Question 1

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%?

Accepted Answer

A)  4.20% 
B)  8.64% 
C)  9.00% 
D) 9.20% 
A)  4.20% 
B)  8.64% 
C)  9.00% 
D) 9.20%

Question 2

Why should many investors be cautious when relying on yield to maturity? Is it a convenient measure of rate of return for investors who might not hold their bonds to maturity?

Accepted Answer

Yield to maturity is an extremely popula

Question 3

Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond.

Accepted Answer

A) True 
 B)False

Question 4

Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.

Accepted Answer

A) True 
 B)False

Question 5

Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield? Assume both bonds are selling at a premium.

Accepted Answer

A)  Real rate of return 
B)  Inflation premium 
C)  Default premium 
D) Loss of premium 
A)  Real rate of return 
B)  Inflation premium 
C)  Default premium 
D) Loss of premium

Question 6

Bond ratings measure a bond's credit risk.

Accepted Answer

A) True 
 B)False

Question 7

A bond's yield to maturity takes into consideration:

Accepted Answer

A)  current yield but not any price changes. 
B)  price changes but not the current yield. 
C)  both the current yield and any price changes. 
D) neither the current yield nor any price changes. 
A)  current yield but not any price changes. 
B)  price changes but not the current yield. 
C)  both the current yield and any price changes. 
D) neither the current yield nor any price changes.

Question 8

What happens to a discount bond as the time to maturity decreases?

Accepted Answer

A)  The coupon rate increases. 
B)  The bond price increases. 
C)  The coupon rate decreases. 
D) The bond price decreases. 
A)  The coupon rate increases. 
B)  The bond price increases. 
C)  The coupon rate decreases. 
D) The bond price decreases.

Question 9

Explain why bond investors may be interested in TIPS rather than traditional bonds. Why have TIPS not been popular lately?

Accepted Answer

Treasury Inflation-Protected Securities

Question 10

Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments. She sold the bond after 6 months and earned a total return of 4.8% on this investment. At what price, did she sell the bond?

Accepted Answer

A)  $1,001.47 
B)  $974.28 
C)  $981.06 
D) $1,003.18 
A)  $1,001.47 
B)  $974.28 
C)  $981.06 
D) $1,003.18

Question 11

If you purchase a 3-year, 9% annual coupon bond for $1,002.03, how much could it be sold for 2 years later if interest rates have remained stable?

Accepted Answer

A)  $999.29 
B)  $1,000.74 
C)  $998.97 
D) $1,000.00 
A)  $999.29 
B)  $1,000.74 
C)  $998.97 
D) $1,000.00

Question 12

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

Accepted Answer

A)  The coupon rate increases to 10%. 
B)  The coupon rate remains at 9%. 
C)  The coupon rate remains at 8%. 
D) The coupon rate decreases to 8%. 
A)  The coupon rate increases to 10%. 
B)  The coupon rate remains at 9%. 
C)  The coupon rate remains at 8%. 
D) The coupon rate decreases to 8%.

Question 13

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of these may have caused this price increase?

Accepted Answer

A)  The bond's rating was downgraded. 
B)  The issuing firm announced the next interest payment. 
C)  The issuing firm announced that its annual earnings met investor expectations. 
D) Market interest rates decreased. 
A)  The bond's rating was downgraded. 
B)  The issuing firm announced the next interest payment. 
C)  The issuing firm announced that its annual earnings met investor expectations. 
D) Market interest rates decreased.

Question 14

The existence of an upward-sloping yield curve suggests that:

Accepted Answer

A)  bonds should be selling at a discount to par value. 
B)  bonds will not return as much as common stocks. 
C)  interest rates will be increasing in the future. 
D) real interest rates will be increasing soon. 
A)  bonds should be selling at a discount to par value. 
B)  bonds will not return as much as common stocks. 
C)  interest rates will be increasing in the future. 
D) real interest rates will be increasing soon.

Question 15

A Treasury bond's bid price will be lower than the ask price.

Accepted Answer

A) True 
 B)False

Question 16

What is meant by "default risk" in bonds, and how do investors respond to it?

Accepted Answer

Default risk refers to the probability o

Question 17

Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?

Accepted Answer

A)  $917.06 
B)  $928.84 
C)  $987.50 
D) $1,000.00 
A)  $917.06 
B)  $928.84 
C)  $987.50 
D) $1,000.00

Question 18

Which one of the following bond values will change when interest rates change?

Accepted Answer

A)  The expected cash flows 
B)  The present value 
C)  The coupon payment 
D) The maturity value 
A)  The expected cash flows 
B)  The present value 
C)  The coupon payment 
D) The maturity value

Question 19

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:

Accepted Answer

A)  receives 97.162% of the stated coupon payments. 
B)  receives $971.62 upon the maturity date of the bond. 
C)  pays 97.162% of face value for the bond. 
D) pays $10,971.62 for a $10,000 face value bond. 
A)  receives 97.162% of the stated coupon payments. 
B)  receives $971.62 upon the maturity date of the bond. 
C)  pays 97.162% of face value for the bond. 
D) pays $10,971.62 for a $10,000 face value bond.

Question 20

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19?

Accepted Answer

A)  4.53% 
B)  5.33% 
C)  5.16% 
D) 4.92% 
A)  4.53% 
B)  5.33% 
C)  5.16% 
D) 4.92%

Exam 6: Valuing Bonds

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%?

Why should many investors be cautious when relying on yield to maturity? Is it a convenient measure of rate of return for investors who might not hold their bonds to maturity?

Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond.

Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.

Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield? Assume both bonds are selling at a premium.

Bond ratings measure a bond's credit risk.

A bond's yield to maturity takes into consideration:

What happens to a discount bond as the time to maturity decreases?

Explain why bond investors may be interested in TIPS rather than traditional bonds. Why have TIPS not been popular lately?

Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments. She sold the bond after 6 months and earned a total return of 4.8% on this investment. At what price, did she sell the bond?

If you purchase a 3-year, 9% annual coupon bond for $1,002.03, how much could it be sold for 2 years later if interest rates have remained stable?

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

The market price of a bond with 12 years until maturity and an annual coupon rate of 8% increased yesterday. Which one of these may have caused this price increase?

The existence of an upward-sloping yield curve suggests that:

A Treasury bond's bid price will be lower than the ask price.

What is meant by "default risk" in bonds, and how do investors respond to it?

Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?

Which one of the following bond values will change when interest rates change?

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19?

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

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