Question 1

Why might a bond's current yield offer an incomplete idea of what return the investor is receiving?

Accepted Answer

The current yield is synonymous with yie

Question 2

It is impossible for an investor to insure against the risk of bond default.

Accepted Answer

A) True 
 B)False

Question 3

How much should you be prepared to pay for a 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 4

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 5

If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be:

Accepted Answer

A)  lower than current interest rates. 
B)  equal to the coupon rate. 
C)  higher than the coupon rate. 
D) lower than the coupon rate. 
A)  lower than current interest rates. 
B)  equal to the coupon rate. 
C)  higher than the coupon rate. 
D) lower than the coupon rate.

Question 6

Investors who purchase bonds having lower credit ratings should expect:

Accepted Answer

A)  lower yields to maturity. 
B)  higher default possibilities. 
C)  lower coupon payments. 
D) higher purchase prices. 
A)  lower yields to maturity. 
B)  higher default possibilities. 
C)  lower coupon payments. 
D) higher purchase prices.

Question 7

Speculative-grade bonds have default risk; investment grade bonds do not.

Accepted Answer

A) True 
 B)False

Question 8

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 9

What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?

Accepted Answer

A)  $100,135.41 
B)  $135,000.41 
C)  $136,269.38 
D) $135,406.20 
A)  $100,135.41 
B)  $135,000.41 
C)  $136,269.38 
D) $135,406.20

Question 10

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 11

One-year Treasury bonds yield 5% while 2-year bonds yield 6%. You are quite confident that one year from now 1-year bonds will yield 8%. Would the higher yield on 2-year bonds cause you to prefer them?

Accepted Answer

If you invest in a 2-year bond, you will

Question 12

If a bond investor's rate of return for a particular period equaled the bond's coupon rate, then during that period, the bond's price:

Accepted Answer

A)  increased. 
B)  decreased. 
C)  remained constant. 
D) changed, but the direction of the change is irrelevant. 
A)  increased. 
B)  decreased. 
C)  remained constant. 
D) changed, but the direction of the change is irrelevant.

Question 13

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 14

A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3 years. What is its yield to maturity?

Accepted Answer

A)  4.78% 
B)  5.48% 
C)  9.57% 
D) 12.17% 
A)  4.78% 
B)  5.48% 
C)  9.57% 
D) 12.17%

Question 15

TIPS are unlike most bonds in that their cash flows increase when the national rate of gross domestic product increases.

Accepted Answer

A) True 
 B)False

Question 16

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:

Accepted Answer

A)  increase by $51.54. 
B)  decrease by $51.54. 
C)  increase by $53.46. 
D) decrease by $53.46. 
A)  increase by $51.54. 
B)  decrease by $51.54. 
C)  increase by $53.46. 
D) decrease by $53.46.

Question 17

When market interest rates exceed a bond's coupon rate, the bond will:

Accepted Answer

A)  sell for less than par value. 
B)  sell for more than par value. 
C)  decrease its coupon rate. 
D) increase its coupon rate. 
A)  sell for less than par value. 
B)  sell for more than par value. 
C)  decrease its coupon rate. 
D) increase its coupon rate.

Question 18

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

Accepted Answer

A) True 
 B)False

Question 19

When the yield curve is upward-sloping, then:

Accepted Answer

A)  short-maturity bonds offer the highest coupon rates. 
B)  long-maturity bonds are priced above par value. 
C)  short-maturity bonds yield less than long-maturity bonds. 
D) long-maturity bonds increase in price when interest rates increase. 
A)  short-maturity bonds offer the highest coupon rates. 
B)  long-maturity bonds are priced above par value. 
C)  short-maturity bonds yield less than long-maturity bonds. 
D) long-maturity bonds increase in price when interest rates increase.

Question 20

A bond's par value can also be called its:

Accepted Answer

A)  coupon payment. 
B)  present value. 
C)  market value. 
D) face value. 
A)  coupon payment. 
B)  present value. 
C)  market value. 
D) face value.

Exam 6: Valuing Bonds

Why might a bond's current yield offer an incomplete idea of what return the investor is receiving?

It is impossible for an investor to insure against the risk of bond default.

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

Periodic receipts of interest by the bondholder are known as:

If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be:

Investors who purchase bonds having lower credit ratings should expect:

Speculative-grade bonds have default risk; investment grade bonds do not.

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?

What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?

As the coupon rate of a bond increases, the bond's:

One-year Treasury bonds yield 5% while 2-year bonds yield 6%. You are quite confident that one year from now 1-year bonds will yield 8%. Would the higher yield on 2-year bonds cause you to prefer them?

If a bond investor's rate of return for a particular period equaled the bond's coupon rate, then during that period, the bond's price:

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

A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3 years. What is its yield to maturity?

TIPS are unlike most bonds in that their cash flows increase when the national rate of gross domestic product increases.

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:

When market interest rates exceed a bond's coupon rate, the bond will:

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

When the yield curve is upward-sloping, then:

A bond's par value can also be called its:

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