Question 1

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 2

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

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

The return to bondholders is guaranteed to equal the yield to maturity only if the bond is held until maturity.

Accepted Answer

A) True 
 B)False

Question 5

Which one of the following is fixed for the life of a given bond?

Accepted Answer

A)  Current price 
B)  Current yield 
C)  Yield to maturity 
D)  Coupon rate 
A)  Current price 
B)  Current yield 
C)  Yield to maturity 
D)  Coupon rate

Question 6

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 7

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 by the same proportion. 
D)  Neither bond will decrease in price, but their 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 by the same proportion. 
D)  Neither bond will decrease in price, but their yields will increase.

Question 8

A bond's par value can also be called its:

Accepted Answer

A)  coupon payment. 
B)  present value. 
C)  market value. 
D)  face value. 
A)  coupon payment. 
B)  present value. 
C)  market value. 
D)  face value.

Question 9

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

Accepted Answer

A)  A 
B)  Ba 
C)  Aa 
D)  Baa 
A)  A 
B)  Ba 
C)  Aa 
D)  Baa

Question 10

If a bond's asked price is 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 11

If an investor purchases a bond when its current yield is higher than the coupon rate,then the bond's price will be expected to:

Accepted Answer

A)  decline over time, reaching par value at maturity. 
B)  increase over time, reaching par value at maturity. 
C)  be less than the face value at maturity. 
D)  exceed the face value at maturity. 
A)  decline over time, reaching par value at maturity. 
B)  increase over time, reaching par value at maturity. 
C)  be less than the face value at maturity. 
D)  exceed the face value at maturity.

Question 12

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 13

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

Accepted Answer

A)  The CCC bond will have a variable-coupon rate. 
B)  The CCC bond will have a shorter term. 
C)  The CCC bond will offer a higher promised yield to maturity. 
D)  The CCC bond will have a higher price for the same term. 
A)  The CCC bond will have a variable-coupon rate. 
B)  The CCC bond will have a shorter term. 
C)  The CCC bond will offer a higher promised yield to maturity. 
D)  The CCC bond will have a higher price for the same term.

Question 14

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 15

Assume a bond is currently selling at par value.What will happen in the future if the yield on the bond is lower than the coupon rate?

Accepted Answer

A)  The price of the bond will increase. 
B)  The coupon rate of the bond will increase. 
C)  The par value of the bond will decrease. 
D)  The coupon payments will be adjusted to the new discount rate. 
A)  The price of the bond will increase. 
B)  The coupon rate of the bond will increase. 
C)  The par value of the bond will decrease. 
D)  The coupon payments will be adjusted to the new discount rate.

Question 16

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

Accepted Answer

A)  The rate of return will be lower than the yield to maturity. 
B)  The rate of return will be higher than the yield to maturity. 
C)  The rate of return will equal the yield to maturity. 
D)  It could be higher or lower. 
A)  The rate of return will be lower than the yield to maturity. 
B)  The rate of return will be higher than the yield to maturity. 
C)  The rate of return will equal the yield to maturity. 
D)  It could be higher or lower.

Question 17

The yield curve depicts the current relationship between:

Accepted Answer

A)  bond yields and default risk. 
B)  bond maturity and bond ratings. 
C)  bond yields and maturity. 
D)  promised yields and default premiums. 
A)  bond yields and default risk. 
B)  bond maturity and bond ratings. 
C)  bond yields and maturity. 
D)  promised yields and default premiums.

Question 18

When the market interest rate exceeds the coupon rate,bonds sell for less than face value.

Accepted Answer

A) True 
 B)False

Question 19

Assume a bond has been owned by four different investors during its 20-year history.Which one of the following is most likely to have been different for each of these owners?

Accepted Answer

A)  Coupon rate 
B)  Coupon frequency 
C)  Par value 
D)  Yield to maturity 
A)  Coupon rate 
B)  Coupon frequency 
C)  Par value 
D)  Yield to maturity

Question 20

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

Exam 6: Valuing Bonds

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

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

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

The return to bondholders is guaranteed to equal the yield to maturity only if the bond is held until maturity.

Which one of the following is fixed for the life of a given bond?

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.

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%?

A bond's par value can also be called its:

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

If a bond's asked price is 97.162,the investor:

If an investor purchases a bond when its current yield is higher than the coupon rate,then the bond's price will be expected to:

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

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

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

Assume a bond is currently selling at par value.What will happen in the future if the yield on the bond is lower than the coupon rate?

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

The yield curve depicts the current relationship between:

When the market interest rate exceeds the coupon rate,bonds sell for less than face value.

Assume a bond has been owned by four different investors during its 20-year history.Which one of the following is most likely to have been different for each of these owners?

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?

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Using Discounted Cash-Flow Analysis to Make Investment Decisions

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Introduction to Risk, Return, and the Opportunity Cost of Capital

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Introduction to Corporate Financing and Governance

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