Question 1

Consider a 3.75 percent TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A) 3.75 percent 
B) 4.62 percent 
C) 7.10 percent 
D) 8.80 percent

Question 2

A 5 percent coupon bond has 10 years to maturity and could be called in two years. If the bond is called, investors will earn 6.2 percent. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond's yield to maturity?

Accepted Answer

A) 2.36 percent 
B) 4.72 percent 
C) 5.18 percent 
D) 6.49 percent

Question 3

Which of the following statements is correct?

Accepted Answer

A) Long-term bonds have more reinvestment rate risk than short-term bonds. 
B) Long-term bonds have more interest rate risk than short-term bonds. 
C) Short-term bonds with high coupons have high interest rate risk. 
D) Zero coupon bonds do not have interest rate risk.

Question 4

Which of the following statements is correct?

Accepted Answer

A) All else the same, an investor will require less return to invest in a callable bond than one that is not callable. 
B) All else the same, an investor will require more return to invest in a callable bond than one that is not callable. 
C) The call feature does not impact the return that investors demand. 
D) We would need to know the current level of interest rates to answer this question.

Question 5

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 semi-annually 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 6

A 7 percent coupon bond has 10 years to maturity and could be called in three years. If the bond is called, investors will earn 5.5 percent. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond's yield to maturity?

Accepted Answer

A) 2.84 percent 
B) 3.17 percent 
C) 5.38 percent 
D) 5.67 percent

Question 7

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 current yield. Assume interest payments are paid semi-annually and a par value of $5,000.

Accepted Answer

A) 5.94 percent 
B) 11.89 percent 
C) 12.19 percent 
D) 13.14 percent

Question 8

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Accepted Answer

A) Credit quality risk 
B) Interest rate risk 
C) Liquidity rate risk 
D) Reinvestment rate risk

Question 9

A 7.5 percent coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

Accepted Answer

A) 4.77 percent 
B) 7.5 percent 
C) 9.54 percent 
D) 10.34 percent

Question 10

Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond?

Accepted Answer

A) $685.93; discount 
B) $791.03; discount 
C) $1,051.83; premium 
D) $1,176.31; premium

Question 11

Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually), 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 12

A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in percent? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A) 3.5 percent 
B) 5.3 percent 
C) 7.0 percent 
D) 7.15 percent

Question 13

A 5.125 percent TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is the par value of the TIPS?

Accepted Answer

A) $981.75 
B) $1,018.60 
C) $992.75 
D) $1,042.95

Question 14

Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

Accepted Answer

A) Discount 
B) Premium

Question 15

To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued:

Accepted Answer

A) trust securities. 
B) mortgage-backed securities. 
C) current yield securities. 
D) Treasury Inflation Protected Securities.

Question 16

A 5.5 percent corporate coupon bond is callable in four 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? (Assume annual interest payments.)

Accepted Answer

A) $55 
B) $220 
C) $1,000 
D) $1,055

Question 17

A bond issued by a corporation on October 1, 2007, is scheduled to mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

A) 2 years 
B) 50 years 
C) 998 years 
D) 100 years

Question 18

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) $1000, $1,000, $1,000, respectively 
C) $877.81, $1,024.20, $5,072.50, respectively 
D) $1,000, $1,024.20, $1,001.45, respectively

Question 19

Reconsider a 3.25 percent TIPS that was issued with CPI reference of 186.7. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.5. For the interest in the middle of the year, the CPI was 201.1. Now, at the end of the year, the CPI is 202.4 and the interest payment has been made. What is the total return of the TIPS in percentage terms for the year? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A) 1.6 percent 
B) 2.4 percent 
C) 5.8 percent 
D) 9.1 percent

Question 20

Which of the following statements is true?

Accepted Answer

A) Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level. 
B) Interest payments paid to corporate bond holders are not taxed at the federal level. 
C) Interest payments paid to corporate bond holders are not taxed at the state level. 
D) Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

Exam 7: Valuing Bonds

Consider a 3.75 percent TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

A 5 percent coupon bond has 10 years to maturity and could be called in two years. If the bond is called, investors will earn 6.2 percent. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond's yield to maturity?

Which of the following statements is correct?

Which of the following statements is correct?

A 7 percent coupon bond has 10 years to maturity and could be called in three years. If the bond is called, investors will earn 5.5 percent. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond's yield to maturity?

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 current yield. Assume interest payments are paid semi-annually and a par value of $5,000.

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

A 7.5 percent coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond?

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

A 5.125 percent TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is the par value of the TIPS?

Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued:

A 5.5 percent corporate coupon bond is callable in four 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? (Assume annual interest payments.)

A bond issued by a corporation on October 1, 2007, is scheduled to mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

Which of the following statements is true?