Question 1

Investors who buy which type of bond will be guaranteed a capital loss if they hold the bond to maturity?

Accepted Answer

A)  Discount bond 
B)  Premium bond 
C)  Zero-coupon bond 
D) Junk bond 
A)  Discount bond 
B)  Premium bond 
C)  Zero-coupon bond 
D) Junk bond

Question 2

An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985. What was the investor's rate of return?

Accepted Answer

A)  9.00% 
B)  9.23% 
C)  9.65% 
D) 10.26% 
A)  9.00% 
B)  9.23% 
C)  9.65% 
D) 10.26%

Question 3

Which one of the following is correct concerning real interest rates?

Accepted Answer

A)  Real interest rates are constant. 
B)  Real interest rates must be positive. 
C)  Real interest rates must be less than nominal interest rates. 
D) Real interest rates, if positive, increase purchasing power over time. 
A)  Real interest rates are constant. 
B)  Real interest rates must be positive. 
C)  Real interest rates must be less than nominal interest rates. 
D) Real interest rates, if positive, increase purchasing power over time.

Question 4

When comparing a highly liquid bond with a comparable but less liquid bond, the highly liquid bond is most apt to have:

Accepted Answer

A)  a lower yield. 
B)  a shorter maturity. 
C)  a higher yield. 
D) a longer maturity. 
A)  a lower yield. 
B)  a shorter maturity. 
C)  a higher yield. 
D) a longer maturity.

Question 5

What are the differences between a bond's coupon rate, its current yield, and its yield to maturity?

Accepted Answer

A bond is a long-term debt of a governme

Question 6

A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.

Accepted Answer

A) True 
 B)False

Question 7

This morning, you purchased a TIPS. Which one of these should you expect to occur if you hold this bond during an inflationary period?

Accepted Answer

A)  The coupon payment will increase in real terms. 
B)  The maturity value will increase in nominal terms. 
C)  The market price will remain constant at par. 
D) The market price will decrease. 
A)  The coupon payment will increase in real terms. 
B)  The maturity value will increase in nominal terms. 
C)  The market price will remain constant at par. 
D) The market price will decrease.

Question 8

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant?

Accepted Answer

A)  $904.90 
B)  $925.39 
C)  $947.93 
D) $1,000.00 
A)  $904.90 
B)  $925.39 
C)  $947.93 
D) $1,000.00

Question 9

Bonds rated BB or above by Standard & Poor's are called investment grade.

Accepted Answer

A) True 
 B)False

Question 10

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?

Accepted Answer

A)  $927.90 
B)  $981.40 
C)  $1,000.00 
D) $1,075.82 
A)  $927.90 
B)  $981.40 
C)  $1,000.00 
D) $1,075.82

Question 11

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

Accepted Answer

A)  dividend yield. 
B)  yield to maturity. 
C)  current yield. 
D) coupon rate. 
A)  dividend yield. 
B)  yield to maturity. 
C)  current yield. 
D) coupon rate.

Question 12

Why might an investor prefer a convertible bond over a regular bond?

Accepted Answer

If an investor believes the bond issuer

Question 13

Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.

Accepted Answer

A) True 
 B)False

Question 14

What are the conditions imposed on a debt issuer that are designed to protect bondholders called?

Accepted Answer

A)  Collateral agreements 
B)  Vanilla wrappers 
C)  Protective covenants 
D) Default provisions 
A)  Collateral agreements 
B)  Vanilla wrappers 
C)  Protective covenants 
D) Default provisions

Question 15

Indexed bonds were completely unknown in the United States until 1997 when the U.S. Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities, or TIPS.

Accepted Answer

A) True 
 B)False

Question 16

The current yield measures the bond's total rate of return.

Accepted Answer

A) True 
 B)False

Question 17

A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years is called a:

Accepted Answer

A)  TIPS. 
B)  Treasury bill. 
C)  Treasury bond. 
D) Treasury note. 
A)  TIPS. 
B)  Treasury bill. 
C)  Treasury bond. 
D) Treasury note.

Question 18

How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later?

Accepted Answer

A)  $19.93 
B)  $20.00 
C)  $23.93 
D) $25.66 
A)  $19.93 
B)  $20.00 
C)  $23.93 
D) $25.66

Question 19

Why do investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings?

Accepted Answer

Investors demand higher promised yields

Question 20

When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors.

Accepted Answer

A) True 
 B)False

Exam 6: Valuing Bonds

Investors who buy which type of bond will be guaranteed a capital loss if they hold the bond to maturity?

An investor buys a 5-year, 9% coupon bond for $975, holds it for 1 year, and then sells the bond for $985. What was the investor's rate of return?

Which one of the following is correct concerning real interest rates?

When comparing a highly liquid bond with a comparable but less liquid bond, the highly liquid bond is most apt to have:

What are the differences between a bond's coupon rate, its current yield, and its yield to maturity?

A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.

This morning, you purchased a TIPS. Which one of these should you expect to occur if you hold this bond during an inflationary period?

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant?

Bonds rated BB or above by Standard & Poor's are called investment grade.

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

Why might an investor prefer a convertible bond over a regular bond?

Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.

What are the conditions imposed on a debt issuer that are designed to protect bondholders called?

Indexed bonds were completely unknown in the United States until 1997 when the U.S. Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities, or TIPS.

The current yield measures the bond's total rate of return.

A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years is called a:

How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later?

Why do investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings?

When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

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