Question 1

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, investor in Treasury inflation-protected securities receives an inflation-adjusted principal amount.
D)  All of these statements are correct. D

Question 2

Which of the following was the catalyst for the recent financial crisis?

Accepted Answer

A)  Corruption in the investment banking industry.
B)  Widespread layoffs due to illegal alien hiring.
C)  Defaults on subprime mortgages.
D)  All of these were catalysts. C

Question 3

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 D

Question 4

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent tax bracket, which bond should she select and why?

Accepted Answer

A)   Sally should select Bond A because its interest income is not taxable.
B)   Sally should select Bond B is better because it has lower risk.
C)   Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B.
D)   Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

Question 5

Bond prices are quoted in terms of which of the following?

Accepted Answer

A)  Original issue discount
B)  Percent of par value
C)  Coupon rate in dollars
D)  Market rate in dollars

Question 6

Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1 percent?

Accepted Answer

A)  2-year, 5 percent coupon bond
B)  30-year, 10 percent coupon bond
C)  10-year, zero coupon
D)  30-year, zero coupon

Question 7

Which of the following statements is correct?

Accepted Answer

A)  There is an inverse relationship between bond prices and bond yields.
B)  There is a positive relationship between bond prices and bond yields.
C)  There is no relationship between bond prices and bond yields.
D)  The relationship between bond prices and bond yields is dependent on the market interest rate.

Question 8

A 5.5 percent coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in nine years. The call premium is one year of coupon payments. Compute the bond's yield to maturity and yield to call. Assume interest payments are paid semi-annually and a par value of $5,000.

Accepted Answer

A)  YTM = 6.91 percent; YTC = 7.52 percent
B)  YTM = 6.24 percent; YTC = 7.08 percent
C)  YTM = 5.78 percent; YTC = 6.61 percent
D)  YTM = 5.92 percent; YTC = 6.85 percent

Question 9

Which of following are backed only by the reputation and financial stability of the corporation?

Accepted Answer

A)  Debentures
B)  Unsecured bonds
C)  Both of these
D)  None of these

Question 10

A 4.25 percent coupon bond with eight years left to maturity is offered for sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

Accepted Answer

A)  2.25 percent
B)  2.36 percent
C)  4.25 percent
D)  4.50 percent

Question 11

Which of the following are main issuers of bonds?

Accepted Answer

A)  U.S. Treasury bonds
B)  Corporate bonds
C)  Municipal bonds
D)  All of these

Question 12

A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

A)  $45
B)  $225
C)  $1,000
D)  $1,045

Question 13

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)

Accepted Answer

A)  $90.29
B)  $195.62
C)  $1,195.62
D)  $995.62

Question 14

Which of the following determines the dollar amount of interest paid to bondholders?

Accepted Answer

A)  Original issue discount
B)  Call premium
C)  Coupon rate
D)  Market rate

Question 15

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.75 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

Accepted Answer

A)   Sally should select Bond A because its interest income is not taxable.
B)   Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.
C)   Sally should select Bond A because its TEY is greater than the yield of Bond B.
D)   Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B.

Question 16

Which of the following statements is correct?

Accepted Answer

A)  Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators.
B)  Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times.
C)  Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them.
D)  All of these statements are correct.

Question 17

Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

Accepted Answer

A)  Debenture
B)  Enforcement codes
C)  Indenture
D)  Prospectus

Question 18

Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semi-annually), 4.75 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)

Accepted Answer

A)  $4.00, $4.75, $0, respectively
B)  $20.00, $23.75, $0, respectively
C)  $20.00, $23.75, $150, respectively
D)  $40.00, $47.50, $0, respectively

Question 19

A 10 percent coupon bond has 15 years to maturity and could be called in two years. If the bond is called, investors will earn 4 percent. The call premium is one year of coupon payments. If coupon payments are made annually and par value is $1,000, what is the bond's yield to maturity?

Accepted Answer

A)  6.19 percent
B)  6.82 percent
C)  7.65 percent
D)  7.98 percent

Question 20

Consider a 4.5 percent TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS in dollars?

Accepted Answer

A)  $32.73
B)  $46.92
C)  $62.49
D)  $75.85

Exam 7: Valuing Bonds

Which of the following is not a correct statement?

Which of the following was the catalyst for the recent financial crisis?

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.)

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent tax bracket, which bond should she select and why?

Bond prices are quoted in terms of which of the following?

Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1 percent?

Which of the following statements is correct?

Which of following are backed only by the reputation and financial stability of the corporation?

A 4.25 percent coupon bond with eight years left to maturity is offered for sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

Which of the following are main issuers of bonds?

A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)

Which of the following determines the dollar amount of interest paid to bondholders?

Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.75 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

Which of the following statements is correct?

Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semi-annually) , 4.75 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)

A 10 percent coupon bond has 15 years to maturity and could be called in two years. If the bond is called, investors will earn 4 percent. The call premium is one year of coupon payments. If coupon payments are made annually and par value is $1,000, what is the bond's yield to maturity?

Consider a 4.5 percent TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS in dollars?