Question 1

Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

Accepted Answer

A) JM bond, TC bond, B&O bond, IB bond 
B) IB bond, B&O bond, TC bond, JM bond 
C) TC bond, B&O bond, IB bond, JM bond 
D) JM bond, IB bond, B&O bond, TC bond

Question 2

Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Accepted Answer

A) $2.50, $3.15, $0, respectively 
B) $12.50, $15.75, $0, respectively 
C) $12.50, $15.75, $100, respectively 
D) $25.00, $31.50, $0, respectively

Question 3

Bonds are issued by which of the following?

Accepted Answer

A) Corporations 
B) Federal government or its agencies 
C) State and local governments 
D) All of these

Question 4

Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)

Accepted Answer

A) $553.68 
B) $558.66 
C) $940.00 
D) $1,000.00

Question 5

A 3.75 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A) $1,000, $18.75, respectively 
B) $1,000, $37.50, respectively 
C) $1,181.46, $22.15, respectively 
D) $1,181.46, $37.50, respectively

Question 6

Which of the following is true regarding U.S. Government Agency Securities?

Accepted Answer

A) They carry the federal government's full faith and credit guarantee. 
B) They do not carry the federal government's full faith and credit guarantee. 
C) They are insured by the FDIC. 
D) They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee.

Question 7

A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity. You believe that in one year, the yield to maturity will be 8 percent. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

Accepted Answer

A) $97.75 
B) $101.50 
C) $129.25 
D) $137.75

Question 8

If a bond is selling at a premium, then:

Accepted Answer

A) its coupon rate must be greater than its yield. 
B) its coupon rate must be less than its yield. 
C) its coupon rate must be equal to its yield. 
D) its coupon rate must be equal to one-half the yield to maturity for a five-year bond.

Question 9

A bond's current yield is defined as:

Accepted Answer

A) the bond's annual coupon rate divided by the bond's par value. 
B) the bond's annual coupon rate divided by the market interest rate. 
C) the bond's annual coupon rate divided by the bond's current market price. 
D) the bond's annual coupon rate divided by the bond's original issue price.

Question 10

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

Accepted Answer

A) Credit quality risk 
B) Interest rate risk 
C) Liquidity of interest rate risk 
D) Term structure of interest rates

Question 11

A 30-year bond with an 8 percent coupon has a yield to maturity of 6 percent. The bond could be called in seven years and if called would generate a yield to call of 5.75 percent. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.

Accepted Answer

A) $219.73 
B) $152.64 
C) $106.29 
D) $301.76

Question 12

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

Accepted Answer

A) They are able to avoid interest rate risk. 
B) They are able to avoid reinvestment rate risk. 
C) They are able to offer reduced credit risk as they are backed by the federal government. 
D) They are tax exempt-at least at the federal level.

Question 13

Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate?

Accepted Answer

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

Question 14

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 these conditions will cause an increase in the bond's yield.

Question 15

An 8 percent coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in six years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.

Accepted Answer

A) 4.68 percent; yes, the bond will be called 
B) 9.36 percent; yes, the bond will be called 
C) 9.36 percent; no, the bond will not be called 
D) 10.71 percent; no, the bond will not be called

Question 16

A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

Accepted Answer

A) 3.00 percent 
B) 3.09 percent 
C) 5.75 percent 
D) 6.00 percent

Question 17

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 semi-annually and par value is $1,000.

Accepted Answer

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

Question 18

A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are made semi-annually and par value is $1,000.

Accepted Answer

A) $19.73 
B) $81.87 
C) $41.20 
D) $66.03

Question 19

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 7.20 percent. Bond B is a corporate bond that yields 10.00 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 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 20

A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

A) $19.67 
B) $21.55 
C) $25.00 
D) $41.22

Exam 7: Valuing Bonds

Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semi-annually) , 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)