Question 1

Which of the following statements is true?

Accepted Answer

A)  Long-term bonds have lower price volatility than short-term bonds of similar risk. 
B)  As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline. 
C)  All other things being equal, short-term bonds are riskier than long-term bonds. 
D)  Interest rate risk decreases as maturity increases. 
A)  Long-term bonds have lower price volatility than short-term bonds of similar risk. 
B)  As interest rates decline, the prices of bonds rise and as interest rates rise, the prices of bonds decline. 
C)  All other things being equal, short-term bonds are riskier than long-term bonds. 
D)  Interest rate risk decreases as maturity increases.

Question 2

The risk that the lender may not receive payments as promised is called default risk.

Accepted Answer

A) True 
 B)False

Question 3

Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)

Accepted Answer

A)  13.4% 
B)  6.81% 
C)  6.70% 
D)  None of the above 
A)  13.4% 
B)  6.81% 
C)  6.70% 
D)  None of the above

Question 4

As interest rates fall, the prices of bonds decline.

Accepted Answer

A) True 
 B)False

Question 5

U.S. Treasury securities are the best proxy measure for the risk-free rate.

Accepted Answer

A) True 
 B)False

Question 6

Which one of the following statements is NOT true?

Accepted Answer

A)  Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. 
B)  Corporate bonds are more marketable than the securities that have higher daily trading volumes. 
C)  The market for corporate bonds is thin compared to the market for corporate stocks. 
D)  The largest investors in corporate bonds are life insurance companies and pension funds. 
A)  Prices in the corporate bond market tend to be more volatile than the markets for stocks or money market securities. 
B)  Corporate bonds are more marketable than the securities that have higher daily trading volumes. 
C)  The market for corporate bonds is thin compared to the market for corporate stocks. 
D)  The largest investors in corporate bonds are life insurance companies and pension funds.

Question 7

You can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. The price of the bond suggests that the expected return on bonds with this risk is lower than 10%.

Accepted Answer

A) True 
 B)False

Question 8

Which one of the following statements about zero coupon bonds is NOT true?

Accepted Answer

A)  Zero coupon bonds have no coupon payments but promise a single payment at maturity. 
B)  Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. 
C)  Zero coupon bonds make coupon payments but no principal payment at maturity. 
D)  All of the above statements are true. 
A)  Zero coupon bonds have no coupon payments but promise a single payment at maturity. 
B)  Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments. 
C)  Zero coupon bonds make coupon payments but no principal payment at maturity. 
D)  All of the above statements are true.

Question 9

Kevin Rogers is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis. The current market rate for similar bonds is 8.8 percent. What should be the current price of this bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $1,048 
B)  $965 
C)  $1,099 
D)  $982 
A)  $1,048 
B)  $965 
C)  $1,099 
D)  $982

Question 10

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Accepted Answer

A) True 
 B)False

Question 11

The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the yield to maturity for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)

Accepted Answer

A)  $684 
B)  $860 
C)  $515 
D)  $604 
A)  $684 
B)  $860 
C)  $515 
D)  $604

Question 12

Bonds sell at a discount when the market rate of interest is:

Accepted Answer

A)  less than the bond's coupon rate. 
B)  greater than the bond's coupon rate. 
C)  equal to the bond's coupon rate. 
D)  None of the above is true. 
A)  less than the bond's coupon rate. 
B)  greater than the bond's coupon rate. 
C)  equal to the bond's coupon rate. 
D)  None of the above is true.

Question 13

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

Accepted Answer

A) True 
 B)False

Question 14

Which one of the following statements is true of a bond's yield to maturity?

Accepted Answer

A)  The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. 
B)  It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. 
C)  A bond's yield to maturity changes daily as interest rates increase or decrease. 
D)  All of the above are true. 
A)  The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. 
B)  It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. 
C)  A bond's yield to maturity changes daily as interest rates increase or decrease. 
D)  All of the above are true.

Question 15

Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market.

Accepted Answer

A) True 
 B)False

Question 16

Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

Accepted Answer

A)  7% 
B)  8% 
C)  11% 
D)  10% 
A)  7% 
B)  8% 
C)  11% 
D)  10%

Question 17

Which of the following statements is true?

Accepted Answer

A)  Investment grade bonds are those rated single B and higher. 
B)  Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. 
C)  Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk. 
D)  All else equal, the higher a bond's rating the higher the coupon rate. 
A)  Investment grade bonds are those rated single B and higher. 
B)  Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds. 
C)  Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk. 
D)  All else equal, the higher a bond's rating the higher the coupon rate.

Question 18

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $872 
B)  $1,066 
C)  $990 
D)  $945 
A)  $872 
B)  $1,066 
C)  $990 
D)  $945

Question 19

The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

Accepted Answer

A) True 
 B)False

Question 20

Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. How much will you be willing to pay for Triumph's bond today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.)

Accepted Answer

A)  $972 
B)  $1,066 
C)  $1,014 
D)  $923 
A)  $972 
B)  $1,066 
C)  $1,014 
D)  $923

Which of the following statements is true?

The risk that the lender may not receive payments as promised is called default risk.

Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)

As interest rates fall, the prices of bonds decline.

U.S. Treasury securities are the best proxy measure for the risk-free rate.

Which one of the following statements is NOT true?

You can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. The price of the bond suggests that the expected return on bonds with this risk is lower than 10%.

Which one of the following statements about zero coupon bonds is NOT true?

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Bonds sell at a discount when the market rate of interest is:

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

Which one of the following statements is true of a bond's yield to maturity?

Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market.

Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

Which of the following statements is true?

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

Analyzing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

Filters

Exam 8: Bond Valuation and the Structure of Interest Rates

Which of the following statements is true?

The risk that the lender may not receive payments as promised is called default risk.

Stanley Hart invested in a municipal bond that promised an annual yield of 6.7 percent. The bond pays coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round percentage to two decimal places.)

As interest rates fall, the prices of bonds decline.

U.S. Treasury securities are the best proxy measure for the risk-free rate.

Which one of the following statements is NOT true?

You can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. The price of the bond suggests that the expected return on bonds with this risk is lower than 10%.

Which one of the following statements about zero coupon bonds is NOT true?

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Bonds sell at a discount when the market rate of interest is:

Most secondary market transactions for corporate bonds take place on the New York Stock Exchange.

Which one of the following statements is true of a bond's yield to maturity?

Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market.

Five years ago, Shirley Harper bought a 10-year bond that pays 8 percent semiannually for $981.10. Today, she sold it for $1,067.22. What is the realized yield on her investment? (Round to the nearest percent.)

Which of the following statements is true?

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

The real rate of interest varies with the business cycle, with the highest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

The Financial Manager and the Firm

The Financial System and the Level of Interest Rates

The Financial System and the Level of Interest Rates

Analyzing Financial Statements

The Time Value of Money

Discounted Cash Flows and Valuation

Risk and Return

Stock Valuation

The Fundamentals of Capital Budgeting

Cash Flows and Capital Budgeting

Evaluating Project Economics

The Cost of Capital

Working Capital Management

How Firms Raise Capital

Capital Structure Policy

Dividends, Stock Repurchases, and Payout Policy

Business Formation, Growth, and Valuation

Financial Planning and Managing Growth

Options and Corporate Finance

International Financial Management

Filters