Deck 6: Valuing Bonds

Question 1

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

Answer 1

True

Question 2

Indexed bonds were completely unknown in the United States until 1997 when the U.S.Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities,or TIPS.
Indexed bonds were not completely unknown in the United States before 1997.For example,in 1780 American Revolution soldiers were compensated with indexed bonds that paid the value of "five bushels of corn,68 pounds and four-sevenths part of a pound of beef,ten pounds of sheep's wool,and sixteen pounds of sole leather."

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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.

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

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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 11

It would be realistic to read an asked price listed as 100:16 and a bid price of 100:18.

Question 12

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

Question 13

A long-term investor would more likely be interested in current yield than internal rate of return.

Question 14

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

Question 15

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

Question 16

TIPS are unlike most bonds in that their cash flows increase when the national unemployment rate increases.

Question 17

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

Question 18

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

Question 19

Bonds selling at a premium price offer a higher current yield (which overstates the true return)than bonds selling at par value.

Question 20

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

Question 21

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

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

Question 22

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

A) 82:50
B) 97:25
C) 98:08
D) 98:25

Question 23

Bond ratings measure the bond's credit risk.

Question 24

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

A) speculative grade ratings.
B) high coupon payments.
C) long periods until maturity.
D) exemption from federal taxes.

Question 25

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 26

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 27

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) 104:18
D) 104:56

Question 28

Which of the following identifies the distinction between a U.S.Treasury bond and a Treasury note?

A) Bonds make coupon payments; notes do not.
B) Bills have default risk; bonds do not.
C) Bonds are priced in 32s; notes are not.
D) Bonds initially have more than 10 years until maturity; notes have fewer than 10 years initially.

Question 29

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

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

Question 30

What price will be paid for a U.S.Treasury bond with an ask price of 135:20?

A) $1,350.20
B) $1,350.31
C) $1,350.63
D) $1,356.25

Question 31

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

Question 32

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 33

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 34

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 35

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 36

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 37

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 38

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.

Question 39

The coupon rate of a bond equals:

A) its yield to maturity.
B) a percentage of its face value.
C) the maturity value.
D) a percentage of its price.

Question 40

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 rate

Question 41

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with a 7% coupon and sells the bond 1 year later for $1,037.19?

A) 5.00%
B) 5.33%
C) 6.46%
D) 7.00%

Question 42

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 43

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 44

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 45

By how much did the price of a $1,000 par-value bond increase if The Wall Street Journal shows a change of +6 from the previous day?

A) $0.600
B) $1.875
C) $6.000
D) $18.75

Question 46

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 47

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

A) receives 97.5% of the stated coupon payments.
B) receives $975 upon the maturity date of the bond.
C) pays 97.5% of face value for the bond.
D) pays $1,025 for the bond.

Question 48

Which of the following is correct for a bond priced at $1,100 that has 10 years remaining until maturity,and a 10% coupon,with semiannual 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 49

Which of the following is correct when a bond investor's rate of return for a particular period equals 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) The bond price remained unchanged during the period.

Question 50

What is the current yield of a bond with a 6% coupon,4 years until maturity,and a price of $750?

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

Question 51

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

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 7%.
D) The bond's maturity value is lower than the bond's price.

Question 52

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 53

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 54

By how much did the price of a $1,000 par-value bond decrease if The Wall Street Journal shows a change of -12 from the previous day?

A) $0.88
B) $1.20
C) $3.75
D) $12.00

Question 55

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 are adjusted to the new discount rate.

Question 56

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 57

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 58

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 59

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 60

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%?

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

Question 61

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 62

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

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

Question 63

What is the yield to maturity of a bond with the following characteristics? Coupon rate is 8% with semiannual payments,current price is $960,3 years until maturity.

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

Question 64

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% 1 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

Question 65

By how much will a bond increase in price over the next year if it currently sells for $925,has 5 years until maturity,and an annual coupon rate of 7%?

A) $8.26
B) $8.92
C) $12.55
D) $15.00

Question 66

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 67

An investor buys a 10-year,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 68

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and 5 years remaining 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 69

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 70

The present value of a bond is positively related with:

A) a lower coupon payment.
B) greater perceived liquidity.
C) greater default risk.
D) higher interest rates.

Question 71

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 72

Which of the following is correct for a bond investor whose bond offers a 5% current yield and an 8% 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 bond must be a Treasury Inflation-Protected Security.

Question 73

Two years ago bonds were issued with 10 years until maturity,selling at par,and a 7% 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 74

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) $87.12
B) $93.70
C) $100.00
D) $105.00

Question 75

If the 7s of 2005 are offered at 102:23,then the price of a $1,000 bond would be:

A) $1,020.23.
B) $1,022.30.
C) $1,025.00.
D) $1,027.19.

Question 76

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 77

An investor buys a 5-year,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 78

During the banking crisis of 2007-2009 the U.S.government bailed out all of the corporations except:

A) AIG.
B) Lehman Brothers.
C) Fannie Mae.
D) all were bailed out.

Question 79

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 80

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

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