rates of interest.

Accepted Answer

Bonds are more sensitive to in

Exam 6: Valuing Bonds

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 "convertible bond" provides the option to convert:

When a financial calculator or spreadsheet program finds a bond's yield to maturity, it uses a trial-and-error process.

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

Which one of the following must be correct for a bond currently selling at a premium?

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

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

The yield curve depicts the current relationship between:

How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%?

Why are long-term bonds more sensitive to changes in interest rates than short-term bonds?

An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it for $1,040. What was the investor's rate of return?

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%?

A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment?

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

The current yield of a bond can be calculated by:

Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity.

What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%?

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

What might cause investors to rationally stay away from long-term bonds even when the yield curve is upward-sloping?

Describe two bond characteristics that increase a bond's price sensitivity to changes in market rates of interest.

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