Question 1

A discount bond that pays interest semiannually will ________.
I. have a lower price than an equivalent annual payment bond
II. have a higher EAR than an equivalent annual payment bond
III. sell for less than its conversion value

Accepted Answer

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

Question 2

You can be sure that a bond will sell at a premium to par when its coupon rate is ________.

Accepted Answer

A)  greater than its yield to maturity
B)  less than its yield to maturity
C)  equal to its yield to maturity
D)  less than its conversion value A

Question 3

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

Accepted Answer

A)  Zero coupon bonds
B)  Coupon bonds selling at a discount
C)  Coupon bonds selling at a premium
D)  Floating rate bonds C

Question 4

A callable bond pays annual interest of $60, has a par value of $1 000, matures in 20 years but is callable in 10 years at a price of $1 100, and has a value today of $1 055.84. The yield to call on this bond is ________.

Accepted Answer

A)  6.00%
B)  6.58%
C)  7.20%
D)  8.00% 1055.84 = 60

Question 5

A coupon bond pays semi-annual interest is reported as having an ask price of 117% of its $1 000 par value in the Wall Street Journal. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be ________.

Accepted Answer

A)  $1 140
B)  $1 170
C)  $1 180
D)  $1 200 Invoice price =

Question 6

Bonds with coupon rates that fall when the general level of interest rates rise are called ________.

Accepted Answer

A)  asset-backed bonds
B)  convertible bonds
C)  inverse floaters
D)  index bonds

Question 7

The ________ of a bond is computed as the ratio of coupon payments to market price.

Accepted Answer

A)  nominal yield
B)  current yield
C)  yield to maturity
D)  yield to call

Question 8

TIPS offer investors inflation protection by increasing ________ by the inflation rate each year.

Accepted Answer

A)  only the coupon rate
B)  only the par value
C)  both the par value and the coupon payment
D)  the promised yield to maturity

Question 9

A coupon bond which pays interest annually, has a par value of $1 000, matures in 5 years and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be approximately ________.

Accepted Answer

A)  $856
B)  $892
C)  $926
D)  $1 000 PV0 = $90

Question 10

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding period return in an investor decides to sell now?

Accepted Answer

A)  Increased
B)  Decreased
C)  Stayed the same
D)  Cannot be determined

Question 11

Bonds rated ________ or better by Standard and Poor's are considered investment grade.

Accepted Answer

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

Question 12

You would typically find all but which one of the following in a bond contract?

Accepted Answer

A)  A dividend restriction clause
B)  A sinking fund clause
C)  A requirement to subordinate any new debt issued
D)  A price earnings ratio

Question 13

A bond has a par value of $1 000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the approximate capital gain yield of this bond over the next year?

Accepted Answer

A)  0.7%
B)  1.8%
C)  2.5%
D)  3.4%

Question 14

The primary difference between Treasury notes and bonds is ________.

Accepted Answer

A)  maturity at issue
B)  default risk
C)  coupon rate
D)  tax status

Question 15

________ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Accepted Answer

A)  Asset-backed bonds
B)  TIPS
C)  Catastrophe
D)  Pay-in-kind

Question 16

A bond has a flat price of $985 and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

Accepted Answer

A)  $999.55
B)  $1 002.01
C)  $1 007.45
D)  $1 012.13

Question 17

According to the liquidity preference theory of the term structure of interest rates an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________.

Accepted Answer

A)  declining liquidity premiums
B)  expectation of an upcoming recession
C)  a decline in future inflation expectations
D)  increase in expected interest rate volatility

Question 18

To earn a high rating from the bond rating agencies, a company would want to have ________.
I. a low times-interest-earned ratio
II. a low debt-to-equity ratio
III. a high quick ratio

Accepted Answer

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

Question 19

A convertible bond has a par value of $1 000 but its current market price is $950. The current price of the issuing company's shares is $19 and the conversion ratio is 40 shares. The bond's conversion premium is ________.

Accepted Answer

A)  $50.00
B)  $190.00
C)  $200.00
D)  $240.00

Question 20

You buy an 8-year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon. In one year promised yields have risen to 7%. Your one year holding period return was ________.

Accepted Answer

A)  0.61%
B)  -5.39%
C)  1.28%
D)  -3.25%

Exam 9: Bond Prices and Yields

A discount bond that pays interest semiannually will ________. I. have a lower price than an equivalent annual payment bond II. have a higher EAR than an equivalent annual payment bond III. sell for less than its conversion value