Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

A "convertible bond" provides the option to convert:

Accepted Answer

A)  a bond into shares of common stock. 
B)  fixed-rate coupon payments into variable-rate payments. 
C)  a zero-coupon bond to a coupon-paying bond. 
D)  a junk bond to a zero-coupon investment-grade bond. 
A)  a bond into shares of common stock. 
B)  fixed-rate coupon payments into variable-rate payments. 
C)  a zero-coupon bond to a coupon-paying bond. 
D)  a junk bond to a zero-coupon investment-grade bond.

Question 3

Issuers compensate investors for default risk by putting a high face value on their bonds.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 may 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 may be increasing in the future. 
D)  real interest rates will be increasing soon.

Question 6

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 7

Periodic receipts of interest by the bondholder are known as:

Accepted Answer

A)  the coupon rate. 
B)  principal payments. 
C)  coupon payments. 
D)  the default premium. 
A)  the coupon rate. 
B)  principal payments. 
C)  coupon payments. 
D)  the default premium.

Question 8

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 9

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 10

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?

Accepted Answer

A)  $1,000.00 
B)  $1,030.00 
C)  $1,060.90 
D)  $1,061.36 
A)  $1,000.00 
B)  $1,030.00 
C)  $1,060.90 
D)  $1,061.36

Question 11

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with an annual coupon payment 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%

Question 12

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

Accepted Answer

A)  The face value of the bond has decreased. 
B)  The bond's maturity value exceeds the bond's price. 
C)  The bond's internal rate of return is 7%. 
D)  The bond's market value is higher than its face value. 
A)  The face value of the bond has decreased. 
B)  The bond's maturity value exceeds the bond's price. 
C)  The bond's internal rate of return is 7%. 
D)  The bond's market value is higher than its face value.

Question 13

The coupon rate of a bond equals:

Accepted Answer

A)  its yield to maturity. 
B)  a defined percentage of its face value. 
C)  the yield to maturity when the bond sells at a discount. 
D)  the annual interest divided by the current market price. 
A)  its yield to maturity. 
B)  a defined percentage of its face value. 
C)  the yield to maturity when the bond sells at a discount. 
D)  the annual interest divided by the current market price.

Question 14

How much should you be prepared to pay for a 10-year bond with a 6% coupon,semiannual payments,and a semiannually compounded yield of 7.5%?

Accepted Answer

A)  $895.78 
B)  $897.04 
C)  $938.40 
D)  $1,312.66 
A)  $895.78 
B)  $897.04 
C)  $938.40 
D)  $1,312.66

Question 15

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

Accepted Answer

A)  6.0% 
B)  8.5% 
C)  10.0% 
D)  12.5% 
A)  6.0% 
B)  8.5% 
C)  10.0% 
D)  12.5%

Question 16

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

Accepted Answer

A) True 
 B)False

Question 17

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 18

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

Accepted Answer

A)  $696.74 
B)  $1,075.82 
C)  $1,082.00 
D)  $1,123.01 
A)  $696.74 
B)  $1,075.82 
C)  $1,082.00 
D)  $1,123.01

Question 19

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%,then the investor's real return is:

Accepted Answer

A)  6.73%. 
B)  6.31%. 
C)  15.44%. 
D)  10.56%. 
A)  6.73%. 
B)  6.31%. 
C)  15.44%. 
D)  10.56%.

Question 20

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

Accepted Answer

A)  A zero-coupon bond with 20 years until maturity 
B)  A coupon-paying bond with 20 years until maturity 
C)  A floating-rate bond with 20 years until maturity 
D)  A zero-coupon bond with 30 years until maturity 
A)  A zero-coupon bond with 20 years until maturity 
B)  A coupon-paying bond with 20 years until maturity 
C)  A floating-rate bond with 20 years until maturity 
D)  A zero-coupon bond with 30 years until maturity

Exam 6: Valuing Bonds

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

A "convertible bond" provides the option to convert:

Issuers compensate investors for default risk by putting a high face value on their bonds.

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

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

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

Periodic receipts of interest by the bondholder are known as:

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

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

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?

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

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The coupon rate of a bond equals:

How much should you be prepared to pay for a 10-year bond with a 6% coupon,semiannual payments,and a semiannually compounded yield of 7.5%?

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

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:

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%,then the investor's real return is:

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

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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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

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Long-Term Financial Planning

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Working Capital Management

Mergers,Acquisitions,and Corporate Control

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