Exam 6: Valuing Bonds

You own two bonds: a 5-year and a 10-year bond, each with a 7% annual coupon. Both bonds currently sell at par. How much will the price of each bond change if interest rates increase to 8%? Why is there a difference in the price change?

If a bond is priced at par value, then:

Which one of these statements is correct?

A bond's payment at maturity is referred to as its face value.

A bond has an ask quote of 99.5625 and a bid quote of 99.5475. How much will the bond dealer make on the purchase and resell of a $100,000 bond?

How can one find the market price of a bond given its yield to maturity and find a bond's yield given its price? Why do prices and yields vary inversely?

Which of these bond ratings is the lowest of Moody's investment-grade ratings?

Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds.

The holder of which one of these securities has first claim on the assets of a firm?

Describe the shape of the normal yield curve. Why is that shape fairly typical?

Bonds rated Ba by Moody's have the same safety rating as the bonds rated BB by Standard & Poor's.

Which one of the following is most apt to be correct for a CCC-rated bond, compared to a BBB-rated bond?

What causes bonds to sell for a premium?

If an investor purchases a 3%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years, what will be the real value of the principal at maturity?

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?

Describe the process for calculating a yield to maturity for a bond, and explain what could cause the yield to maturity to change.

How does a bond dealer generate profits when trading bonds?

What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%? Interest is paid annually.

The purpose of a floating-rate bond is to: