Deck 6: Valuing Bonds

Question 1

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

A)6.0 percent
B)8.5 percent
C)10.0 percent
D)12.5 percent Using the BAII Plus calculator:

Answer 1

10.0 percent

Question 2

Which of the following presents the correct relationship? 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

Answer 2

Interest payments increase

Question 3

The coupon rate of a bond equals:

A)Its yield to maturity
B)A percentage of its price
C)The maturity value
D)A percentage of the par value

Answer 3

A percentage of the par value

Question 4

The face value of a bond is received by the bondholder:

A)At the time of purchase
B)Annually
C)Whenever coupon payments are made
D)At maturity

Question 5

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

A)Coupon payment
B)Present value
C)Default value
D)Par value

Question 6

Which of the following factors will change when interest rates change?

A)The expected cash flows from a bond
B)The present value of a bond's payments
C)The coupon payment of a bond
D)The maturity value of a bond

Question 7

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

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

Question 8

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

A)$696.74
B)$1,075.82
C)$1,082.00
D)$1,123.01 Using the BAII Plus Calculator:

Question 9

What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a yield to maturity of 6 percent?

A)6 percent
B)8 percent
C)10 percent
D)11 percent Using the BAII Plus Calculator:

Question 10

What happens to the price of a three-year bond with an 8 percent coupon when interest rates change from 8 percent to 6 percent?

A)A price increase of $51.54
B)A price decrease of $51.54
C)A price increase of $53.47
D)No change in price Using the BAII Plus Calculator:

Question 11

When an investor purchases a $1,000 par value bond that was quoted at 97.16, the investor:

A)Receives 97.5 percent of the stated coupon payments
B)Receives $975 upon the maturity date of the bond
C)Pays 97.5 percent of face value for the bond
D)Pays $1,025 for the bond

Question 12

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

A)Rate of return
B)Yield to maturity
C)Current yield
D)Coupon rate

Question 13

What is the current yield of a bond with a 6 percent coupon, four years until maturity, and a price of $750?

A)6.0 percent
B)8.0 percent
C)12.0 percent
D)14.7 percent

Question 14

What happens when a bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

A)The price of the bond increases
B)The coupon rate of the bond increases
C)The par value of the bond decreases
D)The coupon payments will be adjusted to the new discount rate

Question 15

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 16

A bond's yield to maturity takes into consideration:

A)Current yield but not price changes of a bond
B)Price changes but not current yield of a bond
C)Both current yield and price changes of a bond
D)Neither current yield nor price changes of a bond

Question 17

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 18

If an investor purchases a bond when its current yield is less 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 19

Which of the following statements is correct for a 10 percent coupon bond that has a current yield of 13 percent?

A)The face value of the bond has decreased
B)The bond's maturity value exceeds the bond's price
C)The bond's internal rate of return is 13 percent
D)The bond has few years remaining until maturity

Question 20

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

A)$927.90
B)$981.40
C)$1,000.00
D)$1,075.82 Using the BAII Plus Calculator:

Question 21

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

A)A coupon-paying bond with 5 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 22

What price will be paid for a Canadian government bond with an ask price of 122.28?

A)$1,122.28
B)$1,228.88
C)$1,280.00
D)$1,222.80

Question 23

Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10 percent coupon, with semi-annual payments?

A)Each payment of interest equals $50
B)Each payment of interest equals $55
C)Each payment of interest equals $100
D)Each payment of interest equals $110

Question 24

Which of the following is correct when a bond investor's rate of return for a particular period exceeds the bond's coupon rate?

A)The bond increased in price during the period
B)The bond decreased in price during the period
C)The coupon payment increased during the period
D)It is not possible for a bondholder's rate of return to exceed the bond's coupon rate

Question 25

Where does a "convertible bond" get its name?

A)The option of converting into shares of common stock
B)The option of increasing its coupon payments when interest rates increase
C)The option of converting from zero-coupon to coupon-paying bond
D)The option of increasing yield without decreasing price

Question 26

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 27

If the coupon rate is lower than current interest rates, 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 28

When the yield curve is upward-sloping, then:

A)Short-maturity bonds offer high coupon rates
B)Long-maturity bonds are priced above par value
C)Short-maturity bonds yield less than long-maturity bonds
D)Long-maturity bonds increase in price when interest rates increase

Question 29

When riskier corporations issue bonds that include a default premium, the promised yield will sometimes be:

A)less than the actual yield
B)greater than the actual yield
C)less than the yield on a default-free bond
D)greater than the face value of the bond

Question 30

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

Question 31

What price was reported in the financial press for a bond that was sold to an investor for $1,045.63?

A)95.14
B)95.44
C)104.563
D)104.56

Question 32

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

A)$904.90
B)$925.39
C)$947.93
D)$1,000.00 Using the BAII Plus Calculator:

Question 33

By how much will a bond increase in price over the next year if it currently sells for $925, has five years until maturity, and an annual coupon rate of 7%?

A)$8.26
B)$8.92
C)$12.55
D)$15.00 Using the BAII Plus calculator:

Question 34

The purpose of a floating-rate bond is to:

A)Save interest expense for corporate issuers
B)Avoid making interest payments until maturity
C)Shift the yield curve
D)Offer rates adjusted to current market conditions

Question 35

What is the relationship between an investment's rate of return and its yield to maturity for an investor that does not hold a bond until maturity?

A)Rate of return is lower than yield to maturity
B)Rate of return is higher than yield to maturity
C)Rate of return equals yield to maturity
D)There is no predetermined relationship

Question 36

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 37

Which of the following is fixed (e.g., cannot change) for the life of a given bond?

A)Current price
B)Current yield
C)Yield to maturity
D)Coupon payment

Question 38

What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9 percent to 10 percent?

A)The coupon rate increases to 10 percent
B)The coupon rate remains at 9 percent
C)The coupon rate remains at 8 percent
D)The coupon rate decreases to 8 percent

Question 39

What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7 percent coupon and sells the bond one year later for $1,037.19?

A)5.00 percent
B)5.33 percent
C)6.46 percent
D)7.00 percent Rate of Return = ($70.00 - $17.28)/$1,054.47
= $52.72/$1,054.47

Question 40

Canada bond yields do not contain a:

A)Coupon interest payment
B)Nominal interest rate
C)Default premium
D)Yield to maturity

Question 41

Which one of the following will not happen for an investor who owns a Canada bond during a period of inflation?

A)The coupon payment will increase in nominal terms
B)The maturity value will remain constant in nominal terms
C)The investor's capital gain will rise
D)The bond price will fall

Question 42

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

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

Question 43

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

A)The five-year bond will increase more in price
B)The 20-year bond will increase more in price
C)Both bonds will increase in price similarly
D)Neither bond will increase in price, but yields will decrease

Question 44

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

A)$917.06
B)$928.84
C)$987.50
D)$1,000.00 Using the BAII Plus calculator:

Question 45

What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8 percent with semi-annual payments; current price is $960, three years until maturity.

A)4.78 percent
B)5.48 percent
C)9.57 percent
D)12.17 percent Using the BAII Plus calculator:

Question 46

Which of the following is correct concerning real interest rates?

A)Real interest rates are constant
B)Real interest rates must be positive
C)Real interest rates must be less than nominal interest rates
D)Real interest rates, if positive, indicate increased purchasing power

Question 47

Assume that a bond has been owned by four different investors during its 20-year history.Which of the following is not likely to have been shared by these different owners?

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

Question 48

How much should you be prepared to pay for a 10-year bond with a 6 percent coupon, semi-annual payments, and a semi-annually compounded yield of 7.5 percent?

A)$895.78
B)$897.04
C)$938.40
D)$1,312.66 Using the BAII Plus calculator:

Question 49

If an investor purchases a 3 percent, two-year Canada real return bond and the CPI increases 3 percent over each of the next two years, what does the investor receive at maturity?

A)$1,000.00
B)$1,030.00
C)$1,060.90
D)$1,092.73

Question 50

How much should you be prepared to pay for a 10-year bond with a 6 percent coupon and a yield to maturity to maturity of 7.5 percent?

A)$411.84
B)$897.04
C)$985.00
D)$1,000.00 Using the BAII Plus calculator:

Question 51

Many investors may be drawn to Canada bonds because of the bonds':

A)speculative-grade ratings
B)High coupon payments
C)Long periods until maturity
D)Low default risk

Question 52

Which of the following is correct for a bond currently selling at a premium to par?

A)Its current yield is higher than its coupon rate
B)Its current yield is lower than its coupon rate
C)Its yield to maturity is higher than its coupon rate
D)Its default risk is extremely low

Question 53

Which one of the following identifies the distinction between a Canada bond and a corporate bond?

A)Canada bonds make coupon payments; corporate bonds do not
B)Corporate bonds have default risk; Canada bonds do not
C)Corporate bonds have longer terms
D)Canada bonds have higher yields

Question 54

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

A)$87.12
B)$93.70
C)$100.00
D)$105.00 Using the BAII Plus calculator:

Question 55

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

A)$19.93
B)$20.00
C)$23.93
D)$25.66 Using the BAII Plus calculator:

Question 56

Capital losses will automatically be the case for bond investors who buy:

A)Discount bonds
B)Premium bonds
C)Zero-coupon bonds
D)Junk bonds

Question 57

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 58

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 59

Investors who own bonds having lower credit ratings should expect:

A)Lower yields to maturity
B)Higher default possibilities
C)Lower coupon payments
D)Higher present value of cash flows

Question 60

Which of the following is correct for a bond investor whose bond offers a 5 percent current yield and an 8 percent yield to maturity?

A)The bond is selling at a discount to par value
B)The bond has a high default premium
C)The promised yield is not likely to materialize
D)The security must be a Canada bond

Question 61

Suppose the current market interest rate is 10.25 percent.What is the current market price of a 5-year bond with a face value of $1,000 that has a coupon rate of 14 percent with semi-annual coupon payments?

A)$878.73
B)$1,072.25
C)$1,154.43
D)$1,435.75 Using the BAII Plus calculator

Question 62

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

A)Increasing interest rates; bonds held to maturity
B)Decreasing interest rates; bonds held to maturity
C)Stable interest rates; bonds sold before maturity
D)Increasing interest rates; bonds sold before maturity

Question 63

What causes bonds to sell for a premium compared to face value?

A)The bonds have high ratings
B)The bonds have a long period until maturity
C)The bonds have a higher than market coupon rate
D)The bonds are of speculative grade

Question 64

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

A)4.20 percent
B)8.64 percent
C)9.00 percent
D)9.20 percent 1.04 = 1 + nominal return/1.05

Question 65

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 66

We have a 7 percent annual-pay bond with a face value of $1,000 and a remaining life of 8 years.If this bond is currently trading at $942.53, what is the yield to maturity?

A)6%
B)7%
C)8%
D)9% Using the BAII Plus calculator:

Question 67

Which of the following bonds would be considered to be of speculative-grade?

A)A Caa-rated bond
B)An Aaa-rated bond
C)An AAA-rated bond
D)A Baa-rated bond

Question 68

If you purchase a five-year, zero-coupon bond ($1,000 maturity value) for $500, how much could it be sold for three years later if interest rates have remained stable?

A)$650.00
B)$723.05
C)$757.86
D)$800.00 Using the BAII Plus calculator:

Question 69

If the Globe and Mail shows a change in price of -12 on a $1,000 par-value bond, what we know of yield to maturity?

A)Yield to maturity fell
B)Yield to maturity stayed the same
C)The new yield pushed the nominal coupon payments up
D)Yield to maturity rose

Question 70

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 71

What price was quoted to an investor who paid $982.50 for a $1,000 par value bond?

A)82.500
B)97.250
C)98.250
D)98.080

Question 72

Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-rated bond?

A)The CCC bond will sell for a higher price
B)The CCC bond will sell for a lower price
C)The CCC bond will offer a higher promised yield to maturity
D)The CCC bond will offer a lower promised yield to maturity.

Question 73

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 only show nominal returns
D)The bond may have a higher face value

Question 74

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

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

Question 75

A bond with 10 years until maturity, an 8 percent coupon, and an 8 percent yield to maturity increased in price to $1,107.83 yesterday.What apparently happened to interest rates?

A)Rates increased by 2.0 percent
B)Rates decreased by 2.0 percent
C)Rates increased by .72 percent
D)Rates decreased by 1.5 percent Using the BAII Plus calculator:

Question 76

If you purchase a three-year, 9 percent coupon bond for $950, how much could it be sold for two years later if interest rates have remained stable?

A)$964.95
B)$981.56
C)$983.33
D)$1,000.00 Using the BAII Plus calculator:

Question 77

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

A)6.73 percent
B)7.00 percent
C)8.75 percent
D)10.56 percent 1 + real return = 1.11/1.04

Question 78

Suppose the prevailing market rate is 8 percent.A bond with a coupon rate of 6 percent will be sold at:

A)A premium
B)A discount
C)Par
D)$1,000

Question 79

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

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

Question 80

If the Globe and Mail showed that the price of a $1,000 par-value bond increased by +6 from the previous day, what happened to yield to maturity?

A)It fell
B)It rose
C)It stayed the same
D)Can't tell