Question 1

A default-free security has an annual coupon rate of 3.25% and sells for par.This bond will mature in:

Accepted Answer

A) 1 year 
B) 2 years 
C) 3 years 
D) 4 years 
A) 1 year 
B) 2 years 
C) 3 years 
D) 4 years A

Question 2

What is the relationship between a bond's price and its yield to maturity?

Accepted Answer

There is an inverse relationship between a bond's yield to maturity and its price.As YTM increases,the value of the bond declines.Likewise,as the YTM falls,the value of the bond will increase.

Question 3

Which of the following statements is FALSE?

Accepted Answer

A) Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. 
B) The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond. 
C) The risk of default,which is known as the credit risk of the bond,means that the bond's cash flows are not known with certainty. 
D) For corporate bonds,the issuer may default-that is,it might not pay back the full amount promised in the bond certificate. 
A) Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond. 
B) The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond. 
C) The risk of default,which is known as the credit risk of the bond,means that the bond's cash flows are not known with certainty. 
D) For corporate bonds,the issuer may default-that is,it might not pay back the full amount promised in the bond certificate. B

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) Zero-coupon bonds are also called pure discount bonds. 
B) The IRR of an investment opportunity is the discount rate at which the NPV of the investment opportunity is equal to zero. 
C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. 
D) When prices are quoted in the bond market,they are conventionally quoted in increments of $1000. 
A) Zero-coupon bonds are also called pure discount bonds. 
B) The IRR of an investment opportunity is the discount rate at which the NPV of the investment opportunity is equal to zero. 
C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. 
D) When prices are quoted in the bond market,they are conventionally quoted in increments of $1000.

Question 5

Use the table for the question(s)below.
Consider the following zero-coupon yields on default free securities:  
-The forward rate for year 2 (the forward rate quoted today for an investment that begins in one year and matures in two years)is closest to:

Accepted Answer

A) 5.80% 
B) 5.50% 
C) 5.20% 
D) 5.65% 
A) 5.80% 
B) 5.50% 
C) 5.20% 
D) 5.65%

Question 6

Suppose a five- year bond with a 7% coupon rate and semiannual compounding is trading for a price of $951.58.Expressed as an APR with semiannual compounding,this bonds yield to maturity (YTM)is closest to:

Accepted Answer

A) 7.0% 
B) 7.5% 
C) 7.8% 
D) 8.2% 
A) 7.0% 
B) 7.5% 
C) 7.8% 
D) 8.2%

Question 7

The amount that the price of bond "B" will change if its yield to maturity increases from 7% to 8% is closest to:

Accepted Answer

A) -$36 
B) $9 
C) $36 
D) $39 
A) -$36 
B) $9 
C) $36 
D) $39

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) The IRR of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default free bond at its current price and hold it to maturity. 
B) The yield to maturity of a bond is the discount rate that sets the future value of the promised bond payments equal to the current market price of the bond. 
C) Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields. 
D) When we calculate a bond's yield to maturity by solving the formula,Price of an n-period bond =  
+
  
+ ...+
  
,the yield we compute will be a rate per coupon interval. 
A) The IRR of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default free bond at its current price and hold it to maturity. 
B) The yield to maturity of a bond is the discount rate that sets the future value of the promised bond payments equal to the current market price of the bond. 
C) Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields. 
D) When we calculate a bond's yield to maturity by solving the formula,Price of an n-period bond =  
+
  
+ ...+
  
,the yield we compute will be a rate per coupon interval.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) In general,the expected future spot interest rate will reflect investor's preferences toward the risk of future interest rate fluctuations. 
B) If investors did not care about risk,then they would be indifferent between investing in a two-year bond and investing in a one-year bond and rolling over the money in one-year. 
C) When we refer to the one-year forward rate for year 5,we mean the rate available today on a one-year investment that begins four years from today and is repaid five years from today. 
D) In general,we can compute the forward rate for year n by comparing an investment in an n-year,zero-coupon bond to an investment in an (n + 1)year,zero-coupon bond,with the interest rate earned in the nth year being guaranteed through an interest rate forward contract. 
A) In general,the expected future spot interest rate will reflect investor's preferences toward the risk of future interest rate fluctuations. 
B) If investors did not care about risk,then they would be indifferent between investing in a two-year bond and investing in a one-year bond and rolling over the money in one-year. 
C) When we refer to the one-year forward rate for year 5,we mean the rate available today on a one-year investment that begins four years from today and is repaid five years from today. 
D) In general,we can compute the forward rate for year n by comparing an investment in an n-year,zero-coupon bond to an investment in an (n + 1)year,zero-coupon bond,with the interest rate earned in the nth year being guaranteed through an interest rate forward contract.

Question 10

Which of the following equations is INCORRECT?

Accepted Answer

A) Expected future spot interest rate = forward interest rate + risk premium 
B) (1 + f1)× (1 + f2)× (1 + f3)× ...× (1 + fn)= (1 + YTMn)n 
C) fn =  
- 1 
D) (1 + YTMn)n = (1 + YTMn - 1)n - 1(1 + fn) 
A) Expected future spot interest rate = forward interest rate + risk premium 
B) (1 + f1)× (1 + f2)× (1 + f3)× ...× (1 + fn)= (1 + YTMn)n 
C) fn =  
- 1 
D) (1 + YTMn)n = (1 + YTMn - 1)n - 1(1 + fn)

Question 11

Use the table for the question(s)below.
Consider the following four bonds that pay annual coupons:  
-Assume that the YTM increases by 1% for each of the four bonds listed.Rank the bonds based upon the sensitivity of their prices from least to most sensitive.

Accepted Answer

The answer of Use the table for the question(s)below.
Consider the...

Question 12

Wyatt Oil is contemplating issuing a 20-year bond with semiannual coupons,a coupon rate of 5%,and a face value of $1000.Wyatt Oil believes it can get a AAA rating from Standard and Poor's for this bond issue.If Wyatt Oil is successful in getting a AAA rating,then the issue price for these bonds would be closest to:

Accepted Answer

A) $1035 
B) $975 
C) $1000 
D) $1026 
A) $1035 
B) $975 
C) $1000 
D) $1026

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) The bond's expected return,which is equal to the firm's debt cost of capital,is less than the yield to maturity if there is a risk of default. 
B) The two best-known bond-rating companies are Standard & Poor's and Dow Jones. 
C) Bonds in the bottom five categories are often called speculative bonds,junk bonds,or high-yield bonds. 
D) Bond ratings encourage widespread investor participation and relatively liquid markets. 
A) The bond's expected return,which is equal to the firm's debt cost of capital,is less than the yield to maturity if there is a risk of default. 
B) The two best-known bond-rating companies are Standard & Poor's and Dow Jones. 
C) Bonds in the bottom five categories are often called speculative bonds,junk bonds,or high-yield bonds. 
D) Bond ratings encourage widespread investor participation and relatively liquid markets.

Question 14

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years.The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.
-Assuming the appropriate YTM on the Sisyphean bond is 9.0%,then the price that this bond trades for will be closest to:

Accepted Answer

A) $946 
B) $919 
C) $1086 
D) $1000 
A) $946 
B) $919 
C) $1086 
D) $1000

Question 15

Explain why the expected return of a corporate bind does not equal its yield to maturity?

Accepted Answer

Because we calculate the yield to maturi

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) A bond trades at par when its coupon rate is equal to its yield to maturity. 
B) The clean price of a bond is adjusted for accrued interest. 
C) The price of the bond will drop by the amount of the coupon immediately after the coupon is paid. 
D) If a coupon bond's yield to maturity exceeds its coupon rate,the present value of its cash flows at the yield to maturity will be greater than its face value. 
A) A bond trades at par when its coupon rate is equal to its yield to maturity. 
B) The clean price of a bond is adjusted for accrued interest. 
C) The price of the bond will drop by the amount of the coupon immediately after the coupon is paid. 
D) If a coupon bond's yield to maturity exceeds its coupon rate,the present value of its cash flows at the yield to maturity will be greater than its face value.

Question 17

Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity.If the bond is currently trading for $459,then the yield to maturity on this bond is closest to:

Accepted Answer

A) 7.5% 
B) 10.4% 
C) 9.7% 
D) 8.1% 
A) 7.5% 
B) 10.4% 
C) 9.7% 
D) 8.1%

Question 18

Which of the four bonds is the most sensitive to a one percent increase in the YTM?

Accepted Answer

A) Bond A 
B) Bond B 
C) Bond C 
D) Bond D 
A) Bond A 
B) Bond B 
C) Bond C 
D) Bond D

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. 
B) Unlike the case of bonds that pay coupons,for zero-coupon bonds,there is no simple formula to solve for the yield to maturity directly. 
C) Because we can convert any bond price into a yield,and vice versa,bond prices and yields are often used interchangeably. 
D) The IRR of an investment in a bond is given a special name,the yield to maturity (YTM). 
A) One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. 
B) Unlike the case of bonds that pay coupons,for zero-coupon bonds,there is no simple formula to solve for the yield to maturity directly. 
C) Because we can convert any bond price into a yield,and vice versa,bond prices and yields are often used interchangeably. 
D) The IRR of an investment in a bond is given a special name,the yield to maturity (YTM).

Question 20

If its YTM does not change,how does a bond's cash price change between coupon payments?

Accepted Answer

Two part answer:
1.The bond's cash price

Exam 6: Valuing Bonds

A default-free security has an annual coupon rate of 3.25% and sells for par.This bond will mature in:

What is the relationship between a bond's price and its yield to maturity?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following zero-coupon yields on default free securities: -The forward rate for year 2 (the forward rate quoted today for an investment that begins in one year and matures in two years)is closest to:

Suppose a five- year bond with a 7% coupon rate and semiannual compounding is trading for a price of $951.58.Expressed as an APR with semiannual compounding,this bonds yield to maturity (YTM)is closest to:

The amount that the price of bond "B" will change if its yield to maturity increases from 7% to 8% is closest to:

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following equations is INCORRECT?

Use the table for the question(s)below. Consider the following four bonds that pay annual coupons: -Assume that the YTM increases by 1% for each of the four bonds listed.Rank the bonds based upon the sensitivity of their prices from least to most sensitive.

Which of the following statements is FALSE?

Explain why the expected return of a corporate bind does not equal its yield to maturity?

Which of the following statements is FALSE?

Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity.If the bond is currently trading for $459,then the yield to maturity on this bond is closest to:

Which of the four bonds is the most sensitive to a one percent increase in the YTM?

Which of the following statements is FALSE?

If its YTM does not change,how does a bond's cash price change between coupon payments?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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