Question 1

A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a

Accepted Answer

A)  Samurai bond. 
B)  Eurobond. 
C)  Yankee bond. 
D)  Euroyen bond 
E)  foreign bond. 
A)  Samurai bond. 
B)  Eurobond. 
C)  Yankee bond. 
D)  Euroyen bond 
E)  foreign bond.

Question 2

When homeowners pay off mortgages when they sell their homes, or when homeowners refinance home mortgages, they effectively

Accepted Answer

A)  make the maturities of GNMA securities longer. 
B)  make the maturities of GNMA securities shorter. 
C)  make the maturities of U.S. Treasury securities longer. 
D)  make the maturities of U.S. Treasury securities shorter. 
E)  default on their mortgages. 
A)  make the maturities of GNMA securities longer. 
B)  make the maturities of GNMA securities shorter. 
C)  make the maturities of U.S. Treasury securities longer. 
D)  make the maturities of U.S. Treasury securities shorter. 
E)  default on their mortgages.

Question 3

Suppose you have a 15 percent, 25-year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.

Accepted Answer

A)  15 percent 
B)  16.5 percent 
C)  7.65 percent 
D)  8.52 percent 
E)  9.64 percent 
A)  15 percent 
B)  16.5 percent 
C)  7.65 percent 
D)  8.52 percent 
E)  9.64 percent

Question 4

Calculate the yield to maturity of a zero-coupon bond with a face value of $1000, maturing in 10 years and selling for a price of $529.30.

Accepted Answer

A)  6.57 percent 
B)  8.45 percent 
C)  4.16 percent 
D)  10.23 percent 
E)  12.17 percent 
A)  6.57 percent 
B)  8.45 percent 
C)  4.16 percent 
D)  10.23 percent 
E)  12.17 percent

Question 5

Bonds rated BB or above are considered to be investment-grade bonds.

Accepted Answer

A) True 
 B)False

Question 6

The promised yield to maturity calculation assumes that

Accepted Answer

A)  all coupon interest payments are reinvested at the current market interest rate for the bond. 
B)  all coupon interest payments are reinvested at the coupon interest rate for the bond. 
C)  all coupon interest payments are reinvested at short-term money market interest rates. 
D)  all coupon interest payments are not reinvested. 
E)  None of these are correct. 
A)  all coupon interest payments are reinvested at the current market interest rate for the bond. 
B)  all coupon interest payments are reinvested at the coupon interest rate for the bond. 
C)  all coupon interest payments are reinvested at short-term money market interest rates. 
D)  all coupon interest payments are not reinvested. 
E)  None of these are correct.

Question 7

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
XLR Corporation just issued a $1,000 par value bond with a 7 percent yield to maturity, twenty years to maturity, with an 8 percent semi-annual coupon rate.
-Refer to Exhibit 12.2. What is the price of the XLR Corporate bond?

Accepted Answer

A)  $901.04 
B)  $932.04 
C)  $1,102.62 
D)  $1,105.94 
E)  $1,106.78 
A)  $901.04 
B)  $932.04 
C)  $1,102.62 
D)  $1,105.94 
E)  $1,106.78

Question 8

At what point would an investor be indifferent between a GM corporate bond yielding 9.5 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

Accepted Answer

A)  7.13 percent 
B)  7.60 percent 
C)  11.87 percent 
D)  12.67 percent 
E)  14.27 percent 
A)  7.13 percent 
B)  7.60 percent 
C)  11.87 percent 
D)  12.67 percent 
E)  14.27 percent

Question 9

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a ____ coupon and a ____ term to maturity.

Accepted Answer

A)  low, short 
B)  low, long 
C)  high, short 
D)  high, long 
E)  zero, very long 
A)  low, short 
B)  low, long 
C)  high, short 
D)  high, long 
E)  zero, very long

Question 10

You purchase a 10 1/4s February $10,000 par Treasury note at 102:15 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 104:14?

Accepted Answer

A)  11.92 percent 
B)  8.16 percent 
C)  8.55 percent 
D)  8.61 percent 
E)  10.25 percent 
A)  11.92 percent 
B)  8.16 percent 
C)  8.55 percent 
D)  8.61 percent 
E)  10.25 percent

Question 11

The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.

Accepted Answer

A) True 
 B)False

Question 12

When a fixed income security is being traded at the price above its face value it is trading

Accepted Answer

A)  at a discount. 
B)  at par. 
C)  at a premium. 
D)  flat. 
E)  no accrual. 
A)  at a discount. 
B)  at par. 
C)  at a premium. 
D)  flat. 
E)  no accrual.

Question 13

Which of the following is NOT a major risk premium component for bond investors?

Accepted Answer

A)  quality differentials 
B)  term to maturity 
C)  indenture provisions 
D)  yield to maturity 
E)  exchange rate risk differences 
A)  quality differentials 
B)  term to maturity 
C)  indenture provisions 
D)  yield to maturity 
E)  exchange rate risk differences

Question 14

Institutional investors typically account for about

Accepted Answer

A)  90 to 95 percent of bond market trading. 
B)  40 to 50 percent of bond market trading. 
C)  10 to 15 percent of bond market trading. 
D)  less than 5 percent of bond market trading. 
E)  less than 1 percent of bond market trading. 
A)  90 to 95 percent of bond market trading. 
B)  40 to 50 percent of bond market trading. 
C)  10 to 15 percent of bond market trading. 
D)  less than 5 percent of bond market trading. 
E)  less than 1 percent of bond market trading.

Question 15

Consider a 12 percent, 15-year bond that pays interest semiannually, and its current price is $675. What is the promised yield to maturity?

Accepted Answer

A)  10.23 percent 
B)  18.45 percent 
C)  17.77 percent 
D)  2.31 percent 
E)  9.26 percent 
A)  10.23 percent 
B)  18.45 percent 
C)  17.77 percent 
D)  2.31 percent 
E)  9.26 percent

Question 16

A bond that only pays a principal payment at maturity date is known as a(n)

Accepted Answer

A)  blank bond. 
B)  maturity bond. 
C)  interest free bond. 
D)  mini-coupon bond. 
E)  zero coupon bond. 
A)  blank bond. 
B)  maturity bond. 
C)  interest free bond. 
D)  mini-coupon bond. 
E)  zero coupon bond.

Question 17

The annual interest paid on a bond relative to its prevailing market price is called its

Accepted Answer

A)  promised yield. 
B)  yield to maturity. 
C)  coupon rate. 
D)  effective yield. 
E)  current yield. 
A)  promised yield. 
B)  yield to maturity. 
C)  coupon rate. 
D)  effective yield. 
E)  current yield.

Question 18

The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.

Accepted Answer

A) True 
 B)False

Question 19

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 12.1. What is the current yield for this bond?

Accepted Answer

A)  4.18 percent 
B)  5.88 percent 
C)  4.77 percent 
D)  8.125 percent 
E)  4.063 percent 
A)  4.18 percent 
B)  5.88 percent 
C)  4.77 percent 
D)  8.125 percent 
E)  4.063 percent

Question 20

According to the segmented-market hypothesis, a downward sloping yield curve indicates that

Accepted Answer

A)  demand for long term bonds has fallen and demand for short term bonds has fallen. 
B)  demand for long term bonds has risen and demand for short term bonds has fallen. 
C)  demand for long term bonds has fallen and demand for short term bonds has risen. 
D)  demand for long term bonds has risen and demand for short term bonds has risen. 
E)  None of these are correct. 
A)  demand for long term bonds has fallen and demand for short term bonds has fallen. 
B)  demand for long term bonds has risen and demand for short term bonds has fallen. 
C)  demand for long term bonds has fallen and demand for short term bonds has risen. 
D)  demand for long term bonds has risen and demand for short term bonds has risen. 
E)  None of these are correct.

Exam 12: Bond Fundamentals and Valuation

A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a

When homeowners pay off mortgages when they sell their homes, or when homeowners refinance home mortgages, they effectively

Suppose you have a 15 percent, 25-year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.

Calculate the yield to maturity of a zero-coupon bond with a face value of $1000, maturing in 10 years and selling for a price of $529.30.

Bonds rated BB or above are considered to be investment-grade bonds.

The promised yield to maturity calculation assumes that

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) XLR Corporation just issued a $1,000 par value bond with a 7 percent yield to maturity, twenty years to maturity, with an 8 percent semi-annual coupon rate. -Refer to Exhibit 12.2. What is the price of the XLR Corporate bond?

At what point would an investor be indifferent between a GM corporate bond yielding 9.5 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a ____ coupon and a ____ term to maturity.

You purchase a 10 1/4s February $10,000 par Treasury note at 102:15 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 104:14?

The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.

When a fixed income security is being traded at the price above its face value it is trading

Which of the following is NOT a major risk premium component for bond investors?

Institutional investors typically account for about

Consider a 12 percent, 15-year bond that pays interest semiannually, and its current price is $675. What is the promised yield to maturity?

A bond that only pays a principal payment at maturity date is known as a(n)

The annual interest paid on a bond relative to its prevailing market price is called its

The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 12.1. What is the current yield for this bond?

According to the segmented-market hypothesis, a downward sloping yield curve indicates that

The Investment Setting

The Investment Setting: Part A

Asset Allocation and Security Selection

Asset Allocation and Security Selection: Part A

Organization and Functioning of Securities Markets

Security Market Indexes and Index Funds

Efficient Capital Markets, Behavioral Finance, and Technical Analysis

An Introduction to Portfolio Management

An Introduction to Portfolio Management: Part A

An Introduction to Portfolio Management: Part B

Asset Pricing Models

Equity Valuation

The Top-Down Approach to Market, Industry, and Company Analysis

The Practice of Fundamental Investing

Equity Portfolio Management Strategies

Bond Analysis and Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward, Futures, and Swap Contracts

Option Contracts

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a coupon and a term to maturity.