Deck 5: Interest Rate and Bond Valuation

Question 1

The amount by which the call price exceeds the bond's par value is the:

A)coupon rate.
B)redemption value.
C)call rate.
D)original-issue discount.
E)call premium.

Answer 1

call premium.

Question 2

The long-term bonds issued by the United States government are called _____ bonds.

A)Treasury
B)municipal
C)floating-rate
D)junk
E)zero coupon

Answer 2

Treasury

Question 3

A deferred call provision refers to the:

A)open market price of a callable bond on a certain date.
B)prohibition of a company from redeeming callable bonds prior to a certain date.
C)prohibition of a company from ever redeeming callable bonds.
D)seniority of callable bonds to noncallable bonds in the event of corporate default.
E)amount by which the call price for a callable bond exceeds its par value.

Answer 3

prohibition of a company from redeeming callable bonds prior to a certain date.

Question 4

An account managed by the bond trustee for early bond redemption payments is called a:

A)sinking fund.
B)collateral payment account.
C)deed in trust account.
D)call provision.
E)par value fund.

Question 5

The written,legally binding agreement between the corporate borrower and the lender detailing the terms of a bond issue is called the:

A)covenant.
B)indenture.
C)terms of trade.
D)form 5140.
E)call provision.

Question 6

The stated interest payment,in dollars,made on a bond each period is called the bond's:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 7

A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a _____ bond.

A)par
B)premium
C)discount
D)zero coupon
E)floating rate

Question 8

In the event of default,_____ debt holders must give preference to more _____ debt holders in the priority of repayment distributions.

A)subordinated; senior
B)long-term; short-term
C)senior; junior
D)senior; subordinated
E)short-term; long-term

Question 9

A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond.

A)zero coupon
B)premium
C)discount
D)par value
E)floating rate

Question 10

An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _____ provision.

A)sinking fund
B)call
C)seniority
D)collateral
E)trustee

Question 11

The unsecured debts of a firm with maturities greater than 10 years are most literally called:

A)unfunded liabilities.
B)debentures.
C)notes.
D)bonds.
E)sinking funds.

Question 12

The rate of return required by investors in the market for owning a bond is called the:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 13

The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

A)coupon rate.
B)yield to maturity.
C)maturity.
D)face value.
E)coupon.

Question 14

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a _____ bond.

A)par
B)discount
C)premium
D)zero coupon
E)floating rate

Question 15

The form of bond issue in which the registrar of the company records ownership of each bond,with relevant payments made directly to the owner of record,is called the _____ form.

A)new-issue
B)registered
C)bearer
D)debenture
E)collateral

Question 16

The specified date on which the principal amount of a bond is repaid is called the bond's:

A)coupon rate.
B)face value.
C)yield to maturity.
D)maturity.
E)coupon.

Question 17

The form of bond issue in which the bond is issued without record of the owner's name,with relevant payments made directly to whoever physically holds the bond,is called the _____ form.

A)new-issue
B)registered
C)collateral
D)debenture
E)bearer

Question 18

The unsecured debts of a firm with maturities less than 10 years are most literally called:

A)unfunded liabilities.
B)sinking funds.
C)bonds.
D)notes.
E)debentures.

Question 19

The annual coupon of a bond divided by its face value is called the bond's:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 20

The unfunded debt of a firm is generally understood to mean the firm's:

A)preferred stock.
B)debts that mature in more than one year.
C)debentures.
D)debts that mature in less than one year.
E)secured debt.

Question 21

The relationship between nominal rates,real rates,and inflation is known as the:

A)Miller and Modigliani theorem.
B)Gordon growth model.
C)Fisher effect.
D)interest rate risk premium.
E)term structure of interest rates.

Question 22

A financial market is _____ if it is possible to easily observe its prices and trading volume.

A)open
B)transparent
C)chaotic
D)in equilibrium
E)ordered

Question 23

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future overall price appreciation.

A)liquidity
B)taxability
C)default risk
D)interest rate risk
E)inflation

Question 24

A bond that allows the holder to force the issuer to buy back bonds at a stated rate is called a:

A)put bond.
B)call bond.
C)guaranteed bond.
D)TIPS bond.
E)none of the above.

Question 25

All else constant,a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

A)a discount; higher than
B)a premium; equal to
C)at par; higher than
D)at par; less than
E)a premium; higher than

Question 26

As the yield to maturity increases,the:

A)higher the price the investor offers to buy a bond.
B)longer the time to maturity.
C)lower the rate of return desired by the investor.
D)amount the investor is willing to pay to buy a bond decreases.
E)lower the coupon rate desired by that investor.

Question 27

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

A)default risk
B)taxability
C)liquidity
D)inflation
E)interest rate risk

Question 28

The relationship between nominal interest rates on default-free,pure discount securities and the time to maturity is called the:

A)liquidity effect.
B)Fisher effect.
C)term structure of interest rates.
D)inflation premium.
E)interest rate risk premium.

Question 29

A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

A)$1,007; $70
B)$1,070; $35
C)$1,070; $70
D)$1,000; $35
E)$1,000; $70

Question 30

The long-term bonds issued by state and local governments in the United States are called _____ bonds.

A)Treasury
B)municipal
C)floating-rate
D)junk
E)zero coupon

Question 31

A TIPS bond's interest rate is linked to:

A)income.
B)inflation.
C)liquidity.
D)maturity of the 30 year government bond.
E)corporate tax rates.

Question 32

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.

A)Treasury
B)municipal
C)floating-rate
D)zero coupon
E)junk

Question 33

Parts of the indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called:

A)deferred call provisions.
B)sinking funds provisions.
C)protective covenants.
D)trustee relationships
E)bond ratings.

Question 34

A bond which,at the election of the holder,can be swapped for a fixed number of shares of common stock at any time prior to the bond's maturity is called a _____ bond.

A)zero coupon
B)callable
C)putable
D)convertible
E)warrant

Question 35

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called _____ rates.

A)real
B)nominal
C)effective
D)stripped
E)coupon

Question 36

A bond that pays a variable amount of coupon interest over time is called a _____ bond.

A)Treasury
B)municipal
C)junk
D)floating-rate
E)zero coupon

Question 37

Interest rates or rates of return on investments that have not been adjusted for the effects of inflation are called _____ rates.

A)coupon
B)stripped
C)effective
D)real
E)nominal

Question 38

The market price of a bond is equal to the present value of the:

A)face value minus the present value of the annuity payments.
B)face value plus the present value of the annuity payments.
C)annuity payments plus the future value of the face amount.
D)face value plus the future value of the annuity payments.
E)annuity payments minus the face value of the bond.

Question 39

All else constant,a coupon bond that is selling at a premium,must have:

A)a market price that is less than par value.
B)a coupon rate that is equal to the yield to maturity.
C)a yield to maturity that is less than the coupon rate.
D)semi-annual interest payments.
E)a coupon rate that is less than the yield to maturity.

Question 40

The annual coupon payment of a bond divided by its market price is called the:

A)coupon rate.
B)bid-ask spread.
C)capital gains yield.
D)current yield.
E)yield to maturity.

Question 41

Callable bonds generally:

A)allow the bondholder to decide when the bond is to be called.
B)are associated with sinking funds.
C)permit the issuer to repurchase the bonds at a discount.
D)are called within the first couple of years after issuance.
E)are required to have a deferred call provision if they have a "make-whole" call provision.

Question 42

Which one of the following statements concerning bond ratings is correct?

A)Standard and Poor's and Value Line are the primary bond rating agencies.
B)Bond ratings are solely an assessment of the creditworthiness of the bond issuer.
C)Investment grade bonds include only those bonds receiving one of the highest three bond ratings.
D)Bond ratings evaluate the expected price volatility of a bond issue.
E)All bonds receive the same rating classification from all rating agencies.

Question 43

Protective covenants:

A)are primarily designed to protect bondholders from future actions of the bond issuer.
B)only apply to bonds that have a deferred call provision.
C)are limited to stating actions which a firm must take.
D)are consistent for all bonds issued by a corporation within the United States.
E)are primarily designed to protect the issuing corporation from unreasonable demands of bondholders.

Question 44

Interest rate risk _____ as the time to maturity increases.

A)increases at an increasing rate
B)increases at a decreasing rate
C)increases at a constant rate
D)decreases at an increasing rate
E)decreases at a decreasing rate

Question 45

You own a bond that has a 7% coupon and matures in 12 years.You purchased this bond at par value when it was originally issued.If the current market rate for this.type and quality of bond is 7.5%,then you would expect:

A)the bond issuer to increase the amount of each interest payment on these bonds.
B)the yield to maturity to remain constant due to the fixed coupon rate.
C)to realize a capital loss if you sold the bond at the market price today.
D)today's market price to exceed the face value of the bond.
E)the current yield today to be less than 7%.

Question 46

American Fortunes is preparing a bond offering with an 8% coupon rate.The bonds will be repaid in 10 years.The company plans to issue the bonds at par value and pay interest semiannually.Given this,which of the following statements are correct?
I.The initial selling price of each bond will be $1,000.
II.After the bonds have been outstanding for 1 year,you should use 9 as the number of compounding periods when calculating the market value of the bond.
III.Each interest payment per bond will be $40.
IV.The yield to maturity when the bonds are first issued is 8%.

A)I and II only
B)II and III only
C)II, III, and IV only
D)I, II, and III only
E)I, III, and IV only

Question 47

A bond with semi-annual interest payments,all else equal,would be priced _________ than one with annual interest payments.

A)higher
B)lower
C)the same
D)it is impossible to tell
E)either higher or the same

Question 48

Bonds issued by the U.S.government:
I.are considered to be free of default risk.
II.are considered to be free of interest rate risk.
III.provide totally tax-free income.
IV.pay interest that is exempt from federal income taxes.

A)I only
B)I and III only
C)I and IV only
D)II and III only
E)II and IV only

Question 49

Which one of the following statements is correct concerning interest rate risk as it relates to bonds,all else equal?

A)The shorter the time to maturity, the greater the interest rate risk.
B)The higher the coupon rate, the greater the interest rate risk.
C)For a bond selling at par value, there is no interest rate risk.
D)The greater the number of semiannual interest payments, the greater the interest rate risk.
E)The lower the amount of each interest payment, the lower the interest rate risk.

Question 50

Which of the following statements concerning bond features is (are)correct?
I.Bondholders generally have voting power in a corporation.
II.Bond interest is tax-deductible as a business expense.
III.The repayment of the bond principal is tax-deductible.
IV.Failure to pay either the interest payments or the bond principle as agreed can cause a firm to go into bankruptcy.

A)II only
B)I and II only
C)III and IV only
D)II and IV only
E)II, III, and IV only

Question 51

Which of the following is a (are)positive covenant(s)that might be found in a bond indenture?
I.The company shall maintain a current ratio of 1.5 or better.
II.The company must limit the amount of dividends it pays according to the stated formula.
III.The company cannot lease any major assets without approval by the lender.
IV.The company must maintain the loan collateral in good working order.

A)I only
B)I and II only
C)I and IV only
D)II and IV only
E)I, II, and IV only

Question 52

Which one of the following statements is correct concerning bond classifications?

A)A mortgage security is a bond issued solely by a home builder.
B)A debenture is a long-term bond secured by the fixed assets of a firm.
C)A note is a bond which has an original maturity date longer than 10 years.
D)A callable bond can be repurchased by the issuer prior to the initial maturity date.
E)A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.

Question 53

A "fallen angel" is a bond that:

A)has moved from being an investment-grade bond to being a junk bond.
B)has moved from being a long-term obligation to being a short-term obligation.
C)has moved from having a yield to maturity in excess of the coupon rate to having a yield to maturity that is less than the coupon rate.
D)lowered its annual interest payment.
E)is rated as Ba by one rating agency and rated as BB by another rating agency.

Question 54

Which one of the following bonds has the greatest interest rate risk?

A)5-year; 9% coupon
B)5-year; 7% coupon
C)7-year; 7% coupon
D)9-year; 9% coupon
E)9-year; 7% coupon

Question 55

The break-even tax rate between a taxable corporate bond yielding 7% and a comparable nontaxable municipal bond yielding 5% can be expressed as:

A).07 /(1 - t^*) = .05.
B).07 / (1 - t^*) = .07.
C).07 + (1 - t^*) = .05.
D).07 * (1 - t^*) = .05.
E).05 * (1 - t^*) = .07.

Question 56

The newly issued bonds of the Wynslow Corp.offer a 8% coupon with semiannual interest payments.The bonds are currently priced at par value.The effective annual rate provided by these bonds must be:

A)equal to 3%.
B)greater than 3 % but less than 4%.
C)equal to 8%.
D)greater than 8 % but less than 9%.
E)equal to 12%.

Question 57

All else constant,as the market price of a bond increases the current yield _____ and the yield to maturity _____

A)increases; increases.
B)increases; decreases.
C)decreases; decreases.
D)decreases; increases.
E)remains constant; increases.

Question 58

Municipal bonds:

A)offer income tax advantages to individuals.
B)generally pay a higher rate of return than corporate bonds.
C)are those bonds issued only by local municipalities, such as a city or a borough.
D)are rarely callable.
E)pay interest that is always exempt from both federal and state income taxes.

Question 59

Treasury bonds are:

A)generally issued as coupon bonds.
B)totally risk-free.
C)preferred by high-income individuals because they offer the best tax benefits.
D)those bonds issued by any governmental agency in the U.S.
E)issued only on the first day of each fiscal year by the U.S.Department of Treasury.

Question 60

Which of the following items are generally included in a bond indenture?
I.call provisions
II.security description
III.current yield
IV.protective covenants

A)I and II only
B)II and IV only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV

Question 61

Which of the following are common characteristics of floating-rate bonds?
I.adjustable coupon rates
II.adjustable maturity dates
III.put provision
IV.coupon cap

A)I and II only
B)II and III only
C)I, II, and IV only
D)I, III, and IV only
E)I, II, III, and IV

Question 62

A convertible bond is a bond that can be:

A)exchanged for cash at prescribed points in time.
B)submitted to the issuer for redemption at the discretion of the bondholder.
C)submitted for payment any time the economy converts into a recessionary period.
D)exchanged for a stated number of shares of common stock of the bond issuer.
E)modified from a fixed coupon bond into a floating coupon bond at prescribed points in time.

Question 63

The market price of _____ maturity bonds fluctuates _____ compared with _____ maturity bonds as interest rates change.

A)shorter; more; longer
B)longer; less; shorter
C)shorter; less; longer
D)Both b.and c.
E)None of the above.

Question 64

A zero coupon bond:

A)is sold at a large premium.
B)has implicit interest which is calculated by amortizing the loan.
C)has less interest rate risk than a comparable coupon bond.
D)can only be issued by the U.S.Treasury.
E)has a price equal to the future value of the face amount given a specified rate of return.

Question 65

The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the estimated:

A)yield to maturity.
B)difference between the current yield and the yield to maturity.
C)difference between the yield to call and the yield to maturity.
D)range of yields to maturity provided by the bond over its life to date.
E)difference between the bond's yield and the yield of a particular Treasury issue.

Question 66

The yield to maturity is:

A)the rate that equates the price of the bond with the discounted cash flows.
B)the expected rate to be earned if held to maturity.
C)the rate that is used to determine the market price of the bond.
D)equal to the current yield for bonds priced at par.
E)All of the above.

Question 67

A corporation is more prone to issue floating-rate bonds when it expects future interest rates to _____ over the life of the bond.

A)remain constant
B)continually decline
C)increase briefly and then decline slightly
D)decline briefly and then increase significantly
E)continually increase

Question 68

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

A)default
B)market
C)interest rate
D)inflation
E)maturity

Question 69

A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009.This bond pays

A)$127.50 in July and January.
B)$63.75 in July and January.
C)$127.50 in July.
D)$63.75 in July.
E)None of the above.

Question 70

If its yield to maturity is less than its coupon rate,a bond will sell at a ____,and increases in market interest rates will ____.

A)discount; increase this discount
B)discount; decrease this discount
C)premium; increase this premium
D)premium; decrease this premium
E)None of the above

Question 71

The collar of a floating-rate bond refers to the minimum and maximum:

A)call periods.
B)maturity dates.
C)coupon rates.
D)market prices.
E)yields to maturity.

Question 72

The Fisher formula is expressed as _____ where R is the nominal rate,r is the real rate,and h is the inflation rate.

A)1 + R = (1 + r) * (1 + h)
B)1 + r = (1 + R) * (1 + h)
C)1 + h = (1 + r) / (1 + R)
D)1 + R = (1 + r) / (1 + h)
E)1 + r = (1 + R) / (1 + h)

Question 73

Investors generally tend to buy:

A)Treasury bonds for their high yields.
B)municipal bonds for their high yields.
C)corporate bonds for their guaranteed liquidity.
D)Treasury bonds for their preferential tax treatment.
E)convertible bonds for their potential price appreciation.

Question 74

A put provision in a bond indenture allows:

A)a bond issuer to recall the bond after a specified period of time at a price that exceeds the face amount.
B)the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.
C)a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a specified amount.
D)the issuer to convert a coupon bond into a zero coupon bond at their discretion.
E)the issuer to suspend interest payments for any year in which the interest expense exceeds the net income of the firm.

Question 75

The total interest paid on a zero-coupon bond is equal to:

A)zero.
B)$1,000 minus the par value.
C)$1,000 minus the face value.
D)the face value minus the market price on the maturity date.
E)the face value minus the issue price.

Question 76

The increase you realize in buying power as a result of owning a bond is referred to as the _____ rate of return.

A)real
B)realized
C)nominal
D)inflated
E)risk-free

Question 77

The term structure of interest rates reflects the:

A)pure time value of money for various lengths of time.
B)actual risk premium being paid for corporate bonds of varying maturities.
C)pure inflation adjustment applied to bonds of various maturities.
D)interest rate risk premium applicable to bonds of varying maturities.
E)nominal interest rates applicable to coupon bonds of varying maturities.

Question 78

One basis point is equal to:

A).01%.
B).10%.
C)1.0%.
D)10%.
E)100%.

Question 79

Face value is

A)always higher than current price.
B)always lower than current price.
C)the same as the current price.
D)same as par value.
E)the coupon amount.

Question 80

Today,August 13,you want to buy a bond with a quoted price of 101.5.The bond pays interest on February 1 and August 1.The price you will pay to purchase this bond is equal to the:

A)clean price.
B)muddy price.
C)dirty price.
D)par value price.
E)bid price.