Question 1

Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?

Accepted Answer

A)  The bond is selling at a discount to par value. 
B)  The bond has a high default premium. 
C)  The promised yield is not likely to materialize. 
D)  The bond must be a Treasury Inflation-Protected Security. 
A)  The bond is selling at a discount to par value. 
B)  The bond has a high default premium. 
C)  The promised yield is not likely to materialize. 
D)  The bond must be a Treasury Inflation-Protected Security.

Question 2

Even when the yield curve is upward-sloping,investors might rationally stay away from long-term bonds.

Accepted Answer

A) True 
 B)False

Question 3

An investor holds two bonds,one with 5 years until maturity and the other with 20 years until maturity.Which of the following is more likely if interest rates suddenly increase by 2%?

Accepted Answer

A)  The 5-year bond will decrease more in price. 
B)  The 20-year bond will decrease more in price. 
C)  Both bonds will decrease in price similarly. 
D)  Neither bond will decrease in price, but yields will increase. 
A)  The 5-year bond will decrease more in price. 
B)  The 20-year bond will decrease more in price. 
C)  Both bonds will decrease in price similarly. 
D)  Neither bond will decrease in price, but yields will increase.

Question 4

Which of the following identifies the distinction between a U.S.Treasury bond and a Treasury note?

Accepted Answer

A)  Bonds make coupon payments; notes do not. 
B)  Bills have default risk; bonds do not. 
C)  Bonds are priced in 32s; notes are not. 
D)  Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially. 
A)  Bonds make coupon payments; notes do not. 
B)  Bills have default risk; bonds do not. 
C)  Bonds are priced in 32s; notes are not. 
D)  Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.

Question 5

What price was reported in the financial press for a bond that was sold to an investor for $1,045.63?

Accepted Answer

A)  95:14 
B)  95:44 
C)  104:18 
D)  104:56 
A)  95:14 
B)  95:44 
C)  104:18 
D)  104:56

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

Accepted Answer

A)  the bond's price will decline each year. 
B)  coupon payments can change at any time. 
C)  bonds selling for a premium have low default risk. 
D)  taxes must be paid on the current yield. 
A)  the bond's price will decline each year. 
B)  coupon payments can change at any time. 
C)  bonds selling for a premium have low default risk. 
D)  taxes must be paid on the current yield.

Question 8

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 9

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 10

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

Accepted Answer

A)  The price of the bond increases. 
B)  The coupon rate of the bond increases. 
C)  The par value of the bond decreases. 
D)  The coupon payments are adjusted to the new discount rate. 
A)  The price of the bond increases. 
B)  The coupon rate of the bond increases. 
C)  The par value of the bond decreases. 
D)  The coupon payments are adjusted to the new discount rate.

Question 11

What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity?

Accepted Answer

A)  Rate of return is lower than yield to maturity. 
B)  Rate of return is higher than yield to maturity. 
C)  Rate of return equals yield to maturity. 
D)  There is no predetermined relationship. 
A)  Rate of return is lower than yield to maturity. 
B)  Rate of return is higher than yield to maturity. 
C)  Rate of return equals yield to maturity. 
D)  There is no predetermined relationship.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

During the banking crisis of 2007-2009 the U.S.government bailed out all of the corporations except:

Accepted Answer

A)  AIG. 
B)  Lehman Brothers. 
C)  Fannie Mae. 
D)  all were bailed out. 
A)  AIG. 
B)  Lehman Brothers. 
C)  Fannie Mae. 
D)  all were bailed out.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Determine the current yield,yield to maturity,and price of the following bond as of the date of purchase and on each anniversary date of its purchase until maturity: 3-year bond with a 12% coupon and a purchase price of $1,100.

Accepted Answer

The answer of Determine the current yield,yield to maturity,and price...

Question 16

Bond ratings measure the bond's credit risk.

Accepted Answer

A) True 
 B)False

Question 17

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 18

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 19

The coupon rate of a bond equals:

Accepted Answer

A)  its yield to maturity. 
B)  a percentage of its face value. 
C)  the maturity value. 
D)  a percentage of its price. 
A)  its yield to maturity. 
B)  a percentage of its face value. 
C)  the maturity value. 
D)  a percentage of its price.

Question 20

By how much will a bond increase in price over the next year if it currently sells for $925,has 5 years until maturity,and an annual coupon rate of 7%?

Accepted Answer

A)  $8.26 
B)  $8.92 
C)  $12.55 
D)  $15.00 
A)  $8.26 
B)  $8.92 
C)  $12.55 
D)  $15.00

Exam 6: Valuing Bonds

Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% yield to maturity?

Even when the yield curve is upward-sloping,investors might rationally stay away from long-term bonds.

An investor holds two bonds,one with 5 years until maturity and the other with 20 years until maturity.Which of the following is more likely if interest rates suddenly increase by 2%?

Which of the following identifies the distinction between a U.S.Treasury bond and a Treasury note?

What price was reported in the financial press for a bond that was sold to an investor for $1,045.63?

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

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

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?

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

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity?

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

During the banking crisis of 2007-2009 the U.S.government bailed out all of the corporations except:

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

Determine the current yield,yield to maturity,and price of the following bond as of the date of purchase and on each anniversary date of its purchase until maturity: 3-year bond with a 12% coupon and a purchase price of $1,100.

Bond ratings measure the bond's credit risk.

The current yield of a bond can be calculated by:

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

The coupon rate of a bond equals:

By how much will a bond increase in price over the next year if it currently sells for $925,has 5 years until maturity,and an annual coupon rate of 7%?

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