Question 1

Which of the following terms is a comparison of market yields on securities,assuming all characteristics except maturity are the same?

Accepted Answer

A) Credit quality risk 
B) Interest rate risk 
C) Liquidity of interest rate risk 
D) Term structure of interest rates 
A) Credit quality risk 
B) Interest rate risk 
C) Liquidity of interest rate risk 
D) Term structure of interest rates

Question 2

Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments.Assuming a par value of $1,000,what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

A) $45 
B) $225 
C) $1,000 
D) $1,045 
A) $45 
B) $225 
C) $1,000 
D) $1,045

Question 3

A bond's current yield is defined as:

Accepted Answer

A) the bond's annual coupon rate divided by the bond's par value. 
B) the bond's annual coupon rate divided by the market interest rate. 
C) the bond's annual coupon rate divided by the bond's current market price. 
D) the bond's annual coupon rate divided by the bond's original issue price. 
A) the bond's annual coupon rate divided by the bond's par value. 
B) the bond's annual coupon rate divided by the market interest rate. 
C) the bond's annual coupon rate divided by the bond's current market price. 
D) the bond's annual coupon rate divided by the bond's original issue price.

Question 4

Time to Maturity A bond issued by a corporation on October 1,2007,is scheduled to mature on October 1,3007.If today is October 2,2009,what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

A) 2 years 
B) 50 years 
C) 998 years 
D) 100 years 
A) 2 years 
B) 50 years 
C) 998 years 
D) 100 years

Question 5

TIPS Capital Return Consider a 2.75 percent TIPS with an issue CPI reference of 184.2.At the beginning of this year,the CPI was 195.4 and was at 200.5 at the end of the year.What was the capital gain of the TIPS in dollars?

Accepted Answer

A) $5.10 
B) $11.20 
C) $16.30 
D) $27.69 
A) $5.10 
B) $11.20 
C) $16.30 
D) $27.69

Question 6

Credit Risk and Yield Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity,by their yield to maturity: JM Corporate bond with yield of 12.25 percent,IB Corporate bond with yield of 4.49 percent,TC Corporate bond with yield of 8.76 percent,and B&O Corporate bond with a yield of 5.99 percent.

Accepted Answer

A) JM bond, TC bond, B&O bond, IB bond 
B) IB bond, B&O bond, TC bond, JM bond 
C) TC bond, B&O bond, IB bond, JM bond 
D) JM bond, IB bond, B&O bond, TC bond 
A) JM bond, TC bond, B&O bond, IB bond 
B) IB bond, B&O bond, TC bond, JM bond 
C) TC bond, B&O bond, IB bond, JM bond 
D) JM bond, IB bond, B&O bond, TC bond

Question 7

Junk bonds are those bonds with a credit rating of:

Accepted Answer

A) BB and lower. 
B) B and lower. 
C) BBB and lower. 
D) None of these. 
A) BB and lower. 
B) B and lower. 
C) BBB and lower. 
D) None of these.

Question 8

A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity.You believe that in one year,the yield to maturity will be 8 percent.What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

Accepted Answer

A) $97.75 
B) $101.50 
C) $129.25 
D) $137.75 
A) $97.75 
B) $101.50 
C) $129.25 
D) $137.75

Question 9

Rank the following bonds,from highest to lowest interest rate risk: 2-year zero coupon,2-year 5 percent coupon bond,30-year 5 percent coupon bond,30-year,zero coupon bond.

Accepted Answer

A) 30-year, zero coupon bond, 30-year 5 percent coupon bond, 2-year 5 percent coupon bond, 2-year zero coupon bond 
B) 2-year 5 percent coupon bond, 2-year zero coupon bond, 30-year 5 percent coupon bond, 30-year zero coupon bond 
C) 30-year, zero coupon bond, 30-year 5 percent coupon bond, 2-year zero coupon bond, 2-year 5 percent coupon bond 
D) 30-year, 5 percent coupon bond, 30-year zero coupon bond, 2-year 5 percent coupon bond, 2-year zero coupon bond 
A) 30-year, zero coupon bond, 30-year 5 percent coupon bond, 2-year 5 percent coupon bond, 2-year zero coupon bond 
B) 2-year 5 percent coupon bond, 2-year zero coupon bond, 30-year 5 percent coupon bond, 30-year zero coupon bond 
C) 30-year, zero coupon bond, 30-year 5 percent coupon bond, 2-year zero coupon bond, 2-year 5 percent coupon bond 
D) 30-year, 5 percent coupon bond, 30-year zero coupon bond, 2-year 5 percent coupon bond, 2-year zero coupon bond

Question 10

Which of the following terms means that during periods when interest rates change substantially,bondholders experience distinct gains and losses in their bond investments?

Accepted Answer

A) Credit quality risk 
B) Interest rate risk 
C) Liquidity rate risk 
D) Reinvestment rate risk 
A) Credit quality risk 
B) Interest rate risk 
C) Liquidity rate risk 
D) Reinvestment rate risk

Question 11

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent.(Assume annual compounding and a par value of $1,000.)

Accepted Answer

A) $90.29 
B) $195.62 
C) $1,195.62 
D) $995.62 
A) $90.29 
B) $195.62 
C) $1,195.62 
D) $995.62

Question 12

TIPS Total Return Reconsider a 3.25 percent TIPS that was issued with CPI reference of 186.7.The bond is purchased at the beginning of the year (after the interest payment),when the CPI was 197.5.For the interest in the middle of the year,the CPI was 201.1.Now,at the end of the year,the CPI is 202.4 and the interest payment has been made.What is the total return of the TIPS in percentage terms for the year? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A) 1.6 percent 
B) 2.4 percent 
C) 5.8 percent 
D) 9.1 percent 
A) 1.6 percent 
B) 2.4 percent 
C) 5.8 percent 
D) 9.1 percent

Question 13

Bonds are issued by which of the following?

Accepted Answer

A) Corporations 
B) Federal government or its agencies 
C) State and local governments 
D) All of these 
A) Corporations 
B) Federal government or its agencies 
C) State and local governments 
D) All of these

Question 14

Which of the following statements is correct?

Accepted Answer

A) Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators. 
B) Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times. 
C) Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them. 
D) All of these statements are correct. 
A) Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators. 
B) Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times. 
C) Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them. 
D) All of these statements are correct.

Question 15

If a bond is selling at a discount,which of the following statements is correct?

Accepted Answer

A) The current yield must be greater than the coupon rate. 
B) The coupon rate must be greater than the yield to maturity. 
C) The bond must have a low bond rating. 
D) All of these statements are correct. 
A) The current yield must be greater than the coupon rate. 
B) The coupon rate must be greater than the yield to maturity. 
C) The bond must have a low bond rating. 
D) All of these statements are correct.

Question 16

Explain why high-income and wealthy people are more likely to buy a municipal bond than a corporate bond.

Accepted Answer

Municipal bonds are not taxed

Question 17

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk.Bond A is a municipal bond that yields 5.25 percent.Bond B is a corporate bond that yields 7.75 percent.If Sally is in the 30 percent tax bracket,which bond should she select and why?

Accepted Answer

A) Sally should select Bond A because its interest income is not taxable. 
B) Sally should select Bond B is better because it has lower risk. 
C) Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B. 
D) Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B. 
A) Sally should select Bond A because its interest income is not taxable. 
B) Sally should select Bond B is better because it has lower risk. 
C) Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B. 
D) Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

Question 18

A 10 percent coupon bond has 15 years to maturity and could be called in two years.If the bond is called,investors will earn 4 percent.The call premium is one year of coupon payments.If coupon payments are made annually and par value is $1,000,what is the bond's yield to maturity?

Accepted Answer

A) 6.19 percent 
B) 6.82 percent 
C) 7.65 percent 
D) 7.98 percent 
A) 6.19 percent 
B) 6.82 percent 
C) 7.65 percent 
D) 7.98 percent

Question 19

Which of the following statements is correct?

Accepted Answer

A) Bonds with short-term maturities will have very little interest rate risk. 
B) Bonds with large coupon payments will have very little interest rate risk. 
C) Bonds with higher credit ratings will have very little interest rate risk. 
D) All of these statements are correct. 
A) Bonds with short-term maturities will have very little interest rate risk. 
B) Bonds with large coupon payments will have very little interest rate risk. 
C) Bonds with higher credit ratings will have very little interest rate risk. 
D) All of these statements are correct.

Question 20

To compensate the bondholders for getting the bond called,the issuer pays which of the following?

Accepted Answer

A) Call feature 
B) Call premium 
C) Coupon rate 
D) Original issue premium 
A) Call feature 
B) Call premium 
C) Coupon rate 
D) Original issue premium

Which of the following terms is a comparison of market yields on securities,assuming all characteristics except maturity are the same?

Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments.Assuming a par value of $1,000,what is the price paid to the bondholder if the issuer calls the bond?

A bond's current yield is defined as:

Time to Maturity A bond issued by a corporation on October 1,2007,is scheduled to mature on October 1,3007.If today is October 2,2009,what is this bond's time to maturity? (Assume annual interest payments.)

TIPS Capital Return Consider a 2.75 percent TIPS with an issue CPI reference of 184.2.At the beginning of this year,the CPI was 195.4 and was at 200.5 at the end of the year.What was the capital gain of the TIPS in dollars?

Junk bonds are those bonds with a credit rating of:

Rank the following bonds,from highest to lowest interest rate risk: 2-year zero coupon,2-year 5 percent coupon bond,30-year 5 percent coupon bond,30-year,zero coupon bond.

Which of the following terms means that during periods when interest rates change substantially,bondholders experience distinct gains and losses in their bond investments?

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent.(Assume annual compounding and a par value of $1,000.)

Bonds are issued by which of the following?

Which of the following statements is correct?

If a bond is selling at a discount,which of the following statements is correct?

Explain why high-income and wealthy people are more likely to buy a municipal bond than a corporate bond.

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk.Bond A is a municipal bond that yields 5.25 percent.Bond B is a corporate bond that yields 7.75 percent.If Sally is in the 30 percent tax bracket,which bond should she select and why?

A 10 percent coupon bond has 15 years to maturity and could be called in two years.If the bond is called,investors will earn 4 percent.The call premium is one year of coupon payments.If coupon payments are made annually and par value is $1,000,what is the bond's yield to maturity?

Which of the following statements is correct?

To compensate the bondholders for getting the bond called,the issuer pays which of the following?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Stockspart

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, equity, and Capital Structure

Sharing Firm Wealth: Dividends, share Repurchases and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters

Exam 7: Valuing Bonds

Which of the following terms is a comparison of market yields on securities,assuming all characteristics except maturity are the same?

Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments.Assuming a par value of $1,000,what is the price paid to the bondholder if the issuer calls the bond?

A bond's current yield is defined as:

Time to Maturity A bond issued by a corporation on October 1,2007,is scheduled to mature on October 1,3007.If today is October 2,2009,what is this bond's time to maturity? (Assume annual interest payments.)

TIPS Capital Return Consider a 2.75 percent TIPS with an issue CPI reference of 184.2.At the beginning of this year,the CPI was 195.4 and was at 200.5 at the end of the year.What was the capital gain of the TIPS in dollars?

Junk bonds are those bonds with a credit rating of:

Rank the following bonds,from highest to lowest interest rate risk: 2-year zero coupon,2-year 5 percent coupon bond,30-year 5 percent coupon bond,30-year,zero coupon bond.

Which of the following terms means that during periods when interest rates change substantially,bondholders experience distinct gains and losses in their bond investments?

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent.(Assume annual compounding and a par value of $1,000.)

Bonds are issued by which of the following?

Which of the following statements is correct?

If a bond is selling at a discount,which of the following statements is correct?

Explain why high-income and wealthy people are more likely to buy a municipal bond than a corporate bond.

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk.Bond A is a municipal bond that yields 5.25 percent.Bond B is a corporate bond that yields 7.75 percent.If Sally is in the 30 percent tax bracket,which bond should she select and why?

A 10 percent coupon bond has 15 years to maturity and could be called in two years.If the bond is called,investors will earn 4 percent.The call premium is one year of coupon payments.If coupon payments are made annually and par value is $1,000,what is the bond's yield to maturity?

Which of the following statements is correct?

To compensate the bondholders for getting the bond called,the issuer pays which of the following?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money

Time Value of Money

Valuing Stockspart

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Estimating Cash Flows on Capital Budgeting Projects

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital and Policies

Financial Planning and Forecasting

Assessing Long-Term Debt, equity, and Capital Structure

Sharing Firm Wealth: Dividends, share Repurchases and Other Payouts

Issuing Capital and the Investment Banking Process

International Corporate Finance

Mergers and Acquisitions and Financial Distress

Filters