Deck 14: Bond Prices and Yields

Question 1

A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of 11%, and has a yield to maturity of 12%. The current yield on this bond is

A) 10.39%.
B) 10.43%.
C) 10.58%.
D) 11.73%.
E) None of the options are correct.

Answer 1

D

Question 2

If a 7.25% coupon bond is trading for $982.00, it has a current yield of

A) 7.38%.
B) 6.53%.
C) 7.25%.
D) 8.53%.
E) 7.18%.

Answer 2

A

Question 3

If a 6% coupon bond is trading for $950.00, it has a current yield of

A) 6.5%.
B) 6.3%.
C) 6.1%.
D) 6.0%.
E) 6.6%.

Answer 3

B

Question 4

If an 8% coupon bond is trading for $1,025.00, it has a current yield of

A) 7.8%.
B) 8.7%.
C) 7.6%.
D) 7.9%.
E) 8.1%.

Question 5

If a 7% coupon bond is trading for $975.00, it has a current yield of

A) 7.00%.
B) 6.53%.
C) 7.24%.
D) 8.53%.
E) 7.18%.

Question 6

Of the following five investments, ________ is (are) considered the safest.

A) commercial paper
B) corporate bonds
C) U.S. agency issues
D) Treasury bonds
E) Treasury bills

Question 7

The invoice price of a bond that a buyer would pay is equal to

A) the asked price plus accrued interest.
B) the asked price less accrued interest.
C) the bid price plus accrued interest.
D) the bid price less accrued interest.
E) the bid price.

Question 8

If a 7.5% coupon bond is trading for $1,050.00, it has a current yield of

A) 7.0%.
B) 7.4%.
C) 7.1%.
D) 6.9%.
E) 6.7%.

Question 9

Of the following five investments, ________ is (are) considered the least risky.

A) Treasury bills
B) corporate bonds
C) U.S. agency issues
D) Treasury bonds
E) commercial paper

Question 10

A coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is

A) 10.65%.
B) 10.45%.
C) 10.95%.
D) 10.52%.
E) None of the options are correct.

Question 11

A semi-annual coupon bond is reported as having an ask price of 108% of the $1,000 par value in the Wall Street Journal. If the last interest payment was made 30 days ago and the coupon rate is 9%, the invoice price of the bond will be

A) $1,087.50.
B) $1,110.10.
C) $1,150.00.
D) $1,160.25.
E) None of the options are correct.

Question 12

If a 6.75% coupon bond is trading for $1,016.00, it has a current yield of

A) 7.38%.
B) 6.64%.
C) 7.25%.
D) 8.53%.
E) 7.18%.

Question 13

If a 7.75% coupon bond is trading for $1,019.00, it has a current yield of

A) 7.38%.
B) 6.64%.
C) 7.25%.
D) 7.61%.
E) 7.18%.

Question 14

A coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 8.25%, and has a yield to maturity of 8.64%. The current yield on this bond is

A) 8.65%.
B) 8.45%.
C) 7.95%.
D) 8.36%.
E) None of the options are correct.

Question 15

At issue, coupon bonds typically sell

A) above par value.
B) below par value.
C) at or near par value.
D) at a value unrelated to par.
E) None of the options are correct.

Question 16

A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of 8.7%, and has a yield to maturity of 7.9%. The current yield on this bond is

A) 8.39%.
B) 8.43%.
C) 8.83%.
D) 8.66%.
E) None of the options are correct.

Question 17

A firm with a low rating from the bond-rating agencies would have

A) a low times-interest-earned ratio.
B) a low debt-to-equity ratio.
C) a low quick ratio.
D) a low debt-to-equity ratio and a low quick ratio.
E) a low times-interest-earned ratio and a low quick ratio.

Question 18

An 8% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 15. The accrued interest on the $100,000 face value of this note is

A) $491.80.
B) $800.00.
C) $983.61.
D) $1,661.20.
E) None of the options are correct.

Question 19

Accrued interest

A) is quoted in the bond price in the financial press.
B) must be paid by the buyer of the bond and remitted to the seller of the bond.
C) must be paid to the broker for the inconvenience of selling bonds between maturity dates.
D) is quoted in the bond price in the financial press and must be paid by the buyer of the bond and remitted to the seller of the bond.
E) is quoted in the bond price in the financial press and must be paid to the broker for the inconvenience of selling bonds between maturity dates.

Question 20

To earn a high rating from the bond-rating agencies, a firm should have

A) a low times-interest-earned ratio.
B) a low debt-to-equity ratio.
C) a high quick ratio.
D) a low debt-to-equity ratio and a high quick ratio.
E) a low times-interest-earned ratio and a high quick ratio.

Question 21

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

A) current yield
B) dividend yield
C) P/E ratio
D) yield to maturity
E) discount yield

Question 22

The bond market

A) can be quite "thin."
B) primarily consists of a network of bond dealers in the over-the-counter market.
C) consists of many investors on any given day.
D) can be quite "thin" and primarily consists of a network of bond dealers in the over-the-counter market.
E) primarily consists of a network of bond dealers in the over-the-counter market and consists of many investors on any given day.

Question 23

A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are

A) 3.33% and 2.10%.
B) 2.57% and 2.86%.
C) 1.2% and 1.0%.
D) 0.76% and 0.47%.
E) None of the options are correct.

Question 24

A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date.

A) callable
B) coupon
C) put
D) Treasury
E) zero-coupon

Question 25

A coupon bond is a bond that

A) pays interest on a regular basis (typically every six months).
B) does not pay interest on a regular basis but pays a lump sum at maturity.
C) can always be converted into a specific number of shares of common stock in the issuing company.
D) always sells at par value.
E) None of the options are correct.

Question 26

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be __________ if the coupon rate is 8%.

A) $922.78
B) $924.16
C) $1,075.80
D) $1,077.20
E) None of the options

Question 27

A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in five years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of 7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are

A) 1.0% and 1.2%.
B) 0.5% and .7%.
C) 1.2% and 1.0%.
D) 0.7% and 0.5%.
E) None of the options are correct.

Question 28

A coupon bond that pays interest annually is selling at a par value of $1,000, matures in five years, and has a coupon rate of 9%. The yield to maturity on this bond is

A) 8.0%.
B) 8.3%.
C) 9.0%.
D) 10.0%.
E) None of the options are correct.

Question 29

A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in five years has a yield of 5.6%. A bond issued by Lucent Technologies due in five years has a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%. The default risk premiums on the bonds issued by Exxon and Lucent Technologies, respectively, are

A) 1.6% and 3.3%.
B) 0.5% and 0.7%.
C) 3.3% and 1.6%.
D) 0.7% and 0.5%.
E) None of the options are correct.

Question 30

A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years has a yield of 6.2%. A bond issued by Ford due in 5 years has a yield of 7.5%; a bond issued by Shell Oil due in one year has a yield of 6.5%. The default risk premiums on the bonds issued by Shell and Ford, respectively, are

A) 1.0% and 1.2%.
B) 0.7% and 1.5%.
C) 1.2% and 1.0%.
D) 0.8% and 1.3%.
E) None of the options are correct.

Question 31

A semi-annual coupon bond is reported as having an ask price of 113% of the $1,000 par value in the Wall Street Journal. If the last interest payment was made 60 days ago and the coupon rate is 12%, the invoice price of the bond will be

A) $1,100.
B) $1,110.
C) $1,150.
D) $1,160.
E) None of the options are correct.

Question 32

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%.

A) $712.99
B) $620.92
C) $1,123.01
D) $886.28
E) $1,000.00

Question 33

A coupon bond that pays interest semi-annually is selling at a par value of $1,000, matures in seven years, and has a coupon rate of 8.6%. The yield to maturity on this bond is

A) 8.0%.
B) 8.6%.
C) 9.0%.
D) 10.0%.
E) None of the options are correct.

Question 34

The bonds of Amazon have received a rating of "B" by Moody's. The "B" rating indicates

A) the bonds are insured.
B) the bonds are junk bonds.
C) the bonds are referred to as "high-yield" bonds.
D) the bonds are insured or junk bonds.
E) the bonds are "high-yield" or junk bonds.

Question 35

The _________ gives the number of shares for which each convertible bond can be exchanged.

A) conversion ratio
B) current ratio
C) P/E ratio
D) conversion premium
E) convertible floor

Question 36

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be _________ if the coupon rate is 12%.

A) $922.77
B) $924.16
C) $1,075.82
D) $1,077.20
E) None of the options

Question 37

A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.

A) $712.99
B) $960.14
C) $1,123.01
D) $886.28
E) $1,000.00

Question 38

Callable bonds

A) are called when interest rates decline appreciably.
B) have a call price that declines as time passes.
C) are called when interest rates increase appreciably.
D) are more likely to be called when interest rates decline and have a call price that declines as time passes.
E) have a call price that declines as time passes and are called when interest rates increase appreciably.

Question 39

Floating-rate bonds are designed to ___________, while convertible bonds are designed to __________.

A) minimize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock
B) maximize the holders' interest rate risk; give the investor the ability to share in the price appreciation of the company's stock
C) minimize the holders' interest rate risk; give the investor the ability to benefit from interest rate changes
D) maximize the holders' interest rate risk; give investor the ability to share in the profits of the issuing company
E) None of the options are correct.

Question 40

Ceteris paribus, the price and yield on a bond are

A) positively related.
B) negatively related.
C) sometimes positively and sometimes negatively related.
D) not related.
E) indefinitely related.

Question 41

A Treasury bill with a par value of $100,000 due three months from now is selling today for $97,087 with an effective annual yield of

A) 12.40%.
B) 12.55%.
C) 12.62%.
D) 12.68%.
E) None of the options are correct.

Question 42

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ________ if the coupon rate is 12%.

A) $922.77
B) $924.16
C) $1,075.80
D) $1,077.22
E) None of the options are correct.

Question 43

A convertible bond has a par value of $1,000 and a current market price of $850. The current price of the issuing firm's stock is $29, and the conversion ratio is 30 shares. The bond's market conversion value is

A) $729.
B) $810.
C) $870.
D) $1,000.
E) None of the options are correct.

Question 44

A coupon bond pays interest semi-annually, matures in five years, has a par value of $1,000, a coupon rate of 12%, and an effective annual yield to maturity of 10.25%. The price the bond should sell for today is

A) $922.77.
B) $924.16.
C) $1,075.80.
D) $1,077.20.
E) None of the options are correct.

Question 45

A Treasury bill with a par value of $100,000 due two months from now is selling today for $98,039 with an effective annual yield of

A) 12.40%.
B) 12.55%.
C) 12.62%.
D) 12.68%.
E) None of the options are correct.

Question 46

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ________ if the coupon rate is 9.5%.

A) $922.77
B) $1,010.12
C) $1,075.80
D) $1,077.22
E) None of the options are correct.

Question 47

A 12% coupon bond with semi-annual payments is callable in five years. The call price is $1,120. If the bond is selling today for $1,110, what is the yield to call?

A) 12.03%
B) 10.86%
C) 10.95%
D) 9.14%
E) None of the options are correct.

Question 48

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 five years, while bond B will mature in six years. If the yields to maturity on the two bonds change from 12% to 10%,

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.
E) None of the options are correct.

Question 49

You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell.

A) 10.00%
B) 20.42%
C) 13.8%
D) 1.21%
E) None of the options are correct.

Question 50

You purchased an annual interest coupon bond one year ago that had six years remaining to maturity at that time. The coupon interest rate was 10%, and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been

A) 7.00%.
B) 7.82%.
C) 8.00%.
D) 11.95%.
E) None of the options are correct.

Question 51

A 10% coupon bond with annual payments and 10 years to maturity is callable in three years at a call price of $1,100. If the bond is selling today for $975, the yield to call is

A) 10.26%.
B) 10.00%.
C) 9.25%.
D) 13.98%.
E) None of the options are correct.

Question 52

Consider the following $1,000-par-value zero-coupon bonds: $\begin{array}{ccc}\text { Bond } & \text { Years of } & \text { Price }\\&\text { Maturity }\\\text { A } & 1 & \$ 909.09 \\\text { B } & 2 & 811.62 \\\text { C } & 3 & 711.78 \\\text { D}& 4 & 635.52\end{array}$

The yield to maturity on bond B is

A) 10%.
B) 11%.
C) 12%.
D) 14%.
E) None of the options are correct.

Question 53

You purchased an annual interest coupon bond one year ago that now has six years remaining until maturity. The coupon rate of interest was 10%, and par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. The amount you paid for this bond one year ago was

A) $1,057.50.
B) $1,075.50.
C) $1,088.50.
D) $1.092.46.
E) $1,104.13.

Question 54

A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in eight years, the bond should sell for a price of _______ today.

A) $422.41
B) $494.47
C) $513.16
D) $483.49
E) None of the options are correct.

Question 55

Consider the following $1,000-par-value zero-coupon bonds: $\begin{array}{ccc}\text { Bond } & \text { Years of } & \text { Price }\\&\text { Maturity }\\\text { A } & 1 & \$ 909.09 \\\text { B } & 2 & 811.62 \\\text { C } & 3 & 711.78 \\\text { D}& 4 & 635.52\end{array}$
The yield to maturity on bond A is

A) 10%.
B) 11%.
C) 12%.
D) 14%.
E) None of the options are correct.

Question 56

A convertible bond has a par value of $1,000 and a current market value of $850. The current price of the issuing firm's stock is $27, and the conversion ratio is 30 shares. The bond's conversion premium is

A) $40.
B) $150.
C) $190.
D) $200.
E) None of the options are correct.

Question 57

Consider the following $1,000-par-value zero-coupon bonds: $\begin{array}{ccc}\text { Bond } & \text { Years of } & \text { Price }\\&\text { Maturity }\\\text { A } & 1 & \$ 909.09 \\\text { B } & 2 & 811.62 \\\text { C } & 3 & 711.78 \\\text { D}& 4 & 635.52\end{array}$

The yield to maturity on bond C is

A) 10%.
B) 11%.
C) 12%.
D) 14%.
E) None of the options are correct.

Question 58

A Treasury bill with a par value of $100,000 due one month from now is selling today for $99,010. The effective annual yield is

A) 12.40%.
B) 12.55%.
C) 12.62%.
D) 12.68%.
E) None of the options are correct.

Question 59

Consider the following $1,000-par-value zero-coupon bonds: $\begin{array}{ccc}\text { Bond } & \text { Years of } & \text { Price }\\&\text { Maturity }\\\text { A } & 1 & \$ 909.09 \\\text { B } & 2 & 811.62 \\\text { C } & 3 & 711.78 \\\text { D}& 4 & 635.52\end{array}$

The yield to maturity on bond D is

A) 10%.
B) 11%.
C) 12%.
D) 14%.
E) None of the options are correct.

Question 60

A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in five years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is

A) 6.00%.
B) 8.33%.
C) 12.00%.
D) 60.00%.
E) None of the options are correct.

Question 61

Which one of the following statements about convertibles is true?

A) The longer the call protection on a convertible, the less the security is worth.
B) The more volatile the underlying stock, the greater the value of the conversion feature.
C) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth.
D) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.
E) Convertibles are not callable.

Question 62

The yield to maturity of a 20-year zero-coupon bond that is selling for $372.50 with a value at maturity of $1,000 is

A) 5.1%.
B) 8.8%.
C) 10.8%.
D) 13.4%.
E) None of the options are correct.

Question 63

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now, the price of this bond will be

A) higher.
B) lower.
C) the same.
D) $1,000.
E) Cannot be determined.

Question 64

The ________ is used to calculate the present value of a bond.

A) nominal yield
B) current yield
C) yield to maturity
D) yield to call
E) None of the options are correct.

Question 65

The yield to maturity on a bond is

A) below the coupon rate when the bond sells at a discount and equal to the coupon rate when the bond sells at a premium.
B) the discount rate that will set the present value of the payments equal to the bond price.
C) based on the assumption that any payments received are reinvested at the coupon rate.
D) None of the options are correct.

Question 66

TIPS are

A) securities formed from the coupon payments only of government bonds.
B) securities formed from the principal payments only of government bonds.
C) government bonds with par value linked to the general level of prices.
D) government bonds with coupon rates linked to the general level of prices.
E) zero-coupon government bonds.

Question 67

Which one of the following statements about convertibles are false?I) The longer the call protection on a convertible, the less the security is worth.II) The more volatile the underlying stock, the greater the value of the conversion feature.III) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth.IV) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

A) I only
B) II only
C) I and III
D) IV only
E) I, III, and IV

Question 68

Consider a $1,000-par-value 20-year zero-coupon bond issued at a yield to maturity of 10%. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%, the imputed interest income for the first year of that bond is

A) zero.
B) $14.87.
C) $45.85.
D) $7.44.
E) None of the options are correct.

Question 69

Using semi-annual compounding, a 15-year zero-coupon bond that has a par value of $1,000 and a required return of 8% would be priced at approximately

A) $308.
B) $315.
C) $464.
D) $555.
E) None of the options are correct.

Question 70

A bond with a 12% coupon, 10 years to maturity, and selling at $88.00 has a yield to maturity of

A) over 14%.
B) between 13% and 14%.
C) between 12% and 13%.
D) between 10% and 12%.
E) less than 12%.

Question 71

Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict

A) required coupon rates for new bond issues.
B) bankruptcy risk.
C) the likelihood of a firm becoming a takeover target.
D) the probability of a bond issue being called.
E) None of the options are correct.

Question 72

The bond indenture includes

A) the coupon rate of the bond.
B) the par value of the bond.
C) the maturity date of the bond.
D) All of the options are correct.
E) None of the options are correct.

Question 73

When a bond indenture includes a sinking fund provision,

A) firms must establish a cash fund for future bond redemption.
B) bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed.
C) bondholders may lose because their bonds can be repurchased by the corporation at below-market prices.
D) firms must establish a cash fund for future bond redemption, and bondholders always benefit because principal repayment on the scheduled maturity date is guaranteed.
E) None of the options are true.

Question 74

A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity of 12%. Intuitively and without using calculations, if interest payments are reinvested at 10%, the realized compound yield on this bond must be

A) 10.00%.
B) 10.9%.
C) 12.0%.
D) 12.4%.
E) None of the options are correct.

Question 75

A bond will sell at a discount when

A) the coupon rate is greater than the current yield, and the current yield is greater than yield to maturity.
B) the coupon rate is greater than yield to maturity.
C) the coupon rate is less than the current yield, and the current yield is greater than the yield to maturity.
D) the coupon rate is less than the current yield, and the current yield is less than yield to maturity.
E) None of the options are true.

Question 76

Convertible bonds

A) give their holders the ability to share in price appreciation of the underlying stock.
B) offer lower coupon rates than similar nonconvertible bonds.
C) offer higher coupon rates than similar nonconvertible bonds.
D) give their holders the ability to share in price appreciation of the underlying stock and offer lower coupon rates than similar nonconvertible bonds.
E) give their holders the ability to share in price appreciation of the underlying stock and offer higher coupon rates than similar nonconvertible bonds.

Question 77

You purchased an annual-interest coupon bond one year ago with six years remaining to maturity at the time of purchase. The coupon interest rate is 10%, and par value is $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%, your annual total rate of return on holding the bond for that year would have been

A) 7.00%.
B) 8.00%.
C) 9.95%.
D) 11.95%.
E) None of the options are correct.

Question 78

A 10% coupon bond maturing in 10 years that requires annual payments is expected to make all coupon payments but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975?

A) 10.00%
B) 6.68%
C) 11.00%
D) 8.68%
E) None of the options are correct.

Question 79

Most corporate bonds are traded

A) on a formal exchange operated by the New York Stock Exchange.
B) by the issuing corporation.
C) over the counter by bond dealers linked by a computer quotation system.
D) on a formal exchange operated by the American Stock Exchange.
E) on a formal exchange operated by the Philadelphia Stock Exchange.

Question 80

The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called

A) deferral.
B) reissue.
C) repurchase.
D) refunding.
E) None of the options are correct.