Question 1

A call-protected bond is a bond that:

Accepted Answer

A)   is guaranteed to be called.
B)   can never be called.
C)   is currently being called.
D)   is callable at any time.
E)   cannot be called at this point in time. E

Question 2

Which one of the following statements is false concerning the term structure of interest rates?

Accepted Answer

A)   Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates.
B)   The term structure of interest rates includes both an inflation premium and an interest rate risk premium.
C)   The term structure of interest rates and the time to maturity are always directly related.
D)   The real rate of return has minimal, if any, effect on the slope of the term structure of interest rates.
E)   The interest rate risk premium increases as the time to maturity increases. C

Question 3

U. S. Treasury bonds:

Accepted Answer

A)   are highly illiquid.
B)   are quoted as a percentage of par.
C)   are quoted at the dirty price.
D)   pay interest that is federally tax-exempt.
E)   must be held until maturity. B

Question 4

A highly illiquid bond that pays no interest but might entitle its holder to rental income from an asset is most apt to be a:

Accepted Answer

A)   NoNo bond.
B)   put bond.
C)   contingent callable bond.
D)   structured note.
E)   sukuk.

Question 5

A 3.25 percent Treasury bond is quoted at a price of 99.04. The bond pays interest semiannually. What is the current yield?

Accepted Answer

A)   2.94 percent
B)   2.99 percent
C)   3.28 percent
D)   3.33 percent
E)   3.23 percent

Question 6

Which one of the following is the price at which a dealer will sell a bond?

Accepted Answer

A)   Call price
B)   Asked price
C)   Bid price
D)   Bid-ask spread
E)   Par value

Question 7

A Treasury yield curve plots Treasury interest rates relative to:

Accepted Answer

A)   market rates.
B)   comparable corporate bond rates.
C)   the risk-free rate.
D)   inflation rates.
E)   time to maturity.

Question 8

Last year, Lexington Homes issued $1 million in unsecured, noncallable debt. This debt pays an annual interest payment of $55 and matures six years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt?

Accepted Answer

A)   Semiannual coupon
B)   Discount bond
C)   Note
D)   Trust deed
E)   Collateralized

Question 9

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a current price of $1,108.60. At this price, the bonds yield 7.5 percent. What is the coupon rate?

Accepted Answer

A)   8.93 percent
B)   8.46 percent
C)   9.01 percent
D)   9.32 percent
E)   8.78 percent

Question 10

A bond that is payable to whomever has physical possession of the bond is said to be in:

Accepted Answer

A)   new-issue condition.
B)   registered form.
C)   bearer form.
D)   debenture status.
E)   collateral status.

Question 11

The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7.25 percent?

Accepted Answer

A)   The bond price will decrease by 9.27 percent.
B)   The bond price will increase by 7.04 percent.
C)   The bond price will decrease by 8.64 percent.
D)   The bond price will increase by 7.16 percent.
E)   The bond price will increase by 3.86 percent.

Question 12

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?

Accepted Answer

A)   17.84 years
B)   14.19 years
C)   17.41 years
D)   16.16 years
E)   18.32 years

Question 13

A bond has a coupon rate of 8 percent, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent. If interest rates suddenly rise by 1.5 percent, what will be the percentage change in the bond price?

Accepted Answer

A)   −8.16 percent
B)   −8.87 percent
C)   −7.56 percent
D)   −7.64 percent
E)   −8.67 percent

Question 14

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $3,000?

Accepted Answer

A)   $.30
B)   $.90
C)   $3.00
D)   $.09
E)   $.03

Question 15

Which one of these is most apt to be included in a bond's indenture one year after the bond has been issued?

Accepted Answer

A)   Current yield
B)   Written record of all the current bond holders
C)   List of collateral used as bond security
D)   Current market price
E)   Price at which a bondholder can resell a bond to another bondholder

Question 16

You own a bond that pays $64 in interest annually. The face value is $1,000 and the current market price is $1,021.61. The bond matures in 11 years. What is the yield to maturity?

Accepted Answer

A)   6.12 percent
B)   6.22 percent
C)   6.46 percent
D)   6.71 percent
E)   5.80 percent

Question 17

Sunset Sales has 6.8 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield?

Accepted Answer

A)   7.24 percent
B)   7.19 percent
C)   7.33 percent
D)   7.11 percent
E)   7.07 percent

Question 18

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

Accepted Answer

A)   trustee relationships.
B)   bylaws.
C)   legal bounds.
D)   trust deed.
E)   protective covenants.

Question 19

You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?

Accepted Answer

A)   $1,108.58
B)   $1,052.17
C)   $1,114.14
D)   $1,087.75
E)   $1,083.50

Question 20

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

Accepted Answer

A)   shall maintain a current ratio of 1.1 or higher.
B)   cannot lease any major assets without bondholder approval.
C)   must maintain the loan collateral in good working order.
D)   shall provide audited financial statements in a timely manner.
E)   shall maintain a cash surplus of $100,000 at all times.

Exam 7: Interest Rates and Bond Valuation