Question 1

A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date.

Accepted Answer

A) callable 
B) coupon 
C) put 
D) Treasury 
E) zero-coupon 
A) callable 
B) coupon 
C) put 
D) Treasury 
E) zero-coupon

Question 2

SIVs raise funds by ______ and then use the proceeds to ______.

Accepted Answer

A) issuing short-term commercial paper; retire other forms of their debt 
B) issuing short-term commercial paper; buy other forms of debt such as mortgages 
C) issuing long-term bonds; retire other forms of their debt 
D) issuing long-term bonds; buy other forms of debt such as mortgages 
E) A and D 
A) issuing short-term commercial paper; retire other forms of their debt 
B) issuing short-term commercial paper; buy other forms of debt such as mortgages 
C) issuing long-term bonds; retire other forms of their debt 
D) issuing long-term bonds; buy other forms of debt such as mortgages 
E) A and D

Question 3

Mortgage-backed CDOs were a disaster in 2007 because

Accepted Answer

A) they were formed by pooling high quality fixed-rated loans with low interest rates 
B) they were formed by pooling sub-prime mortgages 
C) home prices stalled 
D) the mortgages were variable rate loans and interest rates increased 
E) B,C,and D 
A) they were formed by pooling high quality fixed-rated loans with low interest rates 
B) they were formed by pooling sub-prime mortgages 
C) home prices stalled 
D) the mortgages were variable rate loans and interest rates increased 
E) B,C,and D

Question 4

One year ago,you purchased a newly issued TIPS bond that has a 4% coupon rate,five years to maturity,and a par value of $1,000.The average inflation rate over the year was 3.6%.What is the amount of the coupon payment you will receive and what is the current face value of the bond?

Accepted Answer

A) $40.00, $1,000 
B) $41.44, $1,036 
C) $40.00, $1,036 
D) $36.00, $1,040 
E) $76.00,$1,000 
A) $40.00, $1,000 
B) $41.44, $1,036 
C) $40.00, $1,036 
D) $36.00, $1,040 
E) $76.00,$1,000

Question 5

When a bond indenture includes a sinking fund provision

Accepted Answer

A) firms must establish a cash fund for future bond redemption. 
B) bondholders always benefit, because principal repayment on the scheduled maturity date is guaranteed. 
C) bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. 
D) both A and B are true. 
E) none of the above are true. 
A) firms must establish a cash fund for future bond redemption. 
B) bondholders always benefit, because principal repayment on the scheduled maturity date is guaranteed. 
C) bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. 
D) both A and B are true. 
E) none of the above are true.

Question 6

Of the following four investments,________ is considered the safest.

Accepted Answer

A) commercial paper 
B) corporate bonds 
C) U.S.Agency issues 
D) Treasury bonds 
E) Treasury bills 
A) commercial paper 
B) corporate bonds 
C) U.S.Agency issues 
D) Treasury bonds 
E) Treasury bills

Question 7

Subordination clauses in bond indentures

Accepted Answer

A) may restrict the amount of additional borrowing the firm can undertake. 
B) are always bad for investors. 
C) provide higher priority to senior creditors in the event of bankruptcy. 
D) all of the above are true. 
E) both A and C are true. 
A) may restrict the amount of additional borrowing the firm can undertake. 
B) are always bad for investors. 
C) provide higher priority to senior creditors in the event of bankruptcy. 
D) all of the above are true. 
E) both A and C are true.

Question 8

You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase.The coupon interest rate is 10% and par value is $1,000.At the time you purchased the bond,the yield to maturity was 8%.If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%,your annual total rate of return on holding the bond for that year would have been _________.

Accepted Answer

A) 7.00% 
B) 8.00% 
C) 9.95% 
D) 11.95% 
E) none of the above 
A) 7.00% 
B) 8.00% 
C) 9.95% 
D) 11.95% 
E) none of the above

Question 9

A Treasury bill with a par value of $100,000 due one month from now is selling today for $99,010.The effective annual yield is __________.

Accepted Answer

A) 12.40% 
B) 12.55% 
C) 12.62% 
D) 12.68% 
E) none of the above 
A) 12.40% 
B) 12.55% 
C) 12.62% 
D) 12.68% 
E) none of the above

Question 10

Accrued interest

Accepted Answer

A) is quoted in the bond price in the financial press. 
B) must be paid by the buyer of the bond and remitted to the seller of the bond. 
C) must be paid to the broker for the inconvenience of selling bonds between maturity dates. 
D) A and B. 
E) A and C. 
A) is quoted in the bond price in the financial press. 
B) must be paid by the buyer of the bond and remitted to the seller of the bond. 
C) must be paid to the broker for the inconvenience of selling bonds between maturity dates. 
D) A and B. 
E) A and C.

Question 11

Consider the following $1,000 par value zero-coupon bonds: $$\begin{array} { l | l | l | } 
\underline { \text { Bond } } & \underline { \text { Years to Maturity } } & \underline { \text { Price } } \
\hline \mathrm { A } & \mathbf { 1 } & \$ 909.09 \
\hline \mathrm { B } & 2 & \$ 811.62 \
\hline \mathrm { C } & 3 & \$ 711.78 \
\hline \mathrm { D } & 4 & \$ 635.52 \
\hline
\end{array}$$
-The yield to maturity on bond B is _________.

Accepted Answer

A) 10% 
B) 11% 
C) 12% 
D) 14% 
E) none of the above 
A) 10% 
B) 11% 
C) 12% 
D) 14% 
E) none of the above

Question 12

CDOs are divided in tranches

Accepted Answer

A) that provide investors with securities with varying degrees of credit risk 
B) and each tranch is given a different level of seniority in terms of its claims on the underlying pool 
C) and none of the tranches are risky 
D) and equity tranch is very low risk 
E) A and B 
A) that provide investors with securities with varying degrees of credit risk 
B) and each tranch is given a different level of seniority in terms of its claims on the underlying pool 
C) and none of the tranches are risky 
D) and equity tranch is very low risk 
E) A and B

Question 13

Bond analysts might be more interested in a bond's yield to call if

Accepted Answer

A) the bond's yield to maturity is insufficient. 
B) the firm has called some of its bonds in the past. 
C) the investor only plans to hold the bond until its first call date. 
D) interest rates are expected to rise. 
E) interest rates are expected to fall. 
A) the bond's yield to maturity is insufficient. 
B) the firm has called some of its bonds in the past. 
C) the investor only plans to hold the bond until its first call date. 
D) interest rates are expected to rise. 
E) interest rates are expected to fall.

Question 14

TIPS are

Accepted Answer

A) securities formed from the coupon payments only of government bonds. 
B) securities formed from the principal payments only of government bonds. 
C) government bonds with par value linked to the general level of prices. 
D) government bonds with coupon rate linked to the general level of prices. 
E) zero-coupon government bonds. 
A) securities formed from the coupon payments only of government bonds. 
B) securities formed from the principal payments only of government bonds. 
C) government bonds with par value linked to the general level of prices. 
D) government bonds with coupon rate linked to the general level of prices. 
E) zero-coupon government bonds.

Question 15

A coupon bond that pays interest annually has a par value of $1,000,matures in 6 years,and has a yield to maturity of 11%.The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.

Accepted Answer

A) $712.99 
B) $851.93 
C) $1,123.01 
D) $886.28 
E) $1,000.00 
A) $712.99 
B) $851.93 
C) $1,123.01 
D) $886.28 
E) $1,000.00

Question 16

You purchased an annual interest coupon bond one year ago that now has 6 years remaining until maturity.The coupon rate of interest was 10% and par value was $1,000.At the time you purchased the bond,the yield to maturity was 8%.The amount you paid for this bond one year ago was

Accepted Answer

A) $1,057.50. 
B) $1,075.50. 
C) $1,088.50. 
D) $1.092.46. 
E) $1,104.13. 
A) $1,057.50. 
B) $1,075.50. 
C) $1,088.50. 
D) $1.092.46. 
E) $1,104.13.

Question 17

A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000.If the bond matures in 18 years,the bond should sell for a price of _______ today.

Accepted Answer

A) 422.41 
B) $501.87 
C) $513.16 
D) $130.04 
E) none of the above 
A) 422.41 
B) $501.87 
C) $513.16 
D) $130.04 
E) none of the above

Question 18

A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in 5 years has a yield of 5.6%.A bond issued by Lucent Technologies due in 5 years has a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%.The default risk premiums on the bonds issued by Exxon and Lucent Technologies,respectively,are:

Accepted Answer

A) 1.6% and 3.3% 
B) 0.5% and 0.7% 
C) 3.3% and 1.6% 
D) 0.7% and 0.5% 
E) none of the above 
A) 1.6% and 3.3% 
B) 0.5% and 0.7% 
C) 3.3% and 1.6% 
D) 0.7% and 0.5% 
E) none of the above

Question 19

A Treasury bond quoted at 107: 16 107:
18 has a bid price of _______ and an asked price of _____.

Accepted Answer

A) $107.16, $107.18 
B) $1,071.60, $1,071.80 
C) $1,075.00, $1,075.63 
D) $1,071.80, $1,071.60 
E) $1,070.50,$1,070.56 
A) $107.16, $107.18 
B) $1,071.60, $1,071.80 
C) $1,075.00, $1,075.63 
D) $1,071.80, $1,071.60 
E) $1,070.50,$1,070.56

Question 20

To earn a high rating from the bond rating agencies,a firm should have

Accepted Answer

A) a low times interest earned ratio 
B) a low debt to equity ratio 
C) a high quick ratio 
D) B and C 
E) A and C 
A) a low times interest earned ratio 
B) a low debt to equity ratio 
C) a high quick ratio 
D) B and C 
E) A and C

Exam 14: Bond Prices and Yields

A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date.

SIVs raise funds by ______ and then use the proceeds to ______.

Mortgage-backed CDOs were a disaster in 2007 because

One year ago,you purchased a newly issued TIPS bond that has a 4% coupon rate,five years to maturity,and a par value of $1,000.The average inflation rate over the year was 3.6%.What is the amount of the coupon payment you will receive and what is the current face value of the bond?

When a bond indenture includes a sinking fund provision

Of the following four investments,________ is considered the safest.

Subordination clauses in bond indentures

A Treasury bill with a par value of $100,000 due one month from now is selling today for $99,010.The effective annual yield is __________.

Accrued interest

Consider the following $1,000 par value zero-coupon bonds: \ 909.09 2 \ 811.62 3 \ 711.78 4 \ 635.52 -The yield to maturity on bond B is _________.

CDOs are divided in tranches

Bond analysts might be more interested in a bond's yield to call if

TIPS are

A coupon bond that pays interest annually has a par value of $1,000,matures in 6 years,and has a yield to maturity of 11%.The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.

You purchased an annual interest coupon bond one year ago that now has 6 years remaining until maturity.The coupon rate of interest was 10% and par value was $1,000.At the time you purchased the bond,the yield to maturity was 8%.The amount you paid for this bond one year ago was

A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000.If the bond matures in 18 years,the bond should sell for a price of _______ today.

A Treasury bond quoted at 107: 16 107: 18 has a bid price of _______ and an asked price of _____.

To earn a high rating from the bond rating agencies,a firm should have

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

The Term Structure of Interest Rates

Managing Bond Portfolios

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

SIVs raise funds by and then use the proceeds to .

A Treasury bond quoted at 107: 16 107: 18 has a bid price of ___ and an asked price of _.