Deck 7: Valuing Bonds

Question 1

Which of the following statements is true?

A) Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level.
B) Interest payments paid to corporate bond holders are not taxed at the federal level.
C) Interest payments paid to corporate bond holders are not taxed at the state level.
D) Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

Answer 1

Interest payments paid to municipal bond holders are not taxed at the federal level, or by the state for which the bond is issued.

Question 2

Which of the following issues Treasury Inflation Protected Securities (TIPS)?

A) U.S. Treasury
B) Corporations
C) Municipalities
D) Nonprofits

Answer 2

U.S. Treasury

Question 3

Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate?

A) credit quality risk
B) interest rate risk
C) liquidity rate risk
D) reinvestment rate risk

Answer 3

reinvestment rate risk

Question 4

Which of the following is true regarding U.S. Government Agency Securities?

A) They carry the federal government's full faith and credit guarantee.
B) They do not carry the federal government's full faith and credit guarantee.
C) They are insured by the FDIC.
D) They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee.

Question 5

Which of the following is a true statement?

A) If interest rates fall, U.S. Treasury bonds will have decreasing values.
B) If interest rates fall, corporate bonds will have decreasing values.
C) If interest rates fall, no bonds will enjoy rising values.
D) If interest rates fall, all bonds will enjoy rising values.

Question 6

Bonds are issued by which of the following?

A) corporations
B) federal government or its agencies
C) state and local governments
D) all of these

Question 7

Bond prices are quoted in terms of which of the following?

A) original issue discount
B) percent of par value
C) coupon rate in dollars
D) market rate in dollars

Question 8

Which of the following terms is a comparison of market yields on securities, assuming all characteristics except maturity are the same?

A) credit quality risk
B) interest rate risk
C) liquidity of interest rate risk
D) term structure of interest rates

Question 9

Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

A) call premium
B) maturity date
C) par or face value
D) time to maturity value

Question 10

Which of the following are main issuers of bonds?

A) U.S. Treasury bonds
B) Corporate bonds
C) Municipal bonds
D) All of these

Question 11

Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

A) debenture
B) enforcement codes
C) indenture
D) prospectus

Question 12

Which of these statements answers why bonds are known as fixed income securities?

A) Many investors on fixed incomes buy them.
B) Investors know how much they will receive in interest payments.
C) Investors will not receive their principal when the bond's term is up.
D) All of these

Question 13

Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

A) credit quality risk
B) interest rate risk
C) liquidity rate risk
D) reinvestment rate risk

Question 14

A bond's current yield is defined as

A) the bond's annual coupon rate divided by the bond's par value.
B) the bond's annual coupon rate divided by the market interest rate.
C) the bond's annual coupon rate divided by the bond's current market price.
D) the bond's annual coupon rate divided by the bond's original issue price.

Question 15

Which of the following bonds makes no interest payments?

A) a bond whose coupon rate is equal to the market interest rates
B) a bond whose coupon rates are greater than market interest rates
C) a bond whose coupon rates are less than the market interest rates
D) zero coupon bond

Question 16

This determines the dollar amount of interest paid to bondholders.

A) original issue discount
B) call premium
C) coupon rate
D) market rate

Question 17

To compensate the bondholders for getting the bond called, the issuer pays which of the following?

A) call feature
B) call premium
C) coupon rate
D) original issue premium

Question 18

Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

A) The amount of uncertainty about whether the company will be able to make all the payments.
B) The term of the loan.
C) The level of interest rates in the overall economy at the time.
D) All of these are factors that determine the coupon rate of a company's bonds.

Question 19

Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans?

A) asset-backed securities
B) credit quality securities
C) debentures
D) junk bonds

Question 20

Which of these statements is false?

A) Bonds are more important capital sources than stocks for companies and governments.
B) Some bonds offer high potential for rewards and, consequently, higher risk.
C) The bond market is larger than the stock market.
D) Bonds are always less risky than stocks.

Question 21

Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

A) $872.50, $1000, $1000, respectively
B) $1000, $1000, $1000, respectively
C) $877.81, $1024.20, $5072.50, respectively
D) $1000, $1024.20, $1001.45, respectively

Question 22

Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

A) $45
B) $225
C) $1000
D) $1045

Question 23

Interest Payments Determine the interest payment for the following three bonds: 2½ percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A) $2.50, $3.15, $0, respectively
B) $12.50, $15.75, $0, respectively
C) $12.50, $15.75, $100, respectively
D) $25.00, $31.50, $0, respectively

Question 24

Time to Maturity A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

A) 9 years
B) 10 years
C) 19 years
D) 20 years

Question 25

TIPS Interest and Par Value A 3 3/4 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

A) $1000, $18.75, respectively
B) $1000, $37.50, respectively
C) $1181.46, $22.15, respectively
D) $1181.46, $37.50, respectively

Question 26

Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)

A) $553.68
B) $558.66
C) $940.00
D) $1000.00

Question 27

TIPS Interest and Par Value A 2½ percent TIPS has an original reference CPI of 170.4. If the current CPI is 205.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

A) $1000, $7.16, respectively
B) $1000, $15.09, respectively
C) $1207.16, $7.16, respectively
D) $1207.16, $15.09, respectively

Question 28

Which of the following bonds carry significant risk that the issuer will not make current or future payments?

A) credit quality risk bonds
B) interest rate risk bonds
C) liquidity rate risk bonds
D) junk bonds

Question 29

Interest Payments Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semi-annually), 4.75 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)

A) $4.00, $4.75, $0, respectively
B) $20.00, $23.75, $0, respectively
C) $20.00, $23.75, $150, respectively
D) $40.00, $47.50, $0, respectively

Question 30

Call Premium A 6 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

A) $60
B) $600
C) $1000
D) $1060

Question 31

Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

A) 1 year, 6 months
B) 8 years
C) 8 years, 6 months
D) 10 years

Question 32

Interest Payments Determine the interest payment for the following three bonds: 5½ percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A) $5.50, $6.45, $0, respectively
B) $27.50, $32.25, $0, respectively
C) $27.50, $32.25, $100, respectively
D) $55.00, $64.50, $0, respectively

Question 33

Call Premium A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)

A) $55
B) $220
C) $1000
D) $1055

Question 34

Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

A) $1002.30, $1000, $1000, respectively
B) $1000, $1000, $5000, respectively
C) $1002.30, $994.50, $5012.25 respectively
D) $1029.38, $994.50, $5122.50, respectively

Question 35

Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 5 years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and $1,000 par value.)

A) $692.02
B) $696.57
C) $962.50
D) $1000.00

Question 36

Which of the following is an important advantage to the issuer of a bond with a call provision?

A) They are able to avoid interest rate risk.
B) They are able to avoid reinvestment rate risk.
C) They are able to reduce their credit risk.
D) They allow for refinancing opportunities.

Question 37

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

A) They are able to avoid interest rate risk.
B) They are able to avoid reinvestment rate risk.
C) They are able to offer reduced credit risk as they are backed by the federal government.
D) They are tax exempt-at least at the federal level.

Question 38

Time to Maturity A bond issued by a corporation on October 1, 2007, is scheduled to mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

A) 2 years
B) 50 years
C) 998 years
D) 100 years

Question 39

Current Yield What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

A) 5.9%
B) 6.0%
C) 6.1%
D) 10.2%

Question 40

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

A) credit quality risk
B) interest rate risk
C) liquidity of interest rate risk
D) term structure of interest rates

Question 41

Yield to Maturity A 4.25 percent coupon bond with 8 years left to maturity is offered for sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

A) 2.25%
B) 2.36%
C) 4.25%
D) 4.50%

Question 42

Compute Bond Price Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

A) discount
B) premium N = 30, I = 3.125, PMT = 23.75, FV = 1000 CPT PV = -855.34
Since this is less than $1,000, it is a discount bond.

Question 43

TIPS Capital Return Consider a 2.75% TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars?

A) $5.10
B) $11.20
C) $16.30
D) $27.69

Question 44

Compute Bond Price Compute the price of a 6 percent coupon bond with 10 years left to maturity and a market interest rate of 8.75 percent. (Assume interest payments are semi-annual and par value is $1,000.) Is this a discount or premium bond?

A) discount
B) premium N = 20, I = 4.375, PMT = 30, FV = 1000 CPT PV = -819.19
Since this is less than $1,000, it is a discount bond.

Question 45

Taxable Equivalent Yield What's the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?

A) 1.76%
B) 4.50%
C) 7.38%
D) 11.54%

Question 46

Yield to Maturity A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

A) 3.00%
B) 3.09%
C) 5.75%
D) 6.00%

Question 47

Current Yield What's the current yield of a 5.75 percent coupon corporate bond quoted at a price of 103.05?

A) 5.58%
B) 5.75%
C) 5.93%
D) 17.54%

Question 48

Credit Risk and Yield Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

A) JM bond, TC bond, B&O bond, IB bond
B) IB bond, B&O bond, TC bond, JM bond
C) TC bond, B&O bond, IB bond, JM bond
D) JM bond, IB bond, B&O bond, TC bond

Question 49

Bond Prices and Interest Rate Changes A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

A) $19.67
B) $21.55
C) $25.00
D) $41.22

Question 50

TIPS Capital Return Consider a 3.25% TIPS with an issue CPI reference of 186.7. At the beginning of this year, the CPI was 197.5 and was at 202.4 at the end of the year. What was the capital gain of the TIPS in dollars? (Assume semi-annual interest payments and $1,000 par value.)

A) $4.90
B) $10.80
C) $15.70
D) $26.25

Question 51

Bond Prices and Interest Rate Changes A 5.5 percent coupon bond with 18 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 5.75 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

A) $25.00
B) $26.89
C) $53.48
D) $80.37

Question 52

Yield to Call A 7.25 percent coupon bond with 25 years left to maturity can be called in 5 years. The call premium is one year of coupon payments. It is offered for sale at $1066.24. What is the yield to call of the bond? (Assume that interest payments are paid semi-annually and par value is $1,000.)

A) 3.41%
B) 3.45%
C) 3.51%
D) 6.90%

Question 53

Comparing Bond Yields A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate bond that offers a 5.10 percent yield. Which bond will give the client more profit after taxes?

A) the municipal bond
B) the corporate bond
C) Both give the client equal profits after taxes.
D) There is not enough information given to determine answer.

Question 54

Comparing Bond Yields A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?

A) the municipal bond
B) the corporate bond
C) Both give the client equal profits after taxes.
D) There is not enough information given to determine answer.

Question 55

Yield to Call A 4.75 percent coupon bond with 12 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $1037.35. What is the yield to call of the bond? (Assume that interest payments are paid semi-annually and par value is $1,000.)

A) 4.60%
B) 4.68%
C) 4.75%
D) 5.05%

Question 56

Current Yield What's the current yield of an 8.15 percent coupon corporate bond quoted at a price of 94.30?

A) 4.30%
B) 8.01%
C) 8.15%
D) 8.64%

Question 57

Comparing Bond Yields A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 percent yield. Which bond will give the client more profit after taxes?

A) the municipal bond
B) the corporate bond
C) Both give the client equal profits after taxes.
D) There is not enough information given to determine.

Question 58

TIPS Capital Return Consider a 3.75% TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

A) 3.75%
B) 4.62%
C) 7.10%
D) 8.80%

Question 59

TIPS Total Return Reconsider a 3.25% TIPS that was issued with CPI reference of 186.7. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.5. For the interest in the middle of the year, the CPI was 201.1. Now, at the end of the year, the CPI is 202.4 and the interest payment has been made. What is the total return of the TIPS in percentage terms for the year? (Assume semi-annual interest payments and $1,000 par value.)

A) 1.6%
B) 2.4%
C) 5.8%
D) 9.1%

Question 60

Taxable Equivalent Yield What's the taxable equivalent yield on a municipal bond with a yield to maturity of 3.9 percent for an investor in the 35 percent marginal tax bracket?

A) 1.09%
B) 3.90%
C) 6.00%
D) 11.14%

Question 61

Which of the following is not true about EE savings bonds?

A) Interest payments are received annually but are tax deductible.
B) About 1 in 6 Americans own a savings bond
C) These are tax deferred investments
D) Patriot bonds sell for one-half of their face value.

Question 62

Rank from highest credit risk to lowest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 6.55%, IBM bond with yield of 10.95%, Trump Casino bond with a yield of 9.15%, and Banc Ono bond with a yield of 9.46%.

A) Treasury, Trump Casino, Banc Ono, IBM
B) Banc Ono, Trump Casino, IBM, Treasury
C) Trump Casino, Treasury, Banc Ono, IBM
D) IBM, Banc Ono, Trump Casino, Treasury

Question 63

Calculate the price of a 6.5% coupon bond with 27 years left to maturity and a market interest rate of 5%. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

A) $982.03; discount
B) $1,010.59; discount
C) $1,220.93; premium
D) $1,315.62; premium

Question 64

What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?

A) 2.88%
B) 3.87%
C) 4.51%
D) 5.56%

Question 65

Which of the following was the catalyst for the recent financial crisis?

A) Corruption in the investment banking industry.
B) Widespread layoffs due to illegal alien hiring.
C) Defaults on subprime mortgages.
D) All of these.

Question 66

A 3.75% TIPS has an original reference CPI of 183.9. If the current CPI is 214.7, what is the current interest payment? (Assume semi-annual interest payments and a par value of $1,000.)

A) $43.78
B) $37.50
C) $21.89
D) $18.75

Question 67

Bond Ratings and Prices A corporate bond with a 5.75 percent coupon has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the bond's price in dollars? (Assume interest payments are paid semi-annually and a par value of $1,000.)

A) decrease $22.25
B) increase $22.25
C) decrease $23.72
D) increase $23.72

Question 68

If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true?

A) The current bond price will increase.
B) Interest rates required on new bond issues will increase.
C) The current bond price will decrease.
D) The current bond price will increase and interest rates on new bonds issues will decrease.

Question 69

Consider a 4.5% TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS in dollars?

A) $32.73
B) $46.92
C) $62.49
D) $75.85

Question 70

Yields of a Bond A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called in 4 years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of $5,000.)

A) 4.5%
B) 4.78%
C) 7.13%
D) 14.48%

Question 71

An 8% coupon bond with 15 years to maturity is priced to offer a 9% yield to maturity. You believe that in one year, the yield to maturity will be 6.5%. What is the change in price the bond will experience in dollars? (Assume annual interest payments and par value is $1,000.)

A) $163.92
B) $176.15
C) $198.45
D) $215.82

Question 72

Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond?

A) $685.93; discount
B) $791.03; discount
C) $1,051.83; premium
D) $1,176.31; premium

Question 73

Yields of a Bond A 3.25 percent coupon municipal bond has 12 years left to maturity and has a price quote of 98.75. The bond can be called in 5 years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 35 percent marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of $5,000.)

A) 3.38%
B) 5.00%
C) 5.20%
D) 10.12%

Question 74

Calculate the price of a zero coupon bond that matures in 20 years if the market interest rate is 8.5%. (Assume annual compounding and a par value of $1,000.)

A) $90.29
B) $195.62
C) $1,195.62
D) $995.62

Question 75

Bond Prices and Interest Rate Changes A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in percent? (Assume semi-annual interest payments and $1,000 par value.)

A) 3.5%
B) 5.3%
C) 7.0%
D) 7.15%

Question 76

A 6.5% coupon bond with 12 years left to maturity can be called in 4 years. The call premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield to call of the bond? (Assume interest payments are paid semi-annually and par value is $1,000.)

A) 1.48%
B) 2.96%
C) 6.5%
D) 7.23%

Question 77

A 7.5% coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

A) 4.77%
B) 7.5%
C) 9.54%
D) 10.34%

Question 78

Rank from lowest credit risk to highest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 5.55%, IBM bond with yield of 7.95%, Trump Casino bond with a yield of 9.15%, and Banc Ono bond with a yield of 6.12%.

A) Treasury, Trump Casino, Banc Ono, IBM
B) Trump Casino, IBM, Banc Ono, Treasury
C) Treasury, Banc Ono, IBM, Trump Casino
D) Trump Casino, Banc Ono, IBM, Treasury

Question 79

Bond Prices and Interest Rate Changes A 6.75 percent coupon bond with 10 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.65 percent. If this occurs, what would be the total return of the bond in percent? (Assume semi-annual interest payments and $1,000 par value.)

A) 5.5%
B) 5.6%
C) 6.6%
D) 6.7%

Question 80

Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal bond has a par value of $5,000, what is the price of the bond in dollars?

A) $5,089.06
B) $5,050.19
C) $5,062.50
D) $5,109.75