Question 1

A sinking fund is managed by a trustee for which one of the following purposes?

Accepted Answer

A) paying interest payments 
B) early bond redemption 
C) converting bonds into equity securities 
D) paying preferred dividends 
E) reducing coupon rates 
A) paying interest payments 
B) early bond redemption 
C) converting bonds into equity securities 
D) paying preferred dividends 
E) reducing coupon rates

Question 2

You are purchasing a 20-year,zero-coupon bond.The yield to maturity is 8.68 percent and the face value is $1,000.What is the current market price?

Accepted Answer

A) $106.67 
B) $108.18 
C) $182.80 
D) $221.50 
E) $228.47 
A) $106.67 
B) $108.18 
C) $182.80 
D) $221.50 
E) $228.47

Question 3

The 7 percent,semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054.What is the amount of the call premium on a $1,000 par value bond?

Accepted Answer

A) $52 
B) $54 
C) $72 
D) $84 
E) $89 
A) $52 
B) $54 
C) $72 
D) $84 
E) $89

Question 4

Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio.Which one of the following bonds is the least suitable for her to own?

Accepted Answer

A) 6-year, putable, high coupon bond 
B) 5-year TIPS 
C) 10-year AAA coupon bond 
D) 5-year floating rate bond 
E) 7- year income bond 
A) 6-year, putable, high coupon bond 
B) 5-year TIPS 
C) 10-year AAA coupon bond 
D) 5-year floating rate bond 
E) 7- year income bond

Question 5

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent.The bonds mature in 6 years.What is the market price per bond if the face value is $1,000?

Accepted Answer

A) $989.70 
B) $991.47 
C) $996.48 
D) $1,002.60 
E) $1,013.48 
A) $989.70 
B) $991.47 
C) $996.48 
D) $1,002.60 
E) $1,013.48

Question 6

The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change.If you actually sell the bond before it matures,your realized return is known as the holding period yield.Suppose that today,you buy a 12 percent annual coupon bond for $1,000.The bond has 13 years to maturity.Two years from now,the yield-to-maturity has declined to 11 percent and you decide to sell.What is your holding period yield?

Accepted Answer

A) 8.84 percent 
B) 9.49 percent 
C) 12.00 percent 
D) 13.01 percent 
E) 14.89 percent 
A) 8.84 percent 
B) 9.49 percent 
C) 12.00 percent 
D) 13.01 percent 
E) 14.89 percent

Question 7

The zero coupon bonds of D&L Movers have a market price of $319.24,a face value of $1,000,and a yield to maturity of 8.45 percent.How many years is it until these bonds mature?

Accepted Answer

A) 11.92 years 
B) 12.28 years 
C) 13.80 years 
D) 13.01 years 
E) 27.59 years 
A) 11.92 years 
B) 12.28 years 
C) 13.80 years 
D) 13.01 years 
E) 27.59 years

Question 8

Bond S is a 4 percent coupon bond.Bond T is a 10 percent coupon bond.Both bonds have 11 years to maturity,make semiannual payments,and have a yield-to-maturity of 7 percent.If interest rates suddenly rise by 2 percent,what will the percentage change in the price of Bond T be?

Accepted Answer

A) -15.16 percent 
B) -14.87 percent 
C) -13.56 percent 
D) -12.92 percent 
E) -12.67 percent 
A) -15.16 percent 
B) -14.87 percent 
C) -13.56 percent 
D) -12.92 percent 
E) -12.67 percent

Question 9

Mary just purchased a bond which pays $60 a year in interest.What is this $60 called?

Accepted Answer

A) coupon 
B) face value 
C) discount 
D) call premium 
E) yield 
A) coupon 
B) face value 
C) discount 
D) call premium 
E) yield

Question 10

A zero coupon bond:

Accepted Answer

A) is sold at a large premium. 
B) pays interest that is tax deductible to the issuer when paid. 
C) can only be issued by the U.S. Treasury. 
D) has more interest rate risk than a comparable coupon bond. 
E) provides no taxable income to the bondholder until the bond matures. 
A) is sold at a large premium. 
B) pays interest that is tax deductible to the issuer when paid. 
C) can only be issued by the U.S. Treasury. 
D) has more interest rate risk than a comparable coupon bond. 
E) provides no taxable income to the bondholder until the bond matures.

Question 11

Protective covenants:

Accepted Answer

A) apply to short-term debt issues but not to long-term debt issues. 
B) only apply to privately issued bonds. 
C) are a feature found only in government-issued bond indentures. 
D) only apply to bonds that have a deferred call provision. 
E) are primarily designed to protect bondholders. 
A) apply to short-term debt issues but not to long-term debt issues. 
B) only apply to privately issued bonds. 
C) are a feature found only in government-issued bond indentures. 
D) only apply to bonds that have a deferred call provision. 
E) are primarily designed to protect bondholders.

Question 12

Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.

Accepted Answer

A downward sloping Treasury yield curve

Question 13

A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56.The bond matures in 22 years.What is the implicit interest,in dollars,for the first year of the bond's life?

Accepted Answer

A) $14.72 
B) $15.50 
C) $15.90 
D) $16.63 
E) $16.89 
A) $14.72 
B) $15.50 
C) $15.90 
D) $16.63 
E) $16.89

Question 14

A Treasury bond is quoted at a price of 105: 10.What is the market price of this bond if the face value is $5,000?

Accepted Answer

A) $5,005.15 
B) $5,105.15 
C) $5,265.63 
D) $5,273.44 
E) $5,515.00 
A) $5,005.15 
B) $5,105.15 
C) $5,265.63 
D) $5,273.44 
E) $5,515.00

Question 15

A newly issued bond has a 7 percent coupon with semiannual interest payments.The bonds are currently priced at par value.The effective annual rate provided by these bonds must be:

Accepted Answer

A) 3.5 percent. 
B) greater than 3.5 percent but less than 7 percent. 
C) 7 percent. 
D) greater than 7 percent. 
E) Answer cannot be determined from the information provided. 
A) 3.5 percent. 
B) greater than 3.5 percent but less than 7 percent. 
C) 7 percent. 
D) greater than 7 percent. 
E) Answer cannot be determined from the information provided.

Question 16

The liquidity premium is compensation to investors for:

Accepted Answer

A) purchasing a bond in the secondary market. 
B) the lack of an active market wherein a bond can be sold for its actual value. 
C) acquiring a bond with an unfavorable tax status. 
D) redeeming a bond prior to maturity. 
E) purchasing a bond that has defaulted on its coupon payments. 
A) purchasing a bond in the secondary market. 
B) the lack of an active market wherein a bond can be sold for its actual value. 
C) acquiring a bond with an unfavorable tax status. 
D) redeeming a bond prior to maturity. 
E) purchasing a bond that has defaulted on its coupon payments.

Question 17

Which one of the following premiums is compensation for expected future inflation?

Accepted Answer

A) default risk 
B) taxability 
C) liquidity 
D) inflation 
E) interest rate risk 
A) default risk 
B) taxability 
C) liquidity 
D) inflation 
E) interest rate risk

Question 18

A 16-year,4.5 percent coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

Accepted Answer

A) 2.14 percent decrease 
B) 1.97 percent decrease 
C) 0.21 percent increase 
D) 1.97 percent increase 
E) 2.14 percent increase 
A) 2.14 percent decrease 
B) 1.97 percent decrease 
C) 0.21 percent increase 
D) 1.97 percent increase 
E) 2.14 percent increase

Question 19

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19.What is the change in the value of a bond that has a face value of $5,000?

Accepted Answer

A) $0.30 
B) $1.50 
C) $3.00 
D) $15.00 
E) $30.00 
A) $0.30 
B) $1.50 
C) $3.00 
D) $15.00 
E) $30.00

Question 20

An 8 percent corporate bond that pays interest semi-annually was issued last year.Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent?
I.a structure as an interest-only loan
II.a current yield that equals the coupon rate
III.a yield-to-maturity equal to the coupon rate
IV.a market price that differs from the face value

Accepted Answer

A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
E) III and IV only 
A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
E) III and IV only

Exam 7: Interest Rates and Bond Valuation

A sinking fund is managed by a trustee for which one of the following purposes?

You are purchasing a 20-year,zero-coupon bond.The yield to maturity is 8.68 percent and the face value is $1,000.What is the current market price?

The 7 percent,semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054.What is the amount of the call premium on a $1,000 par value bond?

Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio.Which one of the following bonds is the least suitable for her to own?

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent.The bonds mature in 6 years.What is the market price per bond if the face value is $1,000?

The zero coupon bonds of D&L Movers have a market price of $319.24,a face value of $1,000,and a yield to maturity of 8.45 percent.How many years is it until these bonds mature?

Bond S is a 4 percent coupon bond.Bond T is a 10 percent coupon bond.Both bonds have 11 years to maturity,make semiannual payments,and have a yield-to-maturity of 7 percent.If interest rates suddenly rise by 2 percent,what will the percentage change in the price of Bond T be?

Mary just purchased a bond which pays $60 a year in interest.What is this $60 called?

A zero coupon bond:

Protective covenants:

Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.

A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56.The bond matures in 22 years.What is the implicit interest,in dollars,for the first year of the bond's life?

A Treasury bond is quoted at a price of 105: 10.What is the market price of this bond if the face value is $5,000?

A newly issued bond has a 7 percent coupon with semiannual interest payments.The bonds are currently priced at par value.The effective annual rate provided by these bonds must be:

The liquidity premium is compensation to investors for:

Which one of the following premiums is compensation for expected future inflation?

A 16-year,4.5 percent coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19.What is the change in the value of a bond that has a face value of $5,000?

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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