Deck 6: Valuing Bonds

Question 1

A Treasury bond's bid price will be lower than the ask price.

Answer 1

True

Question 2

Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity.

Answer 2

True

Question 3

Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond.

Answer 3

True

Question 4

Bonds rated BB or above by Standard & Poor's are called investment grade.

Question 5

Bonds with a rating of Ba or below by Moody's are referred to as speculative grade,high-yield,or junk bonds.

Question 6

The current yield measures the bond's total rate of return.

Question 7

T-bills are unlike most bonds in that their cash flows increase when the national rate of gross domestic product increases.

Question 8

When the market interest rate exceeds the coupon rate,bonds sell for less than face value to provide enough compensation to investors.

Question 9

Bonds rated Ba by Moody's have the same safety rating as the bonds rated BB by Standard & Poor's.

Question 10

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

Question 11

Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds.

Question 12

Bond ratings measure a bond's credit risk.

Question 13

Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.

Question 14

Zero-coupon bonds are issued at prices below face value,and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.

Question 15

Speculative-grade bonds have default risk; investment grade bonds do not.

Question 16

A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.

Question 17

It is impossible for an investor to insure against the risk of bond default.

Question 18

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

Question 19

A bond's payment at maturity is referred to as its face value.

Question 20

When a financial calculator or spreadsheet program finds a bond's yield to maturity,it uses a trial-and-error process.

Question 21

Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon.If interest rates for that grade of bond are currently 8.25%,what will be the market price of these bonds?

A) $917.06
B) $928.84
C) $987.50
D) $1,000.00

Question 22

How much should you be prepared to pay for a $1,000 10-year bond with a 6% coupon,semiannual payments,and a yield of 7.5%,compounded semiannually?

A) $895.78
B) $897.04
C) $938.40
D) $1,312.66

Question 23

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90,how much will it be worth 1 year from now if interest rates are constant?

A) $904.90
B) $925.39
C) $947.93
D) $1,000.00

Question 24

How much should you be prepared to pay for a $1,000 10-year bond with an annual coupon of 6% and a yield to maturity of 7.5%?

A) $411.84
B) $897.04
C) $985.00
D) $1,000.00

Question 25

A bond has an ask quote of 99.5625 and a bid quote of 99.5475.How much will the bond dealer make on the purchase and resell of a $100,000 bond if they earn a 10% commission?

A) $150
B) $1,500
C) $15
D) $1.50

Question 26

How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity,only to see market interest rates increase to 12% one year later?

A) $19.93
B) $20.00
C) $23.93
D) $25.66

Question 27

Even when the yield curve is upward-sloping,investors might rationally stay away from long-term bonds.

Question 28

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

A) $696.74
B) $1,075.82
C) $1,082.00
D) $1,123.01

Question 29

If you purchase a 3-year,9% annual coupon bond for $1,002.03,how much could it be sold for 2 years later if interest rates have remained stable (retain all decimal places in all intermediate steps)?

A) $999.29
B) $1,001.74
C) $998.97
D) $1,000.00

Question 30

By how much will a bond increase in price over the next year if it currently sells for $925.16,has 5 years until maturity,and an annual coupon rate of 7%? (Do not round intermediate calculations.)

A) $8.26
B) $8.92
C) $12.53
D) $11.98

Question 31

If an investor purchases a 3%,5-year bond at its par value of $1,000 and the CPI increases 3% over each of the next 5 years,what will be the real value of the principal at maturity?

A) $1,000.00
B) $1,030.00
C) $1,060.90
D) $1,061.36

Question 32

What is the amount of the annual coupon payment for a bond that has 6 years until maturity,sells for $1,050,and has a yield to maturity of 9.37%?

A) $98.64
B) $95.27
C) $101.38
D) $104.97

Question 33

How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%?

A) $209.91
B) $260.00
C) $760.00
D) $792.09

Question 34

How much should you pay for a $1,000 bond with 10% coupon,annual payments,and 5 years to maturity if the interest rate is 12%?

A) $927.90
B) $981.40
C) $1,000.00
D) $1,075.82

Question 35

What price will be paid for a Canadian Treasury bond with an ask price of 135.4062 if the face value is $100,000?

A) $100,135.41
B) $135,000.41
C) $136,269.38
D) $135,406.20

Question 36

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

A) 6.0%
B) 8.5%
C) 10.0%
D) 12.5%

Question 37

A bond is priced at $1,100,has 10 years remaining until maturity,and has a 10% coupon,paid semiannually.What is the amount of the next interest payment?

A) $50
B) $55
C) $100
D) $110

Question 38

What is the coupon rate for a bond with 3 years until maturity,a price of $1,053.46,and a yield to maturity of 6%? Interest is paid annually.

A) 6%
B) 8%
C) 10%
D) 11%

Question 39

If you purchase a 5-year,zero-coupon bond for $691.72,how much could it be sold for 3 years later if interest rates have remained stable?

A) $848.12
B) $923.50
C) $862.92
D) $911.15

Question 40

Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments.She sold the bond after 6 months and earned a total return of 4.8% on this investment.At what price,did she sell the bond?

A) $1,001.47
B) $974.28
C) $981.06
D) $1,003.18

Question 41

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16.What was your rate of return on this investment if the face value at maturity was $1,000?

A) 4.48%
B) 6.15%
C) 7.52%
D) 6.07%

Question 42

A "convertible bond" provides the option to convert:

A) a bond into shares of common stock.
B) fixed-rate coupon payments into variable-rate payments.
C) a zero-coupon bond to a coupon-paying bond.
D) a junk bond to a zero-coupon investment-grade bond.

Question 43

A bond has a coupon rate of 8%,pays interest semiannually,sells for $960,and matures in 3 years.What is its yield to maturity?

A) 4.78%
B) 5.48%
C) 9.57%
D) 12.17%

Question 44

The yield curve depicts the current relationship between:

A) bond yields and default risk.
B) bond maturity and bond ratings.
C) bond yields and maturity.
D) promised yields and default premiums.

Question 45

Periodic receipts of interest by the bondholder are known as:

A) the coupon rate.
B) a zero-coupon.
C) coupon payments.
D) the default premium.

Question 46

An investor holds two bonds,one with 5 years until maturity and the other with 20 years until maturity.Which of the following is more likely if interest rates suddenly increase by 2%?

A) the 5-year bond will decrease more in price.
B) the 20-year bond will decrease more in price.
C) both bonds will decrease in price similarly.
D) neither bond will decrease in price, but their yields will increase.

Question 47

An investor buys a 10-year $1,000,7% coupon bond for $1,050,holds it for 1 year,and then sells it for $1,040.What was the investor's rate of return?

A) 5.71%
B) 6.00%
C) 6.67%
D) 7.00%

Question 48

What is the current yield of a bond with a 6% coupon,4 years until maturity,and a price quote of 84?

A) 6.00%
B) 11.18%
C) 5.04%
D) 6.38%

Question 49

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?

A) a zero-coupon bond with 20 years until maturity
B) a coupon-paying bond with 20 years until maturity
C) a floating-rate bond with 20 years until maturity
D) a zero-coupon bond with 30 years until maturity

Question 50

If a bond offers an investor 11% in nominal return during a year in which the rate of inflation is 4%,then the investor's real return is:

A) 6.73%.
B) 6.31%.
C) 15.44%.
D) 10.56%.

Question 51

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with a coupon rate of 6.5% and sells the bond 1 year later for $1,037.19?

A) 4.53%
B) 5.33%
C) 5.16%
D) 4.92%

Question 52

If an investor purchases a bond when its current yield is higher than the coupon rate,then the bond's price will be expected to:

A) decline over time, reaching par value at maturity.
B) increase over time, reaching par value at maturity.
C) be less than the face value at maturity.
D) exceed the face value at maturity.

Question 53

A bond's yield to maturity takes into consideration:

A) current yield but not any price changes.
B) price changes but not the current yield.
C) both the current yield and any price changes.
D) neither the current yield nor any price changes.

Question 54

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

A) the bond's price will decline each year.
B) coupon payments can change at any time.
C) bonds selling for a premium have low default risk.
D) taxes must be paid on the current yield.

Question 55

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%?

A) 4.20%
B) 8.64%
C) 9.00%
D) 9.20%

Question 56

Which of these bond ratings is the lowest of Moody's investment-grade ratings?

A) A
B) Ba
C) Aa
D) Baa

Question 57

An investor buys a 5-year $1,000,9% coupon bond for $975,holds it for 1 year,and then sells the bond for $985.What was the investor's rate of return?

A) 9.00%
B) 9.23%
C) 9.65%
D) 10.26%

Question 58

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity,then sells the bond after 1 year for $1,085?

A) 6.82%
B) 6.91%
C) 7.64%
D) 9.00%

Question 59

When comparing a highly liquid bond with a comparable but less liquid bond,the highly liquid bond is most apt to have:

A) a lower yield.
B) a shorter maturity.
C) a higher yield.
D) a longer maturity.

Question 60

How does a bond dealer generate profits when trading bonds?

A) by maintaining bid prices lower than ask prices
B) by maintaining bid prices higher than ask prices
C) by retaining the bond's next coupon payment
D) by lowering the bond's coupon rate upon resale

Question 61

Assume a bond has been owned by four different investors during its 20-year history.Which one of the following is most apt to have been different for each of these owners?

A) Coupon rate
B) Coupon frequency
C) Par value
D) Yield to maturity

Question 62

The current yield of a bond can be calculated by:

A) multiplying the price by the coupon rate.
B) dividing the price by the annual coupon payments.
C) dividing the price by the par value.
D) dividing the annual coupon payments by the price.

Question 63

Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%.Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%.Which of these most likely occurred while the investor owned the bond?

A) the bond's current yield increased above the bond's coupon rate.
B) the inflation rate increased.
C) new bonds with similar characteristics have coupon rates of 6.5%.
D) market interest rates increased.

Question 64

The current yield tends to understate a bond's total return when the bond sells for a discount because:

A) increases in interest rates will increase the current yield.
B) the bond's price will increase each year.
C) current yields show only nominal returns.
D) the bond may have a higher face value.

Question 65

Which of the following would not be associated with a zero-coupon bond?

A) yield to maturity
B) discount bond
C) current yield
D) interest-rate risk

Question 66

If a bond is priced at par value,then:

A) it has a very low level of default risk.
B) its coupon rate equals its yield to maturity.
C) it must be a zero-coupon bond.
D) the bond is quite close to maturity.

Question 67

Many investors may be drawn to bonds with capital gains only because:

A) no taxation on capital gains.
B) high coupon payments.
C) long periods until maturity.
D) reduced taxation on capital gains.

Question 68

If the coupon rate on an outstanding bond is lower than the relevant current interest rate,then the yield to maturity will be:

A) lower than current interest rates.
B) equal to the coupon rate.
C) higher than the coupon rate.
D) lower than the coupon rate.

Question 69

A bond's par value can also be called its:

A) coupon payment.
B) present value.
C) market value.
D) face value.

Question 70

Which one of the following must be correct for a bond currently selling at a premium?

A) its coupon rate is variable.
B) its current yield is lower than its coupon rate.
C) its yield to maturity is higher than its coupon rate.
D) its coupon rate is lower than the current market rate on similar bonds.

Question 71

As the coupon rate of a bond increases,the bond's:

A) face value increases.
B) current price decreases.
C) interest payments increase.
D) maturity date is extended.

Question 72

When market interest rates exceed a bond's coupon rate,the bond will:

A) sell for less than par value.
B) sell for more than par value.
C) decrease its coupon rate.
D) increase its coupon rate.

Question 73

The existence of an upward-sloping yield curve suggests that:

A) bonds should be selling at a discount to par value.
B) bonds will not return as much as common stocks.
C) interest rates will be increasing in the future.
D) real interest rates will be increasing soon.

Question 74

Which one of these is included in the yield of a bond with a low credit rating but not included in a Canadian Treasury bond yield? Assume both bonds are selling at a premium.

A) real rate of return
B) inflation premium
C) default premium
D) loss of premium

Question 75

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

A) dividend yield.
B) yield to maturity.
C) current yield.
D) coupon rate.

Question 76

What causes bonds to sell for a premium?

A) investment-quality ratings
B) long periods until maturity
C) coupon rates that exceed market rates
D) speculative-grade ratings

Question 77

When an investor purchases a $1,000 par value bond that was quoted at 97.162,the investor:

A) receives 97.162% of the stated coupon payments.
B) receives $971.62 upon the maturity date of the bond.
C) pays 97.162% of face value for the bond.
D) pays $10,971.62 for a $10,000 face value bond.

Question 78

Investors who purchase bonds having lower credit ratings should expect:

A) lower yields to maturity.
B) higher default possibilities.
C) lower coupon payments.
D) higher purchase prices.

Question 79

Nominal Canadian Treasury bond yields:

A) are constant over time.
B) are equal to the real yields.
C) include a default premium.
D) include an inflation premium.

Question 80

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon.If interest rates change from 8% to 6% the bond's price will:

A) increase by $51.54.
B) decrease by $51.54.
C) increase by $53.46.
D) decrease by $53.46.