Question 1

Bonds with a high risk of default generally offer high yields.

Accepted Answer

A) True 
 B)False

Question 2

A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3% and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the clean price of the bond is $959.71. After three more months go by, what would you expect the dirty price to be?

Accepted Answer

A)  $978.71 
B)  $969.21 
C)  $997.71 
D)  Cannot be determined from information given. 
A)  $978.71 
B)  $969.21 
C)  $997.71 
D)  Cannot be determined from information given.

Question 3

What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93?

Accepted Answer

A)  7.79% 
B)  9.08% 
C)  6.49% 
D)  3.24% 
A)  7.79% 
B)  9.08% 
C)  6.49% 
D)  3.24%

Question 4

Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?

Accepted Answer

A)  Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity. 
B)  Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. 
C)  Since interest rates will rise and fall in response to the movement in bond prices. 
D)  Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period. 
A)  Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity. 
B)  Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. 
C)  Since interest rates will rise and fall in response to the movement in bond prices. 
D)  Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.

Question 5

What care, if any, should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?

Accepted Answer

There are two issues that one has to be

Question 6

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?

Accepted Answer

A)  a ten-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually 
B)  a ten-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually 
C)  a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually 
D)  a 20-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually 
A)  a ten-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually 
B)  a ten-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually 
C)  a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually 
D)  a 20-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually

Question 7

Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tiles. The company funded this by issuing 15-year bonds with a face value of $1,000 and a coupon rate of 6.2%, paid annually. The above table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the following is most likely to be the rating these bonds received?

Accepted Answer

A)  AA 
B)  A 
C)  BBB 
D)  BB 
A)  AA 
B)  A 
C)  BBB 
D)  BB

Question 8

Consider the following yields to maturity on various one-year, zero-coupon securities:
 
The credit spread of the BBB corporate bond is closest to ________.

Accepted Answer

A)  0.8% 
B)  1.10% 
C)  1.60% 
D)  0.40% 
A)  0.8% 
B)  1.10% 
C)  1.60% 
D)  0.40%

Question 9

How are investors in zero-coupon bonds compensated for making such an investment?

Accepted Answer

A)  Such bonds are purchased at their face value and sold at a premium on a later date. 
B)  Such bonds make regular interest payments. 
C)  Such bonds are purchased at a discount, below their face value. 
D)  Such bonds have a lower face value as compared to other bonds of similar term. 
A)  Such bonds are purchased at their face value and sold at a premium on a later date. 
B)  Such bonds make regular interest payments. 
C)  Such bonds are purchased at a discount, below their face value. 
D)  Such bonds have a lower face value as compared to other bonds of similar term.

Question 10

Which of the following statements is true of bond prices?

Accepted Answer

A)  A fall in bond prices causes interest rates to fall. 
B)  A fall in interest rates causes a fall in bond prices. 
C)  A rise in interest rates causes bond prices to fall. 
D)  Bond prices and interest rates are not connected. 
A)  A fall in bond prices causes interest rates to fall. 
B)  A fall in interest rates causes a fall in bond prices. 
C)  A rise in interest rates causes bond prices to fall. 
D)  Bond prices and interest rates are not connected.

Question 11

Use the information for the question(s) below.  
-Which of the following best describes a bond rated by Standard & Poor's and Moody as B?

Accepted Answer

A)  judged to be high quality by all standards 
B)  considered to be medium grade obligations 
C)  neither highly protected nor poorly secured 
D)  generally lacks the characteristics of a desirable investment 
A)  judged to be high quality by all standards 
B)  considered to be medium grade obligations 
C)  neither highly protected nor poorly secured 
D)  generally lacks the characteristics of a desirable investment

Question 12

What issues should one be careful of when calculating the bond price from its yield to maturity using the "cash flow" (CF) keys of a financial calculator?

Accepted Answer

There are two issues that one has to be

Question 13

Which of the following statements regarding bonds and their terms 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 formula to solve for the yield to maturity. 
C)  Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. 
D)  The internal rate of return (IRR) of 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 formula to solve for the yield to maturity. 
C)  Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. 
D)  The internal rate of return (IRR) of a bond is given a special name, the yield to maturity (YTM).

Question 14

A five-year bond with a $1,000 face value has a yield to maturity is 5.0% and it's coupon rate is 6.0% paid annually. The dirty price of this bond exactly 6 months after its second coupon payment is closest to ________.

Accepted Answer

A)  $1087.23 
B)  $1147.23 
C)  $1027.23 
D)  $1057.23 
A)  $1087.23 
B)  $1147.23 
C)  $1027.23 
D)  $1057.23

Question 15

A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%?

Accepted Answer

A)  $663.78 
B)  $774.42 
C)  $553.15 
D)  $885.05 
A)  $663.78 
B)  $774.42 
C)  $553.15 
D)  $885.05

Question 16

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?

Accepted Answer

A)  3% 
B)  5% 
C)  6% 
D)  7% 
A)  3% 
B)  5% 
C)  6% 
D)  7%

Question 17

What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR?

Accepted Answer

A)  $960.82 
B)  1120.95 
C)  $800.68 
D)  $640.54 
A)  $960.82 
B)  1120.95 
C)  $800.68 
D)  $640.54

Question 18

What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR?

Accepted Answer

A)  $8494.26 
B)  $10,193.11 
C)  $11,891.97 
D)  $6795.41 
A)  $8494.26 
B)  $10,193.11 
C)  $11,891.97 
D)  $6795.41

Question 19

An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?

Accepted Answer

A)  $2606.25 
B)  $5000.00 
C)  $5212.50 
D)  $5425.00 
A)  $2606.25 
B)  $5000.00 
C)  $5212.50 
D)  $5425.00

Question 20

Consolidated Insurance wants to raise $35 million in order to build a new headquarters. The company will fund this by issuing 10-year bonds with a face value of $1,000 and a coupon rate of 6.3%, paid semiannually. The above table shows the yield to maturity for similar 10-year corporate bonds of different ratings. Which of the following is closest to how many more bonds Consolidated Insurance would have to sell to raise this money if their bonds received an A rating rather than an AA rating?

Accepted Answer

A)  937 bonds 
B)  1093 bonds 
C)  781 bonds 
D)  625 bonds 
A)  937 bonds 
B)  1093 bonds 
C)  781 bonds 
D)  625 bonds

Exam 6: Bonds

Bonds with a high risk of default generally offer high yields.

A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3% and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the clean price of the bond is $959.71. After three more months go by, what would you expect the dirty price to be?

What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93?

Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?

What care, if any, should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?

Consider the following yields to maturity on various one-year, zero-coupon securities: The credit spread of the BBB corporate bond is closest to ________.

How are investors in zero-coupon bonds compensated for making such an investment?

Which of the following statements is true of bond prices?

Use the information for the question(s) below. -Which of the following best describes a bond rated by Standard & Poor's and Moody as B?

What issues should one be careful of when calculating the bond price from its yield to maturity using the "cash flow" (CF) keys of a financial calculator?

Which of the following statements regarding bonds and their terms is FALSE?

A five-year bond with a $1,000 face value has a yield to maturity is 5.0% and it's coupon rate is 6.0% paid annually. The dirty price of this bond exactly 6 months after its second coupon payment is closest to ________.

A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%?

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?

What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR?

What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR?

An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters