Doç.Dr.Fatma Dilvin TAŞKIN – Yaşar Üniversitesi



Chapter 10Bond 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 interestB.?stated or flat price in a quote sheet minus accrued interestC.?bid priceD.?average of the bid and ask price?2.Sinking funds are commonly viewed as protecting the _______ of the bond.??A.?issuerB.?underwriterC.?holderD.?dealer?3.A collateral trust bond is _______.??A.?secured by other securities held by the firmB.?secured by equipment owned by the firmC.?secured by property owned by the firmD.?unsecured?4.A mortgage bond is _______.??A.?secured by other securities held by the firmB.?secured by equipment owned by the firmC.?secured by property owned by the firmD.?unsecured?5.A debenture is _________.??A.?secured by other securities held by the firmB.?secured by equipment owned by the firmC.?secured by property owned by the firmD.?unsecured?6.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. (In each case assume that the yield to maturity remains stable over time.)??A.?capital gain; capital lossB.?capital gain; capital gainC.?capital loss; capital gainD.?capital loss; capital loss?7.Floating-rate bonds have a __________ that is adjusted with current market interest rates.??A.?maturity dateB.?coupon payment dateC.?coupon rateD.?dividend yield?8.Inflation-indexed Treasury securities are commonly called ____.??A.?PIKsB.?CARsC.?TIPSD.?STRIPS?9.In regard to bonds, convexity relates to the _______.??A.?shape of the bond price curve with respect to interest ratesB.?shape of the yield curve with respect to maturityC.?slope of the yield curve with respect to liquidity premiumsD.?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.?11.The primary difference between Treasury notes and bonds is ________.??A.?maturity at issueB.?default riskC.?coupon rateD.?tax status?12.TIPS offer investors inflation protection by ______________ by the inflation rate each year.??A.?increasing only the coupon rateB.?increasing only the par valueC.?increasing both the par value and the coupon paymentD.?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 clauseB.?A sinking fund clauseC.?A requirement to subordinate any new debt issuedD.?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 ratioII. A low debt-to-equity ratioIII. A high quick ratio??A.?I onlyB.?II and III onlyC.?I and III onlyD.?I, II, and III?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 premiumsB.?an expectation of an upcoming recessionC.?a decline in future inflation expectationsD.?an increase in expected interest rate volatility?16.__________ are examples of synthetically created zero-coupon bonds.??A.?COLTSB.?OPOSSMSC.?STRIPSD.?ARMs?17.A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.??A.?callableB.?couponC.?puttableD.?Treasury?18.TIPS are an example of _______________.??A.?EurobondsB.?convertible bondsC.?indexed bondsD.?catastrophe bonds?19.Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.??A.?EurobondsB.?Yankee bondsC.?Samurai bondsD.?foreign bonds?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 3 years. The total annual coupon income you will receive in year 3 is _________.??A.?$30B.?$33C.?$32.78D.?$30.90?21.The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.??A.?high gradeB.?intermediate gradeC.?investment gradeD.?junk bonds?22.Bonds rated _____ or better by Standard & Poor's are considered investment grade.??A.?AAB.?BBBC.?BBD.?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 on long-term bondsB.?a higher yield on long-term bonds than on short-term bondsC.?the same yield on both short-term bonds and long-term bondsD.?none of these options (The liquidity preference theory cannot be used to make any of the other statements.)?24.Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays 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 BB.?both bonds will increase in value but bond B will increase more than bond AC.?both bonds will decrease in value but bond A will decrease more than bond BD.?both bonds will decrease in value but bond B will decrease more than bond A?25.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 bondsB.?Senior debenturesC.?Preferred stockD.?Equipment obligation bonds?26.Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.??A.?asset-backed bondsB.?convertible bondsC.?inverse floatersD.?index bonds?27._______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.??A.?Asset-backed bondsB.?TIPSC.?CatastropheD.?Pay-in-kind?28.The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.??A.?an asset-backedB.?a TIPSC.?a catastropheD.?a 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; higherB.?longer; lowerC.?shorter; higherD.?shorter; lower?30.Which one of the following statements is correct???A.?Invoice price = Flat price - Accrued interestB.?Invoice price = Flat price + Accrued interestC.?Flat price = Invoice price + Accrued interestD.?Invoice price = Settlement price - Accrued interest?31.A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.??A.?callableB.?couponC.?puttableD.?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 featureB.?Convertible featureC.?Subordination clauseD.?Sinking fund?33.Serial bonds are associated with _________.??A.?staggered maturity datesB.?collateralC.?coupon payment datesD.?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 bondsB.?Coupon bonds selling at a discountC.?Coupon bonds selling at a premiumD.?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.?increaseB.?decreaseC.?not changeD.?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.?$1,000B.?$884C.?$933D.?$980?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.?$50B.?$190C.?$200D.?$240?38.A coupon bond that 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 that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.??A.?6%B.?7.23%C.?8.12%D.?9.45%?40.A coupon bond that 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%B.?6.49%C.?6.73%D.?7%?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%B.?6.58%C.?7.2%D.?8%?42.A coupon bond that pays interest semiannually 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 __________.??A.?$1,000B.?$1,062.81C.?$1,081.82D.?$1,100.03?43.A coupon bond that 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 _________.??A.?$856.04B.?$891.86C.?$926.47D.?$1,000?44.A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. 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.?$1,140B.?$1,170C.?$1,180D.?$1,200?45.A Treasury bond due in 1 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 Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________.??A.?.4%; .3%B.?.4%; .5%C.?.5%; .5%D.?.5%; .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.?$458.11B.?$641.11C.?$789.11D.?$1,100.11?47.Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.??A.?lower thanB.?slightly higher thanC.?identical toD.?twice as high as?48.You purchased a 5-year annual-interest coupon bond 1 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%B.?5.5%C.?7.6%D.?8.9%?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 analysisB.?horizon analysisC.?maturity analysisD.?reinvestment analysis?50.$1,000 par value zero-coupon bonds (ignore liquidity premiums)??The expected 1-year interest rate 1 year from now should be about _________.??A.?6%B.?7.5 %C.?9.02%D.?10.08%?51.$1,000 par value zero-coupon bonds (ignore liquidity premiums)??One year from now bond C should sell for ________ (to the nearest dollar).??A.?$857B.?$842C.?$835D.?$821?52.$1,000 par value zero-coupon bonds (ignore liquidity premiums)??The expected 2-year interest rate 3 years from now should be _________.??A.?9.55%B.?11.74%C.?14.89%D.?13.73%?53.The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.??A.?nominal yieldB.?current yieldC.?yield to maturityD.?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 capital gain yield of this bond over the next year???A.?.72%B.?1.85%C.?2.58%D.?3.42%?55.Consider the following $1,000 par value zero-coupon bonds:??The expected 1-year interest rate 2 years from now should be _________.??A.?7%B.?8%C.?9%D.?10%?56.Which of the following bonds would most likely sell at the lowest yield???A.?A callable debentureB.?A puttable mortgage bondC.?A callable mortgage bondD.?A puttable debenture?57.A 1% decline in yield will have the least effect on the price of a bond with a _________.??A.?10-year maturity, selling at 80B.?10-year maturity, selling at 100C.?20-year maturity, selling at 80D.?20-year maturity, selling at 100?58.Consider the following $1,000 par value zero-coupon bonds:??The expected 1-year interest rate 3 years from now should be _________.??A.?7%B.?8%C.?9%D.?10%?59.Consider the following $1,000 par value zero-coupon bonds:??The expected 1-year interest rate 4 years from now should be _________.??A.?16%B.?18%C.?20%D.?22%?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 maturityB.?its coupon rate is less than its yield to maturityC.?its coupon rate is equal to its yield to maturityD.?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, 1 year from now the price of this bond will be _________.??A.?higherB.?lowerC.?the sameD.?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 timeB.?expected decreases in inflation over timeC.?the presence of a liquidity premiumD.?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?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 premiumII. The discount rate that will set the present value of the payments equal to the bond priceIII. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity??A.?I onlyB.?II onlyC.?I and II onlyD.?I, II, and III?65.Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.??A.?marketabilityB.?riskC.?taxationD.?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.?$97.22B.?$104.49C.?$364.08D.?$732.14?67.A discount bond that pays interest semiannually will:I. Have a lower price than an equivalent annual payment bondII. Have a higher EAR than an equivalent annual payment bondIII. Sell for less than its conversion value??A.?I and II onlyB.?I and III onlyC.?II and III onlyD.?I, II, and III?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 the $100,000 face amount of this note is _________.??A.?$581.97B.?$1,163.93C.?$2,327.87D.?$3,000?69.The yield to maturity of a 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%?70.Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.??What is the nominal rate of return on the TIPS bond in the first year???A.?5%B.?5.15%C.?8.15%D.?9%?71.Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.??What is the real rate of return on the TIPS bond in the first year???A.?5%B.?8.15%C.?7.15%D.?4%?72.On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.??Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.??A.?The price of the Wildwood bond would decline by more than the price of the Asbury bond.B.?The price of the Wildwood bond would decline by less than the price of the Asbury bond.C.?The price of the Wildwood bond would increase by more than the price of the Asbury bond.D.?The price of the Wildwood bond would increase by less than the price of the Asbury bond.?73.On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.??If interest rates are expected to rise, then Joe Hill should ____.??A.?prefer the Wildwood bond to the Asbury bondB.?prefer the Asbury bond to the Wildwood bondC.?be indifferent between the Wildwood bond and the Asbury bondD.?The answer cannot be determined from the information given.?74.On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.??If the volatility of interest rates is expected to increase, then Joe Hill should __.??A.?prefer the Wildwood bond to the Asbury bondB.?prefer the Asbury bond to the Wildwood bondC.?be indifferent between the Wildwood bond and the Asbury bondD.?The answer cannot be determined from the information given.?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 1-year forward rate 1 year from today???A.?2.07%B.?8.03%C.?9.01%D.?11.12%?76.If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.??A.?$9,828.12B.?$9,809.38C.?$9,840.62D.?$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.?102:10B.?102:11C.?102:12D.?102:13?78.A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)??A.?$13.21B.?$12.57C.?$15.44D.?$16.32?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.?$999.55B.?$1,002.01C.?$1,007.45D.?$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 at which you can sell this bond given a $10,000 par value is _____________.??A.?$9,828.12B.?$9,925C.?$9,934.37D.?$9,955.43?81.A bond has a 5% coupon rate. The coupon is paid semiannually, 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.?$4.81B.?$14.24C.?$25D.?$50?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%?83.You buy a bond with a $1,000 par value 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.?10.4%B.?9.57%C.?7.45%D.?8.78%?84.You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.??A.?.61%B.?-5.39%C.?1.28%D.?-3.25%?85.You buy a 10-year $1,000 par value 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.?$0B.?$4.27C.?$9.38D.?$33.51?86.You buy a 10-year $1,000 par value 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.?$9.10B.?$4.25C.?$7.68D.?$5.20?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.?4.8%B.?4.85%C.?9.6%D.?9.7%?88.If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond???A.?4.3%B.?4.5%C.?5.2%D.?5.5%?89.The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%???A.?4.08%B.?4.5%C.?5.1%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 if an investor decides to sell now???A.?IncreasedB.?DecreasedC.?Stayed the sameD.?The answer cannot be determined from the information given.?91.The ___________ is the document that defines the contract between the bond issuer and the bondholder.??A.?indentureB.?covenant agreementC.?trustee agreementD.?collateral statement?Chapter 10 Bond Prices and Yields Answer Key?Multiple Choice Questions?1.The invoice price of a bond is the ______.??A.?stated or flat price in a quote sheet plus accrued interestB.?stated or flat price in a quote sheet minus accrued interestC.?bid priceD.?average of the bid and ask price?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?2.Sinking funds are commonly viewed as protecting the _______ of the bond.??A.?issuerB.?underwriterC.?holderD.?dealer?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-04 Describe call; convertibility; and sinking fund provisions; and analyze how these provisions affect a bond's price and yield to ic: Bond Characteristics?3.A collateral trust bond is _______.??A.?secured by other securities held by the firmB.?secured by equipment owned by the firmC.?secured by property owned by the firmD.?unsecured?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?4.A mortgage bond is _______.??A.?secured by other securities held by the firmB.?secured by equipment owned by the firmC.?secured by property owned by the firmD.?unsecured?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?5.A debenture is _________.??A.?secured by other securities held by the firmB.?secured by equipment owned by the firmC.?secured by property owned by the firmD.?unsecured?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?6.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. (In each case assume that the yield to maturity remains stable over time.)??A.?capital gain; capital lossB.?capital gain; capital gainC.?capital loss; capital gainD.?capital loss; capital loss?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-03 Calculate how bond prices will change over time for a given interest rate ic: Bond Prices over Time?7.Floating-rate bonds have a __________ that is adjusted with current market interest rates.??A.?maturity dateB.?coupon payment dateC.?coupon rateD.?dividend yield?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?8.Inflation-indexed Treasury securities are commonly called ____.??A.?PIKsB.?CARsC.?TIPSD.?STRIPS?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?9.In regard to bonds, convexity relates to the _______.??A.?shape of the bond price curve with respect to interest ratesB.?shape of the yield curve with respect to maturityC.?slope of the yield curve with respect to liquidity premiumsD.?size of the bid-ask spread?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?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.?AACSB: AnalyticBlooms: RememberDifficulty: 3 HardLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?11.The primary difference between Treasury notes and bonds is ________.??A.?maturity at issueB.?default riskC.?coupon rateD.?tax status?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?12.TIPS offer investors inflation protection by ______________ by the inflation rate each year.??A.?increasing only the coupon rateB.?increasing only the par valueC.?increasing both the par value and the coupon paymentD.?increasing the promised yield to maturity?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?13.You would typically find all but which one of the following in a bond contract???A.?A dividend restriction clauseB.?A sinking fund clauseC.?A requirement to subordinate any new debt issuedD.?A price-earnings ratio?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?14.To earn a high rating from the bond rating agencies, a company would want to have:I. A low times-interest-earned ratioII. A low debt-to-equity ratioIII. A high quick ratio??A.?I onlyB.?II and III onlyC.?I and III onlyD.?I, II, and III?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?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 premiumsB.?an expectation of an upcoming recessionC.?a decline in future inflation expectationsD.?an increase in expected interest rate volatility?AACSB: AnalyticBlooms: RememberDifficulty: 3 HardLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?16.__________ are examples of synthetically created zero-coupon bonds.??A.?COLTSB.?OPOSSMSC.?STRIPSD.?ARMs?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?17.A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.??A.?callableB.?couponC.?puttableD.?Treasury?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?18.TIPS are an example of _______________.??A.?EurobondsB.?convertible bondsC.?indexed bondsD.?catastrophe bonds?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?19.Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.??A.?EurobondsB.?Yankee bondsC.?Samurai bondsD.?foreign bonds?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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 3 years. The total annual coupon income you will receive in year 3 is _________.??A.?$30B.?$33C.?$32.78D.?$30.90($30)(1.02)(1.03)(1.04) = $32.78?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?21.The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.??A.?high gradeB.?intermediate gradeC.?investment gradeD.?junk bonds?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?22.Bonds rated _____ or better by Standard & Poor's are considered investment grade.??A.?AAB.?BBBC.?BBD.?CCC?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?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 on long-term bondsB.?a higher yield on long-term bonds than on short-term bondsC.?the same yield on both short-term bonds and long-term bondsD.?none of these options (The liquidity preference theory cannot be used to make any of the other statements.)?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?24.Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays 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 BB.?both bonds will increase in value but bond B will increase more than bond AC.?both bonds will decrease in value but bond A will decrease more than bond BD.?both bonds will decrease in value but bond B will decrease more than bond A?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?25.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 bondsB.?Senior debenturesC.?Preferred stockD.?Equipment obligation bonds?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?26.Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.??A.?asset-backed bondsB.?convertible bondsC.?inverse floatersD.?index bonds?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?27._______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.??A.?Asset-backed bondsB.?TIPSC.?CatastropheD.?Pay-in-kind?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?28.The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.??A.?an asset-backedB.?a TIPSC.?a catastropheD.?a pay-in-kind?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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; higherB.?longer; lowerC.?shorter; higherD.?shorter; lower?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?30.Which one of the following statements is correct???A.?Invoice price = Flat price - Accrued interestB.?Invoice price = Flat price + Accrued interestC.?Flat price = Invoice price + Accrued interestD.?Invoice price = Settlement price - Accrued interest?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?31.A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.??A.?callableB.?couponC.?puttableD.?Treasury?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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 featureB.?Convertible featureC.?Subordination clauseD.?Sinking fund?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?33.Serial bonds are associated with _________.??A.?staggered maturity datesB.?collateralC.?coupon payment datesD.?conversion features?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?34.In an era of particularly low interest rates, which of the following bonds is most likely to be called???A.?Zero-coupon bondsB.?Coupon bonds selling at a discountC.?Coupon bonds selling at a premiumD.?Floating-rate bonds?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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.?increaseB.?decreaseC.?not changeD.?change in an unpredictable manner?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?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.?$1,000B.?$884C.?$933D.?$980($26)(34) = $884?AACSB: AnalyticBlooms: ApplyDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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.?$50B.?$190C.?$200D.?$240Conversion premium = 950 - 40(19) = 190?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?38.A coupon bond that 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 = Calculator entries are N = 5, PV = -785, PMT = 40, FV = 1,000, CPT I/Y 9.62?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?39.A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.??A.?6%B.?7.23%C.?8.12%D.?9.45%Calculator entries are N = 5, PV = -915.48, PMT = 60, FV = 1,000, CPT I/Y 8.12?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?40.A coupon bond that 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%B.?6.49%C.?6.73%D.?7%Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?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%B.?6.58%C.?7.2%D.?8%1,055.84 = Calculator entries are N = 10, PV = -1,055.84, PMT = 60, FV = 1,100, CPT I/Y 6?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?42.A coupon bond that pays interest semiannually 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 __________.??A.?$1,000B.?$1,062.81C.?$1,081.82D.?$1,100.03Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV -1,062.81?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?43.A coupon bond that 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 _________.??A.?$856.04B.?$891.86C.?$926.47D.?$1,000PV0 = Calculator entries are N = 5, I/Y = 12, PMT = 90, FV = 1,000, CPT PV -891.86?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?44.A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. 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.?$1,140B.?$1,170C.?$1,180D.?$1,200Invoice price = 1.17(1,000) + 30(2/6) = 1180?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?45.A Treasury bond due in 1 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 Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________.??A.?.4%; .3%B.?.4%; .5%C.?.5%; .5%D.?.5%; .8%Default premium for 1-year bond = .068 - .063 = .005Default premium for 5-year bond = .096 - .088 = .008?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?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.?$458.11B.?$641.11C.?$789.11D.?$1,100.11PV0 = Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1,000, CPT PV 458.11?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?47.Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.??A.?lower thanB.?slightly higher thanC.?identical toD.?twice as high as?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?48.You purchased a 5-year annual-interest coupon bond 1 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%B.?5.5%C.?7.6%D.?8.9%PV0 = PV1 = Calculator entries for purchase price are N = 5, I/Y = 4, PMT = 60, FV = 1,000, CPT PV 1,089.04Calculator entries for ending price are N =4, I/Y = 3, PMT = 60, FV = 1,000, CPT PV 1,111.51Total ending cash = 1,111.51 + 60 = 1,171.51HPR= (1,171.51/1,089.04) - 1 = 7.57%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-06 Calculate several measures of bond return; and demonstrate how these measures may be affected by ic: Bond Yields?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 analysisB.?horizon analysisC.?maturity analysisD.?reinvestment analysis?AACSB: AnalyticBlooms: ApplyDifficulty: 1 EasyLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?50.$1,000 par value zero-coupon bonds (ignore liquidity premiums)??The expected 1-year interest rate 1 year from now should be about _________.??A.?6%B.?7.5 %C.?9.02%D.?10.08%1.0752 = 1.06(1 + f2)1.155625 = 1.06(1 + f2)1 + f2 = 1.55625/1.06 = 1.0902123f2 = 9.02%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?51.$1,000 par value zero-coupon bonds (ignore liquidity premiums)??One year from now bond C should sell for ________ (to the nearest dollar).??A.?$857B.?$842C.?$835D.?$8211.07993 = 1.06(1 + 1F3)21.2593621/1.06 = (1 + 1F3)21F3 = 11.81%Price of bond C in 1 year = 1,000/1.1181 = 841.69?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?52.$1,000 par value zero-coupon bonds (ignore liquidity premiums)??The expected 2-year interest rate 3 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)21.10705 = (1.07993)(1 + 3F5)2; 3F5 = 14.89%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?53.The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.??A.?nominal yieldB.?current yieldC.?yield to maturityD.?yield to call?AACSB: AnalyticBlooms: ApplyDifficulty: 1 EasyLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?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 capital gain yield of this bond over the next year???A.?.72%B.?1.85%C.?2.58%D.?3.42%Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000, CPT = I/Y 12.52The current yield = 80/750 = 10.67%Then we use the relationship YTM = Current yield + Capital gain yield12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?55.Consider the following $1,000 par value zero-coupon bonds:??The expected 1-year interest rate 2 years from now should be _________.??A.?7%B.?8%C.?9%D.?10%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?56.Which of the following bonds would most likely sell at the lowest yield???A.?A callable debentureB.?A puttable mortgage bondC.?A callable mortgage bondD.?A puttable debenture?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?57.A 1% decline in yield will have the least effect on the price of a bond with a _________.??A.?10-year maturity, selling at 80B.?10-year maturity, selling at 100C.?20-year maturity, selling at 80D.?20-year maturity, selling at 100?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?58.Consider the following $1,000 par value zero-coupon bonds:??The expected 1-year interest rate 3 years from now should be _________.??A.?7%B.?8%C.?9%D.?10%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?59.Consider the following $1,000 par value zero-coupon bonds:??The expected 1-year interest rate 4 years from now should be _________.??A.?16%B.?18%C.?20%D.?22%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?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 maturityB.?its coupon rate is less than its yield to maturityC.?its coupon rate is equal to its yield to maturityD.?its coupon rate is less than its conversion value?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?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%1,000 = r/2 = 4.489%r = YTC = 8.98%Calculator entries are N = 6, PV = -1,000, PMT = 30, FV = 1,100, CPT I/Y 4.4892 (semiannual)Annual YTC = 2 × 4.4892 = 8.9784?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?62.Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.??A.?higherB.?lowerC.?the sameD.?indeterminate?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-03 Calculate how bond prices will change over time for a given interest rate ic: Bond Prices over Time?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 timeB.?expected decreases in inflation over timeC.?the presence of a liquidity premiumD.?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?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?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 premiumII. The discount rate that will set the present value of the payments equal to the bond priceIII. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity??A.?I onlyB.?II onlyC.?I and II onlyD.?I, II, and III?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?65.Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.??A.?marketabilityB.?riskC.?taxationD.?call protection?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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.?$97.22B.?$104.49C.?$364.08D.?$732.14Calculator entries are N = 40, I/Y = 6, PMT = 0, FV = 1,000, CPT PV -97.22?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?67.A discount bond that pays interest semiannually will:I. Have a lower price than an equivalent annual payment bondII. Have a higher EAR than an equivalent annual payment bondIII. Sell for less than its conversion value??A.?I and II onlyB.?I and III onlyC.?II and III onlyD.?I, II, and III?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?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 the $100,000 face amount of this note is _________.??A.?$581.97B.?$1,163.93C.?$2,327.87D.?$3,000Accrued interest = 100,000(.06/2)(71/183) = 1163.93?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?69.The yield to maturity of a 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%Calculator entries are N = 10, PV = -625, PMT = 0, FV = 1,000, CPT I/Y 4.81?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?70.Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.??What is the nominal rate of return on the TIPS bond in the first year???A.?5%B.?5.15%C.?8.15%D.?9%HPRnom = ?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-06 Calculate several measures of bond return; and demonstrate how these measures may be affected by ic: Bond Yields?71.Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.??What is the real rate of return on the TIPS bond in the first year???A.?5%B.?8.15%C.?7.15%D.?4%HPRnom = HPRreal = ?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-06 Calculate several measures of bond return; and demonstrate how these measures may be affected by ic: Bond Yields?72.On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.??Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.??A.?The price of the Wildwood bond would decline by more than the price of the Asbury bond.B.?The price of the Wildwood bond would decline by less than the price of the Asbury bond.C.?The price of the Wildwood bond would increase by more than the price of the Asbury bond.D.?The price of the Wildwood bond would increase by less than the price of the Asbury bond.?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?73.On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.??If interest rates are expected to rise, then Joe Hill should ____.??A.?prefer the Wildwood bond to the Asbury bondB.?prefer the Asbury bond to the Wildwood bondC.?be indifferent between the Wildwood bond and the Asbury bondD.?The answer cannot be determined from the information given.?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?74.On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.??If the volatility of interest rates is expected to increase, then Joe Hill should __.??A.?prefer the Wildwood bond to the Asbury bondB.?prefer the Asbury bond to the Wildwood bondC.?be indifferent between the Wildwood bond and the Asbury bondD.?The answer cannot be determined from the information given.?AACSB: AnalyticBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?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 1-year forward rate 1 year from today???A.?2.07%B.?8.03%C.?9.01%D.?11.12%1.07(1 + f2) = 1.082 = 1.1664(1 + f2) = 1.1664/1.07 = 1.0900935f2 = 9.01%?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-07 Analyze the factors likely to affect the shape of the yield curve at any time; and impute forward rates from the yield ic: The Yield Curve?76.If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.??A.?$9,828.12B.?$9,809.38C.?$9,840.62D.?$9,813.42?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?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.?102:10B.?102:11C.?102:12D.?102:13?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?78.A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)??A.?$13.21B.?$12.57C.?$15.44D.?$16.32(75/2) × (61/182) = $12.57?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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.?$999.55B.?$1,002.01C.?$1,007.45D.?$1,012.13Invoice = 985 + (69)(90/365) = $1,002.01?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?80.If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.??A.?$9,828.12B.?$9,925C.?$9,934.37D.?$9,955.43?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?81.A bond has a 5% coupon rate. The coupon is paid semiannually, 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.?$4.81B.?$14.24C.?$25D.?$50Accrued interest = (50/2) × (35/182) = 4.81?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics?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%?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-05 Identify the determinants of bond safety and rating and how credit risk is reflected in bond yields and the prices of credit default ic: Default Risk and Bond Pricing?83.You buy a bond with a $1,000 par value 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.?10.4%B.?9.57%C.?7.45%D.?8.78%Total value in 6 years = 1,000 + 6(75) = 1,450Calculator entries for EAR are N = 6, PV = -875, PMT = 0, FV = 1,450, CPT I/Y 8.78,or (875)(1 + EAR)6 = 1,000 + (75)(6); EAR = 8.78%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-06 Calculate several measures of bond return; and demonstrate how these measures may be affected by ic: Bond Yields?84.You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.??A.?.61%B.?-5.39%C.?1.28%D.?-3.25%This year's price is 1,000. since the YTM equals the coupon rate.Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV -46.11At the end of 1 year you'll have 946.11 + 60 = 1,006.11HPR = 1,006.11/1,000 - 1 = .6107%?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-06 Calculate several measures of bond return; and demonstrate how these measures may be affected by ic: Bond Yields?85.You buy a 10-year $1,000 par value 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.?$0B.?$4.27C.?$9.38D.?$33.51Taxes owed ($591.90 - $558.39)(.28) = $9.38?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-03 Calculate how bond prices will change over time for a given interest rate ic: Bond Prices over Time?86.You buy a 10-year $1,000 par value 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.?$9.10B.?$4.25C.?$7.68D.?$5.20Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 852.80Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV 863.97Taxes owed are ($863.97 - $852.80 + $40)(.15) = $7.68?AACSB: AnalyticBlooms: ApplyDifficulty: 3 HardLearning Objective: 10-03 Calculate how bond prices will change over time for a given interest rate ic: Bond Prices over Time?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.?4.8%B.?4.85%C.?9.6%D.?9.7%Current yield = 48/989.4 = .0485?AACSB: AnalyticBlooms: ApplyDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?88.If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond???A.?4.3%B.?4.5%C.?5.2%D.?5.5%A bond sells at a premium when the coupon rate > YTM.?AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: 2 MediumLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Yields?89.The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%???A.?4.08%B.?4.5%C.?5.1%D.?5.6%HPR = [(975 + 45 - 980)/980] - 1 = 4.08%?AACSB: AnalyticBlooms: RememberDifficulty: 2 MediumLearning Objective: 10-06 Calculate several measures of bond return; and demonstrate how these measures may be affected by ic: Bond Yields?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 if an investor decides to sell now???A.?IncreasedB.?DecreasedC.?Stayed the sameD.?The answer cannot be determined from the information given.?AACSB: Reflective ThinkingBlooms: UnderstandDifficulty: 1 EasyLearning Objective: 10-02 Compute a bond's price given its yield to maturity; and compute its yield to maturity given its ic: Bond Pricing?91.The ___________ is the document that defines the contract between the bond issuer and the bondholder.??A.?indentureB.?covenant agreementC.?trustee agreementD.?collateral statement?AACSB: AnalyticBlooms: RememberDifficulty: 1 EasyLearning Objective: 10-01 Explain the general terms of a bond contract and how bond prices are quoted in the financial ic: Bond Characteristics? ................
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