Question 1

Real rates are defined as nominal rates that have been adjusted for which of the following?

Accepted Answer

A) inflation 
B) default risk 
C) accrued interest 
D) interest rate risk 
E) both inflation and interest rate risk 
A) inflation 
B) default risk 
C) accrued interest 
D) interest rate risk 
E) both inflation and interest rate risk

Question 2

The collar of a floating-rate bond refers to the minimum and maximum:

Accepted Answer

A) call periods. 
B) maturity dates. 
C) market prices. 
D) coupon rates. 
E) yields to maturity. 
A) call periods. 
B) maturity dates. 
C) market prices. 
D) coupon rates. 
E) yields to maturity.

Question 3

Interest rates that include an inflation premium are referred to as:

Accepted Answer

A) annual percentage rates. 
B) stripped rates. 
C) effective annual rates. 
D) real rates. 
E) nominal rates. 
A) annual percentage rates. 
B) stripped rates. 
C) effective annual rates. 
D) real rates. 
E) nominal rates.

Question 4

You purchased an investment which will pay you $8,000,in real dollars,a year for the next three years.Each payment will be received at the end of the period with the first payment occurring one year from today.The nominal discount rate is 7.5 percent and the inflation rate is 2.9 percent.What is the present value of these payments?

Accepted Answer

A) $21,720 
B) $22,004 
C) $22,511 
D) $23,406 
E) $23,529 
A) $21,720 
B) $22,004 
C) $22,511 
D) $23,406 
E) $23,529

Question 5

Which of the following defines a note?
I.secured
II.unsecured
III.maturity less than 10 years
IV.maturity in excess of 10 years

Accepted Answer

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

Question 6

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

Accepted Answer

A) market rates 
B) comparable corporate bond rates 
C) the risk-free rate 
D) inflation 
E) maturity 
A) market rates 
B) comparable corporate bond rates 
C) the risk-free rate 
D) inflation 
E) maturity

Question 7

A deferred call provision is which one of the following?

Accepted Answer

A) requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond 
B) ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt 
C) prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity 
D) prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date 
E) requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon should that issuer decide to call a bond 
A) requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond 
B) ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt 
C) prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity 
D) prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date 
E) requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon should that issuer decide to call a bond

Question 8

Suppose the real rate is 9.5 percent and the inflation rate is 1.8 percent.What rate would you expect to see on a Treasury bill?

Accepted Answer

A) 9.50 percent 
B) 11.30 percent 
C) 11.47 percent 
D) 11.56 percent 
E) 11.60 percent 
A) 9.50 percent 
B) 11.30 percent 
C) 11.47 percent 
D) 11.56 percent 
E) 11.60 percent

Question 9

The yield to maturity on a bond is currently 8.46 percent.The real rate of return is 3.22 percent.What is the rate of inflation?

Accepted Answer

A) 5.08 percent 
B) 5.64 percent 
C) 6.24 percent 
D) 6.53 percent 
E) 6.71 percent 
A) 5.08 percent 
B) 5.64 percent 
C) 6.24 percent 
D) 6.53 percent 
E) 6.71 percent

Question 10

A bond is quoted at a price of $989.This price is referred to as which one of the following?

Accepted Answer

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

Question 11

Which of the following statements is correct concerning the term structure of interest rates?
I.Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates.
II.The term structure of interest rates includes both an inflation premium and an interest rate risk premium.
III.The real rate of return has minimal,if any,affect on the slope of the term structure of interest rates.
IV.The term structure of interest rates and the time to maturity are always directly related.

Accepted Answer

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

Question 12

A "fallen angel" is a bond that has moved from:

Accepted Answer

A) being publicly traded to being privately traded. 
B) being a long-term obligation to being a short-term obligation. 
C) having a yield-to-maturity in excess of the coupon rate to having a yield-to- maturity that is less than the coupon rate. 
D) senior status to junior status for liquidation purposes. 
E) investment grade to speculative grade. 
A) being publicly traded to being privately traded. 
B) being a long-term obligation to being a short-term obligation. 
C) having a yield-to-maturity in excess of the coupon rate to having a yield-to- maturity that is less than the coupon rate. 
D) senior status to junior status for liquidation purposes. 
E) investment grade to speculative grade.

Question 13

Which one of the following is the price a dealer will pay to purchase a bond?

Accepted Answer

A) call price 
B) asked price 
C) bid price 
D) bid-ask spread 
E) par value 
A) call price 
B) asked price 
C) bid price 
D) bid-ask spread 
E) par value

Question 14

A corporate bond is quoted at a price of 103.16 and carries a 5.20 percent coupon.The bond pays interest semiannually.What is the current yield on one of these bonds?

Accepted Answer

A) 4.24 percent 
B) 5.04 percent 
C) 5.36 percent 
D) 5.62 percent 
E) 5.66 percent 
A) 4.24 percent 
B) 5.04 percent 
C) 5.36 percent 
D) 5.62 percent 
E) 5.66 percent

Question 15

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change.Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Accepted Answer

A) short-term; low coupon 
B) short-term; high coupon 
C) long-term; zero coupon 
D) long-term; low coupon 
E) long-term; high coupon 
A) short-term; low coupon 
B) short-term; high coupon 
C) long-term; zero coupon 
D) long-term; low coupon 
E) long-term; high coupon

Question 16

An indenture is:

Accepted Answer

A) another name for a bond's coupon. 
B) the written record of all the holders of a bond issue. 
C) a bond that is past its maturity date but has yet to be repaid. 
D) a bond that is secured by the inventory held by the bond's issuer. 
E) the legal agreement between the bond issuer and the bondholders. 
A) another name for a bond's coupon. 
B) the written record of all the holders of a bond issue. 
C) a bond that is past its maturity date but has yet to be repaid. 
D) a bond that is secured by the inventory held by the bond's issuer. 
E) the legal agreement between the bond issuer and the bondholders.

Question 17

The taxability risk premium compensates bond holders for which one of the following?

Accepted Answer

A) yield decreases in response to market changes 
B) lack of coupon payments 
C) possibility of default 
D) a bond's unfavorable tax status 
E) decrease in a municipality's credit rating 
A) yield decreases in response to market changes 
B) lack of coupon payments 
C) possibility of default 
D) a bond's unfavorable tax status 
E) decrease in a municipality's credit rating

Question 18

You own a bond that has a 6 percent annual coupon and matures 5 years from now.You purchased this 10-year bond at par value when it was originally issued.Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

Accepted Answer

A) The current yield-to-maturity is greater than 6 percent. 
B) The current yield is 6 percent. 
C) The next interest payment will be $30. 
D) The bond is currently valued at one-half of its issue price. 
E) You will realize a capital gain on the bond if you sell it today. 
A) The current yield-to-maturity is greater than 6 percent. 
B) The current yield is 6 percent. 
C) The next interest payment will be $30. 
D) The bond is currently valued at one-half of its issue price. 
E) You will realize a capital gain on the bond if you sell it today.

Question 19

You purchase a bond with an invoice price of $1,460.The bond has a coupon rate of 7.5 percent,and there are 3 months to the next semiannual coupon date.What is the clean price of this bond?

Accepted Answer

A) $1,441.25 
B) $1,452.17 
C) $1,460.00 
D) $1,467.83 
E) $1,483.50 
A) $1,441.25 
B) $1,452.17 
C) $1,460.00 
D) $1,467.83 
E) $1,483.50

Question 20

The Fisher effect is defined as the relationship between which of the following variables?

Accepted Answer

A) default risk premium, inflation risk premium, and real rates 
B) nominal rates, real rates, and interest rate risk premium 
C) interest rate risk premium, real rates, and default risk premium 
D) real rates, inflation rates, and nominal rates 
E) real rates, interest rate risk premium, and nominal rates 
A) default risk premium, inflation risk premium, and real rates 
B) nominal rates, real rates, and interest rate risk premium 
C) interest rate risk premium, real rates, and default risk premium 
D) real rates, inflation rates, and nominal rates 
E) real rates, interest rate risk premium, and nominal rates

Exam 7: Interest Rates and Bond Valuation

Real rates are defined as nominal rates that have been adjusted for which of the following?

The collar of a floating-rate bond refers to the minimum and maximum:

Interest rates that include an inflation premium are referred to as:

Which of the following defines a note? I.secured II.unsecured III.maturity less than 10 years IV.maturity in excess of 10 years

A Treasury yield curve plots Treasury interest rates relative to which one of the following?

A deferred call provision is which one of the following?

Suppose the real rate is 9.5 percent and the inflation rate is 1.8 percent.What rate would you expect to see on a Treasury bill?

The yield to maturity on a bond is currently 8.46 percent.The real rate of return is 3.22 percent.What is the rate of inflation?

A bond is quoted at a price of $989.This price is referred to as which one of the following?

A "fallen angel" is a bond that has moved from:

Which one of the following is the price a dealer will pay to purchase a bond?

A corporate bond is quoted at a price of 103.16 and carries a 5.20 percent coupon.The bond pays interest semiannually.What is the current yield on one of these bonds?

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change.Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

An indenture is:

The taxability risk premium compensates bond holders for which one of the following?

You own a bond that has a 6 percent annual coupon and matures 5 years from now.You purchased this 10-year bond at par value when it was originally issued.Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent?

You purchase a bond with an invoice price of $1,460.The bond has a coupon rate of 7.5 percent,and there are 3 months to the next semiannual coupon date.What is the clean price of this bond?

The Fisher effect is defined as the relationship between which of the following variables?

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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