Fin 3013 Chapter 10

Chapter 10 - Bond Prices and Yields

Chapter 10 Bond Prices and Yields Multiple Choice Questions

1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

2. Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer

3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

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6. Bonds issued in the U.S. are __________ and most bonds issued overseas are ___________. A. bearer bonds; registered bonds B. registered bonds; bearer bonds C. straight bonds; convertible bonds D. puttable bonds; callable

7. Floating rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

8. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

9. When discussing bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

10. A Japanese firm issued and sold a pound denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

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11. The primary difference between Treasury notes and bonds is ________. A. maturity at issue B. default risk C. coupon rate D. tax status

12. TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

13. You would typically find all but which one of the following in a bond contract? A. A dividend restriction clause B. A sinking fund clause C. A requirement to subordinate any new debt issued D. A price-earnings ratio

14. 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 A. I only B. II and III only C. I and III only D. I, II and III

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

16. __________ are examples of synthetically created zero coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

17. A __________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

18. TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds

19. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

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20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is _________. A. $30.00 B. $33.00 C. $32.78 D. $30.90

21. The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's. The "C" rating indicates the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

22. Bonds rated _____ or better by Standard and Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short term bonds than long term bonds B. a higher yield on long term bonds than short term bonds C. the same yield on both short term bonds and long term bonds D. the liquidity preference theory cannot be used to make any of the other statements.

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24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pay interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

25. Everything else equal _________ bonds will require a higher promised YTM than ________ bonds. A. catastrophe; standard B. non-callable; callable C. mortgage; debenture D. AAA rated; BAA rated

26. Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

27. _______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset backed bonds B. TIPS C. Catastrophe D. Pay in Kind

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28. The issuer of a/an ________ bond may choose to pay interest either in cash or in additional bonds. A. asset backed bonds B. TIPS C. catastrophe D. pay in kind

29. Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

30. Which one of the following statements is correct? A. Invoice price = Flat price - Accrued Interest B. Invoice price = Flat price + Accrued Interest C. Flat price = Invoice price + Accrued Interest D. Invoice price = Settlement price - Accrued Interest

31. A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund

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33. Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

34. In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating rate bonds

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

36. A convertible bond has a par value of $1,000 but its current market price is $975. The current price of the issuing company's stock is $26 and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980

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37. 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 stock is $19 and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50.00 B. $190.00 C. $200.00 D. $240.00

38. A coupon bond which pays interest of 4% annually, has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A. 7.2% B. 8.8% C. 9.1% D. 9.6%

39. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $84.52 discount from par value. The approximate yield to maturity on this bond is _________. A. 6% B. 7% C. 8% D. 9%

40. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6.00% B. 6.49% C. 6.73% D. 7.00%

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41. 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 $1055.84. The yield to call on this bond is _________. A. 6.00% B. 6.58% C. 7.20% D. 8.00%

42. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar). A. $1,000 B. $1,063 C. $1,081 D. $1,100

43. 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 _________. A. $856 B. $892 C. $926 D. $1,000

44. 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 _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200

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45. A treasury bond due in one year has a yield of 6.3% while a treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corporation has a yield of 9.6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6.8%. The default risk premiums on the one-year and 5-year bonds issued by High Country Marketing Corp. are respectively __________ and _________. A. 0.4%, 0.3% B. 0.4%, 0.5% C. 0.5%, 0.5% D. 0.5%, 0.8%

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.00 B. $641.00 C. $789.00 D. $1,100.00

47. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

48. You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5.0% B. 5.5% C. 7.6% D. 8.9%

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49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

$1,000 par value zero coupon bonds, ignore liquidity premiums

50. The expected one-year interest rate one year from now should be about _________. A. 6.00% B. 7.50 % C. 9.00% D. 10.00%

51. One year from now Bond C should sell for ________ (to the nearest dollar). A. $857 B. $842 C. $835 D. $821

52. The expected two year interest rate three years from now should be _________. A. 9.55% B. 11.74% C. 14.89% D. 13.73%

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53. The __________ of a bond is computed as the ratio of coupon payments to market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

54. 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? A. 0.7% B. 1.8% C. 2.5% D. 3.4%

55. Consider the following $1,000 par value zero-coupon bonds:

The expected one-year interest rate two years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00%

56. Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A putable mortgage bond C. A callable mortgage bond D. A putable debenture

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57. A 1% decline in yield will have the least effect on the price of the bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100


The expected one-year interest rate three years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00%


The expected one-year interest rate four years from now should be _________. A. 16.00% B. 18.00% C. 20.00% D. 22.00%

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60. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate equal to its yield to maturity D. its coupon rate is less than its conversion value

61. A corporate bond has a 10 year maturity and pays interest semiannually. The quoted coupon rate is 6% and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98%

62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long-term part of the market

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64. The yield to maturity on a bond is ________. I. above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium II. the discount rate that will set the present value of the payments equal to the bond price III. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II and III

65. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97 B. $104 C. $364 D. $732

67. 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 A. I and II only B. I and III only C. II and III only D. I, II and III

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68. A 6% coupon U.S. treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on $100,000 face amount of this note is _________. A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000.00

69. The yield to maturity of an 10-year zero coupon bond, with a par value of $1,000 and a market price of $625, is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4%

Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and a coupon rate of 5%. Assume annual coupon payments.

70. What is the nominal rate of return on the TIPS bond in the first year? A. 5.00% B. 5.15% C. 8.15% D. 9.00%

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71. What is the real rate of return on the TIPS bond in the first year? A. 5.00% B. 8.15% C. 7.15% D. 4.00%

On May 1, 2007, Joe Hill is considering one of the following newly-issued 10 year AAA corporate bonds.

72. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be: A. The price of Wildwood bond would decline by more than the Asbury bond. B. The price of Wildwood bond would decline by less than the Asbury bond. C. The price of Wildwood bond would increase by more than the Asbury bond. D. The price of Wildwood bond would increase by less than the Asbury bond.

73. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell

74. If the volatility of interest rates is expected to increase, the Joe Hill should __. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell

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75. One, two and three year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate, one year from today? A. 2.0% B. 8.0% C. 9.0% D. 11.1%

76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42

77. If the price of a $10,000 par Treasury bond is $10,237.50 the quote would be listed in the newspaper as ________. A. 102:10 B. 102:11 C. 102:12 D. 102:13

78. A bond pays a semi-annual coupon and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? A. $13.21 B. $12.57 C. $15.44 D. $16.32

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79. 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? A. $999.55 B. $1,002.01 C. $1,007.45 D. $1,012.13

80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925.00 C. $9,934.37 D. $9,955.43

81. A bond has a 5% coupon rate. The coupon is paid semi-annually and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25.00 D. $50.00

82. The price on a treasury bond is 104:21 with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11 with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04%

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83. You buy a bond with a $1,000 par today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.40% B. 9.57% C. 7.45% D. 8.78%

84. 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 ___. A. 0.61% B. -5.39% C. 1.28% D. -3.25%

85. You buy a 10 year $1,000 par zero coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.27 C. $9.38 D. $33.51

86. You buy a 10 year $1,000 par 4% annual payment coupon bond priced to yield 6%. You do not sell the bond at year end. If you are in a 15% tax bracket at year end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $7.68 D. $5.20

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87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.80% B. 4.85% C. 9.60% D. 9.70%

88. If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.30% B. 4.50% C. 5.20% D. 5.50%

89. The price of a bond at the beginning of a period is $980.00 and $975.00 at the end of the period. What is the holding period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.50% C. 5.10% D. 5.6%

90. 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? A. Increased B. Decreased C. Stayed the same D. Can not be determined

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91. The ___________ is the document defining the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

92. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds

93. If you are holding a premium bond you must expect a _______ each year until maturity. If you are holding a discount bond you must expect a _______ each year until maturity. A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

Chapter 10 Bond Prices and Yields Answer Key

Multiple Choice Questions

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1. The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

Difficulty: Medium

2. Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer

Difficulty: Easy

3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

Difficulty: Easy

4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

Difficulty: Easy

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5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

Difficulty: Easy

6. Bonds issued in the U.S. are __________ and most bonds issued overseas are ___________. A. bearer bonds; registered bonds B. registered bonds; bearer bonds C. straight bonds; convertible bonds D. puttable bonds; callable

Difficulty: Easy

7. Floating rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

Difficulty: Easy

8. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS

Difficulty: Easy

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9. When discussing bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread

Difficulty: Medium

10. A Japanese firm issued and sold a pound denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond.

Difficulty: Hard

11. The primary difference between Treasury notes and bonds is ________. A. maturity at issue B. default risk C. coupon rate D. tax status

Difficulty: Easy

12. TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity

Difficulty: Easy

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13. You would typically find all but which one of the following in a bond contract? A. A dividend restriction clause B. A sinking fund clause C. A requirement to subordinate any new debt issued D. A price-earnings ratio

Difficulty: Easy

14. 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 A. I only B. II and III only C. I and III only D. I, II and III

Difficulty: Easy

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

Difficulty: Hard

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16. __________ are examples of synthetically created zero coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs

Difficulty: Easy

17. A __________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

Difficulty: Easy

18. TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds

Difficulty: Easy

19. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds

Difficulty: Easy

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20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is _________. A. $30.00 B. $33.00 C. $32.78 D. $30.90 ($30)(1.02)(1.03)(1.04) = $32.78

Difficulty: Medium

21. The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's. The "C" rating indicates the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds

Difficulty: Easy

22. Bonds rated _____ or better by Standard and Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC

Difficulty: Easy

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23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short term bonds than long term bonds B. a higher yield on long term bonds than short term bonds C. the same yield on both short term bonds and long term bonds D. the liquidity preference theory cannot be used to make any of the other statements.

Difficulty: Easy

24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pay interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A

Difficulty: Medium

25. Everything else equal _________ bonds will require a higher promised YTM than ________ bonds. A. catastrophe; standard B. non-callable; callable C. mortgage; debenture D. AAA rated; BAA rated

Difficulty: Medium

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26. Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds

Difficulty: Easy

27. _______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset backed bonds B. TIPS C. Catastrophe D. Pay in Kind

Difficulty: Easy

28. The issuer of a/an ________ bond may choose to pay interest either in cash or in additional bonds. A. asset backed bonds B. TIPS C. catastrophe D. pay in kind

Difficulty: Easy

29. Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower

Difficulty: Medium

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30. Which one of the following statements is correct? A. Invoice price = Flat price - Accrued Interest B. Invoice price = Flat price + Accrued Interest C. Flat price = Invoice price + Accrued Interest D. Invoice price = Settlement price - Accrued Interest

Difficulty: Easy

31. A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury

Difficulty: Easy

32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund

Difficulty: Easy

33. Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

Difficulty: Medium

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34. In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating rate bonds

Difficulty: Medium

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

Difficulty: Medium

36. A convertible bond has a par value of $1,000 but its current market price is $975. The current price of the issuing company's stock is $26 and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980 ($26)(34) = $884

Difficulty: Medium

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37. 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 stock is $19 and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50.00 B. $190.00 C. $200.00 D. $240.00 Conversion Premium = 950 - 40(19) = 190.00

Difficulty: Medium

38. A coupon bond which pays interest of 4% annually, has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A. 7.2% B. 8.8% C. 9.1% D. 9.6%

$785 = $40

Difficulty: Hard

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39. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $84.52 discount from par value. The approximate yield to maturity on this bond is _________. A. 6% B. 7% C. 8% D. 9%

Difficulty: Medium

40. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6.00% B. 6.49% C. 6.73% D. 7.00%

Difficulty: Medium

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41. 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 $1055.84. The yield to call on this bond is _________. A. 6.00% B. 6.58% C. 7.20% D. 8.00%

1055.84 = 60

Difficulty: Medium

42. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar). A. $1,000 B. $1,063 C. $1,081 D. $1,100

= 1,063

Difficulty: Medium

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43. 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 _________. A. $856 B. $892 C. $926 D. $1,000

PV0 = $90

Difficulty: Medium

44. 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 _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200 Invoice Price =

Difficulty: Medium

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45. A treasury bond due in one year has a yield of 6.3% while a treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corporation has a yield of 9.6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6.8%. The default risk premiums on the one-year and 5-year bonds issued by High Country Marketing Corp. are respectively __________ and _________. A. 0.4%, 0.3% B. 0.4%, 0.5% C. 0.5%, 0.5% D. 0.5%, 0.8% Default premium for 1-Year Bond = .068 - .063 = .005 Default premium for 5-Year Bond = .096 - .088 = .008

Difficulty: Medium

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.00 B. $641.00 C. $789.00 D. $1,100.00

PV0 =

Difficulty: Medium

47. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

Difficulty: Easy

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48. You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5.0% B. 5.5% C. 7.6% D. 8.9%

PV0 = 60

PV1 = 60

Difficulty: Hard

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

Difficulty: Easy

$1,000 par value zero coupon bonds, ignore liquidity premiums

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50. The expected one-year interest rate one year from now should be about _________. A. 6.00% B. 7.50 % C. 9.00% D. 10.00%

Difficulty: Hard

51. One year from now Bond C should sell for ________ (to the nearest dollar). A. $857 B. $842 C. $835 D. $821 1.07993 = (1.06)(1 + 1F3)2; (1 + 1F3)2 = 1.188 P1 =

= $841.69

Difficulty: Hard

52. The expected two year interest rate three years from now should be _________. A. 9.55% B. 11.74% C. 14.89% D. 13.73% (1 + 0R5)5 = (1 + 0R3)3(1 + 3F5)2 1.10705 = (1.07993)(1 + 3F5)2; 3F5 = 14.89%

Difficulty: Hard

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53. The __________ of a bond is computed as the ratio of coupon payments to market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

Difficulty: Easy

54. 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? A. 0.7% B. 1.8% C. 2.5% D. 3.4%

Difficulty: Hard

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The expected one-year interest rate two years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00%

Difficulty: Hard

56. Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A putable mortgage bond C. A callable mortgage bond D. A putable debenture

Difficulty: Medium

57. A 1% decline in yield will have the least effect on the price of the bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

Difficulty: Medium

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The expected one-year interest rate three years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00%

Difficulty: Hard


The expected one-year interest rate four years from now should be _________. A. 16.00% B. 18.00% C. 20.00% D. 22.00%

Difficulty: Hard

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60. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate equal to its yield to maturity D. its coupon rate is less than its conversion value

Difficulty: Medium

61. A corporate bond has a 10 year maturity and pays interest semiannually. The quoted coupon rate is 6% and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98%

1000 =

r = YTC = 8.98%

Difficulty: Hard

62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

Difficulty: Medium

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63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long-term part of the market

Difficulty: Medium

64. The yield to maturity on a bond is ________. I. above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium II. the discount rate that will set the present value of the payments equal to the bond price III. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II and III

Difficulty: Medium

65. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

Difficulty: Medium

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66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97 B. $104 C. $364 D. $732

Difficulty: Medium

67. 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 A. I and II only B. I and III only C. II and III only D. I, II and III

Difficulty: Hard

68. A 6% coupon U.S. treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on $100,000 face amount of this note is _________. A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000.00

Difficulty: Medium

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69. The yield to maturity of an 10-year zero coupon bond, with a par value of $1,000 and a market price of $625, is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4%

Difficulty: Medium

Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and a coupon rate of 5%. Assume annual coupon payments.

70. What is the nominal rate of return on the TIPS bond in the first year? A. 5.00% B. 5.15% C. 8.15% D. 9.00%

HPRNom =

Difficulty: Medium

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71. What is the real rate of return on the TIPS bond in the first year? A. 5.00% B. 8.15% C. 7.15% D. 4.00%

HPRNom =

HPRreal =

Difficulty: Medium

On May 1, 2007, Joe Hill is considering one of the following newly-issued 10 year AAA corporate bonds.

72. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be: A. The price of Wildwood bond would decline by more than the Asbury bond. B. The price of Wildwood bond would decline by less than the Asbury bond. C. The price of Wildwood bond would increase by more than the Asbury bond. D. The price of Wildwood bond would increase by less than the Asbury bond.

Difficulty: Medium

73. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell

Difficulty: Medium

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74. If the volatility of interest rates is expected to increase, the Joe Hill should __. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell

Difficulty: Medium

75. One, two and three year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate, one year from today? A. 2.0% B. 8.0% C. 9.0% D. 11.1% Implied forward rate = I (1.07) (1 + I) = (1.08)2

Difficulty: Medium

76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42

Difficulty: Medium

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77. If the price of a $10,000 par Treasury bond is $10,237.50 the quote would be listed in the newspaper as ________. A. 102:10 B. 102:11 C. 102:12 D. 102:13

Difficulty: Medium

78. A bond pays a semi-annual coupon and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? A. $13.21 B. $12.57 C. $15.44 D. $16.32

= $12.57

Difficulty: Medium

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79. 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? A. $999.55 B. $1,002.01 C. $1,007.45 D. $1,012.13

Invoice = 985 + (69)

= $1,002.01

Difficulty: Medium

80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925.00 C. $9,934.37 D. $9,955.43

Difficulty: Medium

81. A bond has a 5% coupon rate. The coupon is paid semi-annually and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25.00 D. $50.00 Accrued interest = (50/2) x (35/182) = 4.81

Difficulty: Medium

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82. The price on a treasury bond is 104:21 with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11 with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04% Credit risk premium = 4.59 - 3.45 = 1.14%

Difficulty: Medium

83. You buy a bond with a $1,000 par today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.40% B. 9.57% C. 7.45% D. 8.78% (875)(1 + EAR)6 = 1000 + (75)(6); EAR = 8.78%

Difficulty: Hard

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84. 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 ___. A. 0.61% B. -5.39% C. 1.28% D. -3.25%

P1 = (60) HPR =

= 0.61%

Difficulty: Hard

85. You buy a 10 year $1,000 par zero coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.27 C. $9.38 D. $33.51

Taxes owed ($591.90 - $558.39)(0.28) = $9.38

Difficulty: Hard

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86. You buy a 10 year $1,000 par 4% annual payment coupon bond priced to yield 6%. You do not sell the bond at year end. If you are in a 15% tax bracket at year end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $7.68 D. $5.20

Taxes owed ($863.97 - $852.80 + $40)(0.15) = $7.68

Difficulty: Hard

87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.80% B. 4.85% C. 9.60% D. 9.70% Current yield = 48/989.4 = .0485

Difficulty: Medium

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88. If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.30% B. 4.50% C. 5.20% D. 5.50% A bond sells at premium when coupon rate > YTM.

Difficulty: Medium

89. The price of a bond at the beginning of a period is $980.00 and $975.00 at the end of the period. What is the holding period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.50% C. 5.10% D. 5.6% HPR = (975 - 980 + 45)/980 = 4.08%

Difficulty: Medium

90. 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? A. Increased B. Decreased C. Stayed the same D. Can not be determined

Difficulty: Easy

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91. The ___________ is the document defining the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

Difficulty: Easy

92. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds

Difficulty: Easy

93. If you are holding a premium bond you must expect a _______ each year until maturity. If you are holding a discount bond you must expect a _______ each year until maturity. A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

Difficulty: Easy

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Fin 3013 Chapter 10

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