Question 1

What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?

Accepted Answer

A) 1.76 percent 
B) 4.50 percent 
C) 7.38 percent 
D) 11.54 percent

Question 2

Which of the following countries became the first to miss an International Monetary Fund loan repayment?

Accepted Answer

A) Argentina 
B) Greece 
C) Japan 
D) Mexico

Question 3

A 3.5 percent coupon municipal bond has 8 years left to maturity and has a price quote of 102.75. The bond can be called in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $1,000.)

Accepted Answer

A) 2.35 percent 
B) 3.50 percent 
C) 4.64 percent 
D) 9.75 percent

Question 4

Consider the following three bond quotes; a Treasury note quoted at 87.25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Accepted Answer

A) $872.50, $1,000, $1,000, respectively 
B) $1,000, $1,000, $1,000, respectively 
C) $872.50, $1,024.20, $5,072.50, respectively 
D) $1,000, $1,024.20, $1,001.45, respectively

Question 5

An 8 percent coupon bond with 15 years to maturity is priced to offer a 9 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.5 percent. What is the change in price the bond will experience in dollars? (Assume annual interest payments and par value is $1,000.)

Accepted Answer

A) $163.92 
B) $176.15 
C) $198.45 
D) $215.82

Question 6

Under which conditions will an investor demand a larger return (yield) on a bond?

Accepted Answer

A) The bond issue is upgraded from A to AA. 
B) The bond issue is downgraded from A to BBB. 
C) Interest rates decrease due to decline in inflation. 
D) None of the conditions will cause an increase in the bond's yield.

Question 7

A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

A) 1 year, 6 months 
B) 8 years 
C) 8 years, 6 months 
D) 10 years

Question 8

A corporate bond with a 5.75 percent coupon has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the bond's price in dollars? (Assume interest payments are paid semiannually and a par value of $1,000.)

Accepted Answer

A) decrease $22.25 
B) increase $22.25 
C) decrease $23.72 
D) increase $23.72

Question 9

A 4.75 percent coupon bond with 12 years left to maturity can be called in two years. The call premium is one year of coupon payments. It is offered for sale at $1037.35. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $1,000.)

Accepted Answer

A) 4.60 percent 
B) 4.68 percent 
C) 4.75 percent 
D) 5.05 percent

Question 10

Under what conditions is a bond likely to be called?

Accepted Answer

A) The firm is in financial duress. 
B) The firm is planning a massive expansion and needs to raise a lot of capital. 
C) Interest rates have significantly declined. 
D) The firm wants to increase its debt ratio.

Question 11

Which of the following is not a correct statement?

Accepted Answer

A) Treasury inflation-protected securities have fixed coupon rates. 
B) The federal government adjusts the par value of Treasury inflation-protected securities at the rate of inflation. 
C) At maturity, an investor in Treasury inflation-protected securities receives an inflation-adjusted principal amount. 
D) All of these choices are correct.

Question 12

A corporate bond with a 5 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9 percent. What will be the change in the bond's price in dollars? Assume interest payments are paid semiannually and par value is $1,000.

Accepted Answer

A) (-$43.61) 
B) (-$51.07) 
C) (-$62.43) 
D) (-$56.31)

Question 13

A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $5,000.)

Accepted Answer

A) 4.5 percent 
B) 4.78 percent 
C) 7.13 percent 
D) 14.48 percent

Question 14

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

Accepted Answer

A) The current yield must equal the coupon rate. 
B) The current yield must equal the yield to maturity. 
C) Both of these statements are correct. 
D) None of these choices are correct.

Question 15

A corporate bond with an 8.5 percent coupon has 10 years left to maturity. It has had a credit rating of A and a yield to maturity of 10 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BBB. The new appropriate discount rate will be 11.5 percent. What will be the change in the bond's price in dollars? Assume interest payments are paid semiannually and par value is $1,000.

Accepted Answer

A) (-$82.13) 
B) (-$95.19) 
C) (-$101.37) 
D) (-$69.85)

Question 16

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

Question 17

A 2.95 percent TIPS has an original reference CPI of 180.2. If the current CPI is 205.1, what is the current interest payment and par value of the TIPS? (Assume semiannual interest payments and $1,000 par value.)

Accepted Answer

A) $878.60, $16.79, respectively 
B) $1,000.00, $29.50, respectively 
C) $1,138.18, $16.79, respectively 
D) $1,138.18, $29.50, respectively

Question 18

Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semiannually), 6.45 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Accepted Answer

A) $5.50, $6.45, $0, respectively 
B) $27.50, $32.25, $0, respectively 
C) $27.50, $32.25, $100, respectively 
D) $55.00, $64.50, $0, respectively

Question 19

Many bonds are not callable, but for those that are, which of following is a common feature?

Accepted Answer

A) called any time after 2 years of issuance 
B) called any time after 2 years from the time an investor buys the bond 
C) called any time after 10 years of issuance 
D) called any time after 10 years from the time an investor buys the bond

Question 20

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 choices are correct.

Exam 7: Valuing Bonds