Question 1

The current yield is defined as the annual interest on a bond divided by which one of the following?

Accepted Answer

A) coupon 
B) face value 
C) market price 
D) call price 
E) dirty price

Question 2

The specified date on which the principal amount of a bond is payable is referred to as which one of the following?

Accepted Answer

A) coupon date 
B) yield date 
C) maturity 
D) dirty date 
E) clean date

Question 3

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks.One stream is expressed in nominal values and the other stream is expressed in real values.You decide to discount the nominal cash flows using a nominal annual rate of 8 percent.What rate should you use to discount the real cash flows?

Accepted Answer

A) 8 percent 
B) EAR of 8 percent compounded monthly 
C) comparable risk-free rate 
D) comparable real rate 
E) You cannot compare the present values of these two streams of cash flows.

Question 4

Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper.Assume the bond has a face value of $1,000 and the current date is April 15,2009.What is the yield to maturity on this bond?

Accepted Answer

A) 6.64 percent 
B) 8.96 percent 
C) 10.23 percent 
D) 12.47 percent 
E) 13.27 percent

Question 5

Which of the following statements concerning bonds are correct?
I.Bonds provide tax benefits to issuers.
II.The risk of a firm financially failing increases when the firm issues bonds.
III.Most long-term bond issues are referred to as unfunded debt.
IV.All bonds are treated equally in a bankruptcy proceeding.

Accepted Answer

A) II and III only 
B) I and II only 
C) III and IV only 
D) II and IV only 
E) I, II, and III only

Question 6

Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 16.5 years.The bonds have a par value of $1,000 and a market price of $944.30.Interest is paid semiannually.What is the yield to maturity?

Accepted Answer

A) 8.36 percent 
B) 8.42 percent 
C) 8.61 percent 
D) 8.74 percent 
E) 9.16 percent

Question 7

Which of the following are negative covenants that might be found in a bond indenture?
I.The company shall maintain a current ratio of 1.10 or better.
II.No debt senior to this issue can be issued.
III.The company cannot lease any major assets without approval by the lender.
IV.The company must maintain the loan collateral in good working order.

Accepted Answer

A) I and II only 
B) II and III only 
C) III and IV only 
D) II, III, and IV only 
E) I, II, and III only

Question 8

Municipal bonds:

Accepted Answer

A) are totally risk-free. 
B) generally have higher coupon rates than corporate bonds. 
C) pay interest that is federally tax-free. 
D) are rarely callable. 
E) are free of default-risk.

Question 9

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 during a certain period of time.

Question 10

A Treasury bond is quoted at a price of 101: 14 with a current yield of 7.236 percent.What is the coupon rate?

Accepted Answer

A) 7.20 percent 
B) 7.28 percent 
C) 7.30 percent 
D) 7.34 percent 
E) 7.39 percent

Question 11

A bond that has only one payment,which occurs at maturity,defines which one of the following?

Accepted Answer

A) debenture 
B) callable 
C) floating-rate 
D) junk 
E) zero coupon

Question 12

Last year,Lexington Homes issued $1 million in unsecured,non-callable debt.This debt pays an annual interest payment of $55 and matures 6 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) semi-annual coupon 
B) discount bond 
C) note 
D) trust deed 
E) collateralized

Question 13

Which of the following are characteristics of a premium bond?
I.coupon rate  yield-to-maturity
III.coupon rate  current yield

Accepted Answer

A) I only 
B) I and III only 
C) I and IV only 
D) II and III only 
E) II and IV only

Question 14

Pete paid $1,032 as his total cost of purchasing a bond.This price is referred to as the:

Accepted Answer

A) quoted price. 
B) spread price. 
C) clean price. 
D) dirty price. 
E) call price.

Question 15

A 6 percent,annual coupon bond is currently selling at a premium and matures in 7 years.The bond was originally issued 3 years ago at par.Which one of the following statements is accurate in respect to this bond today?

Accepted Answer

A) The face value of the bond today is greater than it was when the bond was issued. 
B) The bond is worth less today than when it was issued. 
C) The yield-to-maturity is less than the coupon rate. 
D) The coupon rate is greater than the current yield. 
E) The yield-to-maturity equals the current yield.

Question 16

The Corner Grocer has a 7-year,6 percent annual 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 percent?

Accepted Answer

A) The bond price will increase by $57.14. 
B) The bond price will increase by 5.29 percent. 
C) The bond price will decrease by $53.62. 
D) The bond price will decrease by 8 percent. 
E) The bond price will decrease by 8.36 percent.

Question 17

Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity.The bond makes annual payments and currently sells for $842.10.What is the yield-to-maturity?

Accepted Answer

A) 8.50 percent 
B) 8.68 percent 
C) 8.92 percent 
D) 9.52 percent 
E) 9.68 percent

Question 18

You want to buy a bond from a dealer.Which one of the following prices will you pay?

Accepted Answer

A) call price 
B) auction price 
C) bid price 
D) asked price 
E) bid-ask spread

Question 19

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years.The bond pays interest semiannually.What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

Accepted Answer

A) $899.80 
B) $899.85 
C) $903.42 
D) $967.24 
E) $1,007.52

Question 20

Which of the following increase the price sensitivity of a bond to changes in interest rates?
I.increase in time to maturity
II.decrease in time to maturity
III.increase in coupon rate
IV.decrease in coupon rate

Accepted Answer

A) II only 
B) I and III only 
C) I and IV only 
D) II and III only 
E) II and IV only

Exam 7: Interest Rates and Bond Valuation