Deck 6: Bond Valuation and Interest Rates

Question 1

Which of the following statements is FALSE?

A)When the prevailing market interest rate is lower than the coupon rate, the bond will be traded at a premium.
B)When the prevailing market interest rate is higher than the coupon rate, the bond will be traded at a discount.
C)The longer the time to maturity, the less sensitive the market price of the bond becomes to changes in prevailing market rates.
D)The higher the coupon rate, the less sensitive the market price of the bond becomes to changes in prevailing market rates.

Answer 1

The longer the time to maturity, the less sensitive the market price of the bond becomes to changes in prevailing market rates.

Question 2

Toronto Skates Corp.has 6% annual-pay coupon bonds that trade with a yield to maturity of 5.5%.The bonds have eight years to maturity.What is the current bond price?

A)$1,032.01
B)$1,031.67
C)$968.95
D)$968.60

Answer 2

$1,031.67

Question 3

Which of the following statements is TRUE?

A)Protective covenants are clauses that restrict the actions of the issuer.
B)Convertible bonds are debt instruments that can be converted into preferred shares at predetermined conversion prices.
C)Sinking fund provisions require the trustee to set money aside each year so that funds are available at maturity to pay off the debt.
D)Purchase fund provisions require the repurchase of a certain amount of debt only if it can be repurchased at or above a given price.

Answer 3

Protective covenants are clauses that restrict the actions of the issuer.

Question 4

Which of the following is (are)needed to price a bond?

A)The coupon rate.
B)The face value amount.
C)The yield to maturity.
D)All of the above.

Question 5

Bonds that are classified as unsecured obligations are called:

A)callable bond.
B)treasury bond.
C)debenture.
D)all of the above.

Question 6

Which of the following statements is FALSE?

A)The bullet (balloon)payment refers to the principal payment made in one lump sum at maturity.
B)Collateral trust bonds are debt instruments that are secured by real assets.
C)Protective covenants can be positive or negative.
D)Debentures are debt instruments that are generally unsecured.

Question 7

Which one of the following is NOT a bond provision?

A)Pledging financial assets as collateral to the bond issue.
B)Limiting dividend payments to equity holders.
C)Limiting payments to other existing bondholders.
D)Pledging equipment as collateral for the issue.

Question 8

Which of the following is NOT a true statement?

A)Mortgage bonds are debt instruments that are secured by real assets.
B)Callable bonds give the issuer the option to "call" or repurchase outstanding bonds at predetermined call prices at specified times.
C)Retractable bonds allow the bondholder to sell the bonds back to the issuer at predetermined prices at specified times earlier than the maturity date.
D)Extendible bonds allow the issuer to extend the maturity date of the bond.

Question 9

Use the following three statements to answer this question:
I.The prices of bonds with higher durations are more sensitive to interest rate changes than are those with lower durations.
II.All else being equal, durations will be higher when (1)market yields are lower, (2)bonds have longer maturities, and (3)bonds have lower coupons.
III.Duration is a measure of risk of the bond

A)I is correct, II, III are incorrect.
B)I is incorrect, II, III are correct.
C)I, II and III are correct.
D)I, II and III are incorrect.

Question 10

Two years ago, St.Laurent Shippers Co.issued seven-year semi-annual pay bonds with a coupon rate of 8%.At issue, the yield to maturity was 7.5%.Today the market rate on the bonds is 9%.If you wished to purchase this bond today what price would you be willing to pay?

A)$1,026.85
B)$1,020.53
C)$960.44
D)$948.89

Question 11

Which of the following bonds is secured by real assets?

A)A mortgage bond.
B)A collateral trust bond.
C)A debenture.
D)A bullet bond.

Question 12

An investor bought a bond at par (=$1,000)and held it for one month.If the coupon rate is 5%, original maturity of the bond is 8 years, and the selling price was $937.90, what is the holding period return?

A)5%
B)5.79%
C)-5.79%
D)-1.79%

Question 13

An investor bought a bond at par and held it for one year.If the coupon rate is 5%, original maturity of the bond is 8 years, and the yield to maturity of the bond when it was sold was 6%, what is the holding period return of the bond? Assume annual interest coupon payments.

A)5%
B)6%
C)-1.21%
D)-1.23%

Question 14

Which of the following statements is TRUE?

A)The price of bonds with lower coupon rates will be less sensitive to interest rates than the price of higher-coupon-paying bonds will be.
B)The price of bonds with lower coupon rates will be more sensitive to interest rates than the price of higher-coupon-paying bonds will be.
C)The longer the time to maturity, the less sensitive the bond price is to interest rates.
D)The shorter the time to maturity, the more sensitive the bond price is to interest rates.

Question 15

The price of a ten-year semi-annual pay bond with a par value of $1,000 and a 7.5% annual coupon and yield to maturity of 8.25% is closest to:

A)$949.60
B)$950.24
C)$1,051.48
D)$1,052.11

Question 16

The concave shape of the bond price-yield curve shows:
I.For a given change in interest rates, bond prices will increase more when rates decrease than they will decrease when rates increase.
II.The curve is steeper for higher interest rates.
III.The curve is always downward sloping.

A)I, III are correct, II is incorrect.
B)I is incorrect, II, III are correct.
C)I, II and III are correct.
D)I and II are correct, III is incorrect.

Question 17

Which one of the following increases the sensitivity of the bond prices?

A)Increase in maturity
B)Decrease in maturity
C)Decrease in yield to maturity
D)Increase in coupon payment

Question 18

Which of the following statements is TRUE?

A)The quoted price of a bond is the actual price an investor pays for the bond whenever the bond is sold at a date other than the date of a coupon payment.
B)The quoted price of a bond is the actual price an investor pays for the bond when the bond is sold on the date of a coupon payment.
C)A bond purchaser must pay the bond seller the cash price less the accrued interest on the bond.
D)The cash price plus the accrued interest on the bond is the quoted price of the bond.

Question 19

A five-year annual pay bond is quoted at 93.011 with a market yield of 8%.The coupon rate on this bond issue is:

A)4.12%
B)6.25%
C)6.28%
D)9.19%

Question 20

Which of the following is generally NOT stated in a bond indenture?

A)The interest payment dates.
B)The principal repayment date.
C)The call date.
D)The maturity date.

Question 21

A five-year bond paying 8% semi-annual-pay coupons is trading on the market at a yield of 6.75%.What is the percentage change in price if the market yield increases by 75 basis points immediately after the bond is issued?

A)-2.98%
B)-3.02%
C)-3.05%
D)-3.11%

Question 22

A 5-year bond with a 10% coupon rate and $1000 face value is selling for $1100.Calculate the yield to maturity on the bond assuming annual interest payments.

A)8.53%
B)8.62%
C)10%
D)None of the above

Question 23

refers to the relationship between interest rates and the term to maturity on underlying debt instruments.

A)The Expectations theory
B)The Liquidity preference theory
C)The Market segmentation theory
D)The Term structure of interest rates

Question 24

The market yield rate on a twelve-year 7% annual-pay bond is 6%.The bond is callable in three years and its yield to call is 5.7%.What is the call price of the bond?

A)1057.74
B)1083.84
C)1089.59
D)1026.73

Question 25

What is the current yield of a four-year semi-annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

A)4.29%
B)4.00%
C)5.95%
D)2.14%

Question 26

LaMaudite Lager Inc.has a semi-annual pay bond that trades with a yield to maturity of 7%.The bonds have a six-year term to maturity and are currently selling for $1,067.20.The coupon rate of the bond is:

A)4.95%
B)8.39%
C)8.41%
D)15.69%

Question 27

It is now October 25.Jenny has just purchased a ten-year 4.5% Canadian government bond quoted at 96.894.The last semi-annual coupon payment was made on June 30 in the same year.How much will Jenny actually pay for this bond?

A)$954.52
B)$968.94
C)$976.15
D)$983.36

Question 28

The yield to maturity (YTM)is:

A)the discount rate used to evaluate bonds.
B)the bond's internal rate of return.
C)the yield that an investor would expect to make if they bought the bond at the current price, held it to maturity, received all the promised payments on their scheduled dates, and reinvested all the cash flows received at YTM.
D)All of the above.

Question 29

What is the yield-to-maturity (YTM)of a four-year annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

A)2.96%
B)5.92%
C)5.95%
D)11.90%

Question 30

The current yield (CY)is:

A)The ratio of the semi-annual coupon interest divided by the bond's maturity value.
B)The ratio of the semi-annual coupon interest divided by the bond's current market price.
C)The ratio of the annual coupon interest divided by the bond's current market price.
D)The ratio of the annual coupon interest divided by the bond's maturity value.

Question 31

The market yield on a 12-year 8% semi-annual-pay bond is 6.6%.The bond is callable in four years and its yield to call is 6.48%.What is the call price of the bond?

A)$1,125.46
B)$1,114.81
C)$1,085.94
D)$1,080.01

Question 32

A one-year bond offers a 12.5% yield to maturity (YTM)and a two-year bond offers an 11% yield to maturity (YTM).Based on this information which of the following is true?

A)The term structure is upward sloping.
B)The term structure is flat.
C)The term structure is downward sloping.
D)The term structure cannot be determined.

Question 33

What is the yield-to-maturity (YTM)of a four-year semi-annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $932.35?

A)2.96%
B)5.92%
C)5.95%
D)11.90%

Question 34

Which one of the following will occur during an increase in the supply of loanable funds?

A)A decrease in interest rates.
B)A decrease of the money supply in the economy.
C)A decrease in insured deposit amounts.
D)A decrease in the saving rate in the economy.

Question 35

A fifteen-year, 7% semi-annual-pay coupon bond that is callable in five years at a call price of $1,070 is currently selling for $1,036.53.What is the yield-to-call (YTC)of this bond?

A)7.30%
B)6.61%
C)6.14%
D)6.00%

Question 36

Which of the following is NOT a correct statement of the interest rate parity (IRP)theory?

A)It states the relationship between inflation and interest rates.
B)It states that forward currency contracts can be used to eliminate foreign exchange risk.
C)It demonstrates how differences in interest rates across countries are offset by expected changes in exchange rates.
D)It describes the relationship between interest rates and currency levels by using forward currency exchange rates.

Question 37

The nominal interest rate is:

A)the difference between the real rate and expected inflation.
B)low when expected inflation is low and high when expected inflation is high.
C)high when expected inflation is low and low when expected inflation is high.
D)None of the above

Question 38

What is the yield-to-maturity (YTM)of a four-year annual pay bond with a par value of $1,000 and a 4% coupon rate when the bond is currently priced at $1,000?

A)2.96%
B)4.00%
C)5.95%
D)11.90%

Question 39

A four-year 6% semi-annual-pay bond with a maturity value of $1,000 is trading at a yield-to-maturity (YTM)of 7%.What is this bond's current yield?

A)5.80%
B)6.21%
C)6.76%
D)7.25%

Question 40

A ten-year annual pay bond with a 5% coupon rate is trading with a market yield of 7.75%.What is the percentage change in price if the market yield decreases by 75 basis points immediately after the bond is issued?

A)5.37%
B)5.61%
C)5.67%
D)5.77%

Question 41

Suppose Canadian interest rates are presently 4.5% on one-year Canadian T-bills.Suppose that the U.S.dollar is quoted at US$1 = C$1.0695 and that the interest rate on one-year T-bills in the U.S.is 4.9%.What should the one-year forward exchange rate (C$/US$)be?

A)1.0783
B)1.0736
C)1.0692
D)1.0654

Question 42

Which one of the following is NOT true?

A)A bond issuer's rating is affected by its default risk.
B)An investor holding the bond until maturity expects to receive its par value.
C)Inflation does not affect the interest rates of bonds.
D)Rating agencies use financial statements to assess the default probability of firms.

Question 43

What is the yield of a 91-day Canadian T-bill with a par value of $1,000 that is quoted at 98.735?

A)5.07%
B)5.14%
C)5.22%
D)5.24%

Question 44

The risk premium of a company would increase with:

A)An increase in the debt to equity ratio
B)An increase in the current ratio
C)A stable interest coverage ratio
D)An increase in earnings

Question 45

Which of the following is NOT a theory of the term structure of interest rates?

A)Expectations theory
B)Interest rate parity theory
C)Liquidity preference theory
D)Market segmentations theory

Question 46

Suppose U.S.interest rates are presently 4.54% on one-year U.S.T-bills.Suppose that the one-year forward exchange rate is quoted at US$1 = C$1.0698 and that the interest rate on one-year T-bills in Canada is 4.325%.What should the spot exchange rate be?

A)1.0622
B)1.0676
C)1.0720
D)1.0764

Question 47

What is the price of a 183-day Canadian T-bill with a par value of $5,000 that has a quoted yield of 1.1%?

A)$4,892.66
B)$4, 945.60
C)$4,972.58
D)$9,864.17

Question 48

Suppose you buy 91-day Treasury bill with a par value of $1,000 for 98.125 at the time of the issue.After owning the Treasury bill for 23 days, you sell it.The bond equivalent yield you earned is 6.57%.What price did you receive for the T-bill?

A)$986.31
B)$985.31
C)$856.31
D)$1,000

Question 49

Marie bought a five-year 4.25% annual coupon bond for $974 one year ago.Today, she sold the bond at the market yield rate of 4%.What is Marie's approximate real rate of return if the inflation rate over the past year was 2.2%?

A)1.80%
B)2.05%
C)5.76%
D)5.98%

Question 50

Debt ratings assigned by professional debt-rating services are a measure of the bond issuers'

A)currency risk.
B)interest rate risk.
C)foreign exchange rate risk.
D)default risk.

Question 51

A ten-year zero coupon bond with a face value of $1,000 is currently quoted at $487.20.Assume the bond's yield to maturity (YTM)remains unchanged throughout the bond's term to maturity.What should the bond be sold for three years from now?

A)$542.69
B)$594.19
C)$604.55
D)$641.04

Question 52

A zero coupon bond with a face value of $1,000 is currently selling for $687.38.The bond has a market yield of 5.48%.What is the bond's term to maturity?

A)6.62 years
B)6.93 years
C)7.03 years
D)7.42 years

Question 53

Which one of the following statements is NOT correct?

A)AAA bonds are the safest bond investment.
B)Speculative grade bonds require high yields.
C)Large, well-established companies always have speculative grade ratings.
D)Speculative bonds are also called junk bonds.

Question 54

A twenty-year zero coupon bond with a face value of $1,000 is currently selling for $326.50.What is the bond's yield-to-maturity (YTM)?

A)5.65%
B)5.68%
C)5.72%
D)5.76%

Question 55

Which of the following risks may be included in the spread that compensates corporate bond investors for the assumption of additional risks over domestic government bond investors?

A)Default risk
B)Foreign exchange rate risk
C)Interest rate risk
D)All of these

Question 56

Suppose you observed that five-year government bonds are trading at a yield-to-maturity (YTM)of 5.75%.The yield spread between AAA and BBB rated corporate bonds is 130 basis points.The maturity yield differential between the three-year and five-year government bonds is 45 basis points.What yield would you expect to observe on BBB rated corporate bonds with three years to mature?

A)5.30%
B)6.60%
C)7.05%
D)7.50%

Question 57

Which one of the following ratios is the most correlated to default risk?

A)Account receivables collection period
B)Inventory collection period
C)Debt to equity ratio
D)Profit margin

Question 58

Suppose you observed that one-year T-bills are trading at a yield-to-maturity (YTM)of 4.35%.The yield spread between AAA and BBB rated corporate bonds is 150 basis points.The maturity yield differential between the one-year T-bills and the five-year government bonds is 65 basis points.What yield would you expect to observe on BBB rated corporate bonds with a five-year maturity?

A)5.00%
B)5.20%
C)5.85%
D)6.50%

Question 59

Which of the following rated bonds has the least risk?

A)AA
B)AAA
C)BB
D)A

Question 60

A five-year zero coupon bond with a face value of $1,000 is currently selling for $826.50.What is the bond's YTM?

A)5.65%
B)5.68%
C)5.72%
D)3.85%

Question 61

What is the major limitation about the liquidity preference theory of the yield curve?

Question 62

Suppose the spot exchange rate is C$.75 per US dollar.The forward exchange rate is C$.80per US dollar.Which of the following is true?

A)The Canadian inflation rate is lower.
B)The US dollar is selling at a premium.
C)The US dollar is selling at a discount.
D)None of the above.

Question 63

Explain the difference between nominal and real interest rates.

Question 64

Supreme Investment Co.has observed that the market prices for the one-year and two-year zero coupon bonds that have no default risk are $965.90 and $901.54, respectively.
a)How much would Supreme pay for a two-year 5.8% annual coupon bond that has the same default risk as the zero-coupon bonds? Assume that interest is paid annually.
b)What is the yield to maturity of this two-year coupon bond?

Question 65

Explain the implication to an investor of an increase in expected inflation.

Question 66

Explain the term "yield to maturity."

Question 67

The yield to call (YTC)is:

A)the opportunity cost of forgone coupon payments.
B)the yield that an investor would expect to make if he or she bought the bond at the current price and held it to call date and received the call price.
C)the yield that an investor would expect to make if he or she bought the bond at the current price, held it to maturity, and received all the promised payments on their scheduled dates.
D)All of the above.

Question 68

If everything else held constant, a decrease in relative expected inflation in Canada compared with the U.S.would imply:

A)An increase in the Canadian dollar versus the U.S.dollar
B)A decrease in the Canadian dollar versus the U.S.dollar
C)No change in the Canadian dollar versus the U.S.dollar
D)A decrease in the Canadian dollar versus the euro

Question 69

Which of the following is true with regards to the yield to call (YTC)?

A)The YTC is greater than the coupon rate, because the call price is greater than the bond's current price.
B)The YTC is greater than the coupon rate, because the call price is smaller than the bond's current price.
C)The YTC is greater than the coupon rate, because the call price is equal to the bond's current price.
D)The YTC is greater than the coupon rate, because the call price includes a premium for the yield to maturity

Question 70

Suppose you observed that one-year T-bills are trading with a yield to maturity (YTM)of 4.75%.The yield spread between AAA and BB rated corporate bonds is 130 basis points.The maturity yield differential between the one-year T-bills and three-year government bonds is 45 basis points.
a)What the market yield rate would you expect on a three-year BB rated corporate bond that pays a 7.25% annual coupon?
b)How much would you pay for this three-year BB rated corporate bond if its coupon rate was 7.25% with interest paid annually?

Question 71

J&B Co.has 8.75% coupon bonds with a market yield rate of 9.25%.The bonds have fifteen years to mature and make annual interest payments.What is the percentage change in price for a 10% decrease in market yield?

Question 72

Briefly describe the interest rate parity theory.Why don't firms always issue bonds in the country where interest rates are the lowest?

Question 73

Sam has put aside C$5,000 for his travel to Japan in a year from now.He could invest the money in Canada and earn 4.5%, and then convert it to Japanese yen when he leaves.Alternatively, Sam could convert the funds to Japanese yen (JY)and earn a 4.85% return on a Japanese investment today.Which approach should he take if the currency spot rate is C$/JY=0.008872 and the one-year forward rate is 0.008738?

Question 74

Genie would like to receive an exact real rate of return of 5% per year on a bond investment at a time when the expected rate of inflation is 4.5%.
a)What nominal rate of return would Genie expect to receive on a bond investment?
b)How much would Genie be willing to pay for a bond maturing in five years if it pays a semi-annual coupon of 8%?

Question 75

What is the term structure of interest rates and the yield curve?

Question 76

The market yield on a fifteen-year 7.5% bond is 6.5%.The bond makes semi-annual coupon payments and is callable in five years at a call price of $1,075.
a)What is the current bond price based on the market yield?
b)What is the bond's yield to call?
c)Is this bond likely to be called? Explain.

Question 77

Explain the difference between the coupon rate and the current yield.