Question 1

The Leeward Company just issued 15-year,8 percent,unsecured bonds at par.These bonds fit the definition of which one of the following terms?

Accepted Answer

A) note 
B) discounted 
C) zero-coupon 
D) callable 
E) debenture 
A) note 
B) discounted 
C) zero-coupon 
D) callable 
E) debenture

Question 2

Al is retired and enjoys his daily life.His one concern is that his bonds provide a steady stream of income that will continue to allow him to have the money he desires to continue his active lifestyle without lowering his present standard of living.Although he has sufficient principal to live on,he only wants to spend the interest income provided by his holdings and thus is concerned about the purchasing power of that income.Which one of the following bonds should best ease Al's concerns?

Accepted Answer

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

Question 3

A 6-year,$1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1.Assume today is October 1.What will the difference,if any,be between this bond's clean and dirty prices today?

Accepted Answer

A) no difference 
B) one month's interest 
C) two month's interest 
D) four month's interest 
E) five month's interest 
A) no difference 
B) one month's interest 
C) two month's interest 
D) four month's interest 
E) five month's interest

Question 4

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent.The bonds make semiannual payments.These bonds currently sell for 102 percent of par value.What is the yield-to-maturity?

Accepted Answer

A) 9.98 percent 
B) 10.04 percent 
C) 10.13 percent 
D) 10.27 percent 
E) 10.42 percent 
A) 9.98 percent 
B) 10.04 percent 
C) 10.13 percent 
D) 10.27 percent 
E) 10.42 percent

Question 5

Treasury bonds are:

Accepted Answer

A) issued by any governmental agency in the U.S. 
B) issued only on the first day of each fiscal year by the U.S. Department of Treasury. 
C) bonds that offer the best tax benefits of any bonds currently available. 
D) generally issued as semi-annual coupon bonds. 
E) totally risk-free. 
A) issued by any governmental agency in the U.S. 
B) issued only on the first day of each fiscal year by the U.S. Department of Treasury. 
C) bonds that offer the best tax benefits of any bonds currently available. 
D) generally issued as semi-annual coupon bonds. 
E) totally risk-free.

Question 6

Atlas Entertainment has 15-year bonds outstanding.The interest payments on these bonds are sent directly to each of the individual bondholders.These direct payments are a clear indication that the bonds can accurately be defined as being issued:

Accepted Answer

A) at par. 
B) in registered form. 
C) in street form. 
D) as debentures. 
E) as callable. 
A) at par. 
B) in registered form. 
C) in street form. 
D) as debentures. 
E) as callable.

Question 7

Technical Sales,Inc.has 6.6 percent coupon bonds on the market with 9 years left to maturity.The bonds make semiannual payments and currently sell for 92.5 percent of par.What is the effective annual yield?

Accepted Answer

A) 7.34 percent 
B) 7.40 percent 
C) 7.52 percent 
D) 7.93 percent 
E) 8.60 percent 
A) 7.34 percent 
B) 7.40 percent 
C) 7.52 percent 
D) 7.93 percent 
E) 8.60 percent

Question 8

The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.

Accepted Answer

A) default 
B) market 
C) interest rate 
D) inflation 
E) maturity 
A) default 
B) market 
C) interest rate 
D) inflation 
E) maturity

Question 9

All else constant,a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

Accepted Answer

A) a premium; less than 
B) a premium; equal to 
C) a discount; less than 
D) a discount; higher than 
E) par; less than 
A) a premium; less than 
B) a premium; equal to 
C) a discount; less than 
D) a discount; higher than 
E) par; less than

Question 10

Today,you want to sell a $1,000 face value zero coupon bond you currently own.The bond matures in 4.5 years.How much will you receive for your bond if the market yield to maturity is currently 5.33 percent? Ignore any accrued interest.

Accepted Answer

A) $696.60 
B) $698.09 
C) $741.08 
D) $756.14 
E) $789.22 
A) $696.60 
B) $698.09 
C) $741.08 
D) $756.14 
E) $789.22

Question 11

Kaiser Industries has bonds on the market making annual payments,with 14 years to maturity,and selling for $1,382.01.At this price,the bonds yield 7.5 percent.What is the coupon rate?

Accepted Answer

A) 8.00 percent 
B) 8.50 percent 
C) 9.00 percent 
D) 10.50 percent 
E) 12.00 percent 
A) 8.00 percent 
B) 8.50 percent 
C) 9.00 percent 
D) 10.50 percent 
E) 12.00 percent

Question 12

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:

Accepted Answer

A) trustee relationships. 
B) bylaws. 
C) legal bounds. 
D) "plain vanilla" conditions. 
E) protective covenants. 
A) trustee relationships. 
B) bylaws. 
C) legal bounds. 
D) "plain vanilla" conditions. 
E) protective covenants.

Question 13

Phil has researched TLM Technologies and believes the firm is poised to vastly increase in value.He wants to invest in this company.Phil has decided to purchase TLM Technologies bonds so that he can have a steady stream of interest income.However,he still wishes that he could share in the firm's success along with TLM's shareholders.Which one of the following bond features will help Phil fulfill his wish?

Accepted Answer

A) put provision 
B) positive covenant 
C) warrant 
D) crossover rating 
E) call provision 
A) put provision 
B) positive covenant 
C) warrant 
D) crossover rating 
E) call provision

Question 14

Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security?
I.inflation risk
II.interest rate risk
III.taxability
IV.default risk

Accepted Answer

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

Question 15

Bonds issued by the U.S.government:

Accepted Answer

A) are considered to be free of interest rate risk. 
B) generally have higher coupons than those issued by an individual state. 
C) are considered to be free of default risk. 
D) pay interest that is exempt from federal income taxes. 
E) are called "munis". 
A) are considered to be free of interest rate risk. 
B) generally have higher coupons than those issued by an individual state. 
C) are considered to be free of default risk. 
D) pay interest that is exempt from federal income taxes. 
E) are called "munis".

Question 16

A bond's coupon rate is equal to the annual interest divided by which one of the following?

Accepted Answer

A) call price 
B) current price 
C) face value 
D) clean price 
E) dirty price 
A) call price 
B) current price 
C) face value 
D) clean price 
E) dirty price

Question 17

Last year,you purchased a "TIPS" at par.Since that time,both market interest rates and the inflation rate have increased by 0.25 percent.Your bond has most likely done which one of the following since last year?

Accepted Answer

A) decreased in value due to the change in inflation rates 
B) experienced an increase in its bond rating 
C) maintained a fixed real rate of return 
D) increased in value in response to the change in market rates 
E) increased in value due to a decrease in time to maturity 
A) decreased in value due to the change in inflation rates 
B) experienced an increase in its bond rating 
C) maintained a fixed real rate of return 
D) increased in value in response to the change in market rates 
E) increased in value due to a decrease in time to maturity

Question 18

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Accepted Answer

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

Question 19

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity.What is the $1,000 called?

Accepted Answer

A) coupon 
B) face value 
C) discount 
D) yield 
E) dirty price 
A) coupon 
B) face value 
C) discount 
D) yield 
E) dirty price

Question 20

The semiannual,8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent.What is the amount of each interest payment if the face value of the bonds is $1,000?

Accepted Answer

A) $41.50 
B) $42.25 
C) $43.15 
D) $85.00 
E) $86.29 
A) $41.50 
B) $42.25 
C) $43.15 
D) $85.00 
E) $86.29

Exam 7: Interest Rates and Bond Valuation

The Leeward Company just issued 15-year,8 percent,unsecured bonds at par.These bonds fit the definition of which one of the following terms?

A 6-year,$1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1.Assume today is October 1.What will the difference,if any,be between this bond's clean and dirty prices today?

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent.The bonds make semiannual payments.These bonds currently sell for 102 percent of par value.What is the yield-to-maturity?

Treasury bonds are:

Atlas Entertainment has 15-year bonds outstanding.The interest payments on these bonds are sent directly to each of the individual bondholders.These direct payments are a clear indication that the bonds can accurately be defined as being issued:

Technical Sales,Inc.has 6.6 percent coupon bonds on the market with 9 years left to maturity.The bonds make semiannual payments and currently sell for 92.5 percent of par.What is the effective annual yield?

The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.

All else constant,a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

Today,you want to sell a $1,000 face value zero coupon bond you currently own.The bond matures in 4.5 years.How much will you receive for your bond if the market yield to maturity is currently 5.33 percent? Ignore any accrued interest.

Kaiser Industries has bonds on the market making annual payments,with 14 years to maturity,and selling for $1,382.01.At this price,the bonds yield 7.5 percent.What is the coupon rate?

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:

Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security? I.inflation risk II.interest rate risk III.taxability IV.default risk

Bonds issued by the U.S.government:

A bond's coupon rate is equal to the annual interest divided by which one of the following?

Last year,you purchased a "TIPS" at par.Since that time,both market interest rates and the inflation rate have increased by 0.25 percent.Your bond has most likely done which one of the following since last year?

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity.What is the $1,000 called?

The semiannual,8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent.What is the amount of each interest payment if the face value of the bonds is $1,000?

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

Filters

All else constant,a bond will sell at _ when the coupon rate is _ the yield to maturity.