Question 1

Debentures

Accepted Answer

A) are a claim on assets not otherwise pledged as security. 
B) represent a mortgage claim on real estate. 
C) are a form of subordinated equity. 
D) is another term for trust deeds. 
E) are best defined as bearer bonds. 
A) are a claim on assets not otherwise pledged as security. 
B) represent a mortgage claim on real estate. 
C) are a form of subordinated equity. 
D) is another term for trust deeds. 
E) are best defined as bearer bonds. A

Question 2

A zero coupon bond with a face value of $1,000 is issued at an initial price of $474.20 and a 25-year maturity.What is the implicit interest,in dollars,for the first year of the bond's life? Assume semiannual interest.

Accepted Answer

A) $14.44 
B) $17.58 
C) $14.37 
D) $21.03 
E) $20.25 
A) $14.44 
B) $17.58 
C) $14.37 
D) $21.03 
E) $20.25 C

Question 3

What does the spread between the bid and asked bond prices represent?

Accepted Answer

A) Difference between the coupon rate and the current yield 
B) Difference between the current yield and the yield to maturity 
C) Accrued interest 
D) Dealer's profit 
E) Bondholder's profit 
A) Difference between the coupon rate and the current yield 
B) Difference between the current yield and the yield to maturity 
C) Accrued interest 
D) Dealer's profit 
E) Bondholder's profit D

Question 4

River Tours has 5.8 percent coupon bonds that pay interest semiannually.The face value of each bond is $1,000,and the current market price is $1,003.54.If the yield to maturity is 5.68 percent,how many years is it until these bonds mature?

Accepted Answer

A) 3.49 years 
B) 3.27 years 
C) 5.06 years 
D) 6.43 years 
E) 6.55 years 
A) 3.49 years 
B) 3.27 years 
C) 5.06 years 
D) 6.43 years 
E) 6.55 years

Question 5

Bonds that protect insurance companies from losses arising from natural disasters are called ________ bonds.

Accepted Answer

A) death 
B) CAT 
C) hurricane 
D) flood insurance 
E) DOG 
A) death 
B) CAT 
C) hurricane 
D) flood insurance 
E) DOG

Question 6

A $1,000 Treasury bond matures in 13.5 years,pays interest semiannually,and carries a coupon rate of 3.53 percent.What is the price of this bond if the discount rate is 4 percent?

Accepted Answer

A) $991.17 
B) $951.34 
C) $949.38 
D) $976.96 
E) $997.08 
A) $991.17 
B) $951.34 
C) $949.38 
D) $976.96 
E) $997.08

Question 7

All else constant,as the market price of a bond increases the current yield ________ and the yield to maturity ________.

Accepted Answer

A) decreases; decreases 
B) increases; decreases 
C) increases; increases 
D) decreases; increases 
E) remains constant; increases 
A) decreases; decreases 
B) increases; decreases 
C) increases; increases 
D) decreases; increases 
E) remains constant; increases

Question 8

The percentage change in the amount of money you have as the result of an investment is called the ________ rate of return.

Accepted Answer

A) real 
B) nominal 
C) effective 
D) stripped 
E) coupon 
A) real 
B) nominal 
C) effective 
D) stripped 
E) coupon

Question 9

A bond has a coupon rate of 6 percent and matures in 10 years.The next semiannual interest payment will be paid 1 month from now.Which one of the following do you know with certainty concerning this bond?

Accepted Answer

A) The bond sells at a discount. 
B) The bond sells at a premium. 
C) The dirty price is higher than the clean price. 
D) The clean price is higher than the dirty price. 
E) The market price exceeds the par value. 
A) The bond sells at a discount. 
B) The bond sells at a premium. 
C) The dirty price is higher than the clean price. 
D) The clean price is higher than the dirty price. 
E) The market price exceeds the par value.

Question 10

If the bond holder has any rights that can force repayment of the bond prior to maturity,the bond

Accepted Answer

A) is an income bond. 
B) has a call provision. 
C) is convertible. 
D) is a structured note. 
E) has a put provision. 
A) is an income bond. 
B) has a call provision. 
C) is convertible. 
D) is a structured note. 
E) has a put provision.

Question 11

The ABT Co.zero coupon bonds have a $1,000 face value,a required rate of return of 8 percent,and semiannual compounding.What is one of these bonds worth today if they mature in 12 years?

Accepted Answer

A) $390.12 
B) $360.27 
C) $397.11 
D) $376.89 
E) $356.30 
A) $390.12 
B) $360.27 
C) $397.11 
D) $376.89 
E) $356.30

Question 12

Toy World bonds have a face value of $1,000,mature in 12 years,pay interest semiannually,and have a coupon rate of 7.2 percent.The next interest payment will be paid 4 months from today.What is the dirty price of this bond if the market rate of return is 7.4 percent?

Accepted Answer

A) $996.27 
B) $972.27 
C) $978.14 
D) $984.27 
E) $993.14 
A) $996.27 
B) $972.27 
C) $978.14 
D) $984.27 
E) $993.14

Question 13

If the nominal rate of return on a bond is 7.47 percent and the real rate is 3.49 percent,what is the rate of inflation?

Accepted Answer

A) 3.85% 
B) 3.92% 
C) 3.98% 
D) 10.96% 
E) 11.22% 
A) 3.85% 
B) 3.92% 
C) 3.98% 
D) 10.96% 
E) 11.22%

Question 14

An increase in which one of these is most apt to decrease the nominal interest rate?

Accepted Answer

A) Liquidity 
B) Interest rate risk 
C) Default risk 
D) Expected future inflation 
E) The relevant tax rate 
A) Liquidity 
B) Interest rate risk 
C) Default risk 
D) Expected future inflation 
E) The relevant tax rate

Question 15

Protective covenants

Accepted Answer

A) are primarily designed to protect bondholders from future actions of the bond issuer. 
B) only apply to bonds that have a deferred call provision. 
C) are limited to stating actions that a firm must take. 
D) are consistent for all bonds issued by a corporation within the United States. 
E) are designed to protect the issuer should it default. 
A) are primarily designed to protect bondholders from future actions of the bond issuer. 
B) only apply to bonds that have a deferred call provision. 
C) are limited to stating actions that a firm must take. 
D) are consistent for all bonds issued by a corporation within the United States. 
E) are designed to protect the issuer should it default.

Question 16

Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to

Accepted Answer

A) interest rate risk and time value of money. 
B) time value of money and inflation. 
C) taxes and potential default. 
D) taxes and inflation. 
E) inflation and interest rate risk. 
A) interest rate risk and time value of money. 
B) time value of money and inflation. 
C) taxes and potential default. 
D) taxes and inflation. 
E) inflation and interest rate risk.

Question 17

The lowest Moody's bond rating that is considered to be an investment-grade rating is

Accepted Answer

A) A. 
B) Baa. 
C) BBB. 
D) Ba. 
E) BB. 
A) A. 
B) Baa. 
C) BBB. 
D) Ba. 
E) BB.

Question 18

A sinking fund

Accepted Answer

A) is a claim on assets not otherwise pledged as security. 
B) is used solely to retain funds until a bond issue matures. 
C) is managed by a trustee. 
D) is established during a bankruptcy proceeding to repay secured debts. 
E) ensures all bonds are repaid prior to the original maturity date. 
A) is a claim on assets not otherwise pledged as security. 
B) is used solely to retain funds until a bond issue matures. 
C) is managed by a trustee. 
D) is established during a bankruptcy proceeding to repay secured debts. 
E) ensures all bonds are repaid prior to the original maturity date.

Question 19

A $1,000 face value bond is currently callable at a quoted price of 101.What is the amount of the call premium?

Accepted Answer

A) $1.00 
B) $.0101 
C) $10.00 
D) $1.01 
E) $10.10 
A) $1.00 
B) $.0101 
C) $10.00 
D) $1.01 
E) $10.10

Question 20

Bond prices are quoted as a percentage of the

Accepted Answer

A) issue price. 
B) total interest and principal payments. 
C) face value. 
D) dirty value. 
E) clean value. 
A) issue price. 
B) total interest and principal payments. 
C) face value. 
D) dirty value. 
E) clean value.

Exam 5: Interest Rates and Bond Valuation

Debentures

A zero coupon bond with a face value of $1,000 is issued at an initial price of $474.20 and a 25-year maturity.What is the implicit interest,in dollars,for the first year of the bond's life? Assume semiannual interest.

What does the spread between the bid and asked bond prices represent?

River Tours has 5.8 percent coupon bonds that pay interest semiannually.The face value of each bond is $1,000,and the current market price is $1,003.54.If the yield to maturity is 5.68 percent,how many years is it until these bonds mature?

Bonds that protect insurance companies from losses arising from natural disasters are called ________ bonds.

A $1,000 Treasury bond matures in 13.5 years,pays interest semiannually,and carries a coupon rate of 3.53 percent.What is the price of this bond if the discount rate is 4 percent?

All else constant,as the market price of a bond increases the current yield ________ and the yield to maturity ________.

The percentage change in the amount of money you have as the result of an investment is called the ________ rate of return.

A bond has a coupon rate of 6 percent and matures in 10 years.The next semiannual interest payment will be paid 1 month from now.Which one of the following do you know with certainty concerning this bond?

If the bond holder has any rights that can force repayment of the bond prior to maturity,the bond

The ABT Co.zero coupon bonds have a $1,000 face value,a required rate of return of 8 percent,and semiannual compounding.What is one of these bonds worth today if they mature in 12 years?

Toy World bonds have a face value of $1,000,mature in 12 years,pay interest semiannually,and have a coupon rate of 7.2 percent.The next interest payment will be paid 4 months from today.What is the dirty price of this bond if the market rate of return is 7.4 percent?

If the nominal rate of return on a bond is 7.47 percent and the real rate is 3.49 percent,what is the rate of inflation?

An increase in which one of these is most apt to decrease the nominal interest rate?

Protective covenants

Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to

The lowest Moody's bond rating that is considered to be an investment-grade rating is

A sinking fund

A $1,000 face value bond is currently callable at a quoted price of 101.What is the amount of the call premium?

Bond prices are quoted as a percentage of the

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All else constant,as the market price of a bond increases the current yield and the yield to maturity .