Deck 7: Valuing Bonds

Question 1

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

Answer 1

par or face value

Question 2

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 choices are correct.

Answer 2

All of these choices are correct.

Question 3

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 choices are correct.

Answer 3

All of these choices are correct.

Question 4

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 choices are correct.

Question 5

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 6

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 7

Which of the following determines the dollar amount of interest paid to bondholders?

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

Question 8

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

A)U.S. Treasury
B)corporations
C)municipalities
D)nonprofits

Question 9

Which of the following are main issuers of bonds?

A)U.S. Treasury bonds
B)corporate bonds
C)municipal bonds
D)All of these choices are correct.

Question 10

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 11

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 12

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 13

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

Question 14

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 15

Which of the following statements is true?

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

Question 16

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 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

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 19

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 20

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 21

Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semiannually), 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 22

A 6 percent corporate coupon bond is callable in 10 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)$1,000
D)$1,060

Question 23

Calculate the price of a zero-coupon bond that matures in five years if the market interest rate is 7.50 percent. (Assume semiannual compounding and $1,000 par value.)

A)$692.02
B)$696.57
C)$962.50
D)$1,000.00

Question 24

A 2.5 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 semiannual interest payments and $1,000 par value.)

A)$1,000, $7.16, respectively
B)$1,000, $15.09, respectively
C)$1,207.16, $7.16, respectively
D)$1,207.16, $15.09, respectively

Question 25

A 3.75 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 semiannual interest payments and $1,000 par value.)

A)$1,000, $18.75, respectively
B)$1,000, $37.50, respectively
C)$1,181.46, $22.15, respectively
D)$1,181.46, $37.50, respectively

Question 26

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 27

Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semiannually), 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 28

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 29

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 30

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

A)$553.68
B)$558.66
C)$940.00
D)$1,000.00

Question 31

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, $1,000, $1,000, respectively
B)$1,000, $1,000, $1,000, respectively
C)$872.50, $1,024.20, $5,072.50, respectively
D)$1,000, $1,024.20, $1,001.45, respectively

Question 32

Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semiannually), 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 33

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)$1,000
D)$1,055

Question 34

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)$1,002.30, $1,000, $1,000, respectively
B)$1,000, $1,000, $5,000, respectively
C)$1,002.30, $994.50, $5,012.25 respectively
D)$1,023.00, $994.50, $5,122.50, respectively

Question 35

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 36

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

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

Question 37

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)$1,000
D)$1,045

Question 38

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 39

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 40

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 41

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 semiannual 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

Question 42

Consider a 2.75 percent 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 43

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 semiannual 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

Question 44

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 semiannual interest payments and $1,000 par value.)

A)$25.00
B)$21.55
C)$53.48
D)$80.37

Question 45

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.First determine the ETY:

Question 46

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 47

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

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

Question 48

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 the answer.First determine the ETY:

Question 49

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 50

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 semiannual interest payments and $1,000 par value.)

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

Question 51

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

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

Question 52

What is 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 percent
B)4.50 percent
C)7.38 percent
D)11.54 percent

Question 53

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 semiannual interest payments and $1,000 par value.)

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

Question 54

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 semiannual interest payments and $1,000 par value.)

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

Question 55

Consider a 3.25 percent 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 56

Reconsider a 3.25 percent 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 semiannual interest payments and $1,000 par value.)

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

Question 57

A 4.75 percent coupon bond with 12 years left to maturity can be called in two 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 semiannually and par value is $1,000.)

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

Question 58

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 the answer.First determine the ETY:

Question 59

Consider a 3.75 percent 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 semiannual interest payments and $1,000 par value.)

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

Question 60

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 semiannually and par value is $1,000.)

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

Question 61

Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent. (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 62

A 7.5 percent 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 semiannually and par value is $1,000.)

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

Question 63

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 semiannually and a par value of $1,000.)

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

Question 64

A 6.5 percent coupon bond with 12 years left to maturity can be called in four 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 semiannually and par value is $1,000.)

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

Question 65

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 five 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 semiannually and a par value of $5,000.)

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

Question 66

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 choices are correct.

Question 67

An 8 percent coupon bond with 15 years to maturity is priced to offer a 9 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.5 percent. 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 68

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

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

Question 69

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 70

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 percent, IBM bond with yield of 7.95 percent, Trump Casino bond with a yield of 9.15 percent and Banc Ono bond with a yield of 6.12 percent.

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 71

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 percent, IBM bond with yield of 10.95 percent, Trump Casino bond with a yield of 9.15 percent, and Banc Ono bond with a yield of 9.46 percent.

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 72

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

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

Question 73

Consider a 4.5 percent 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 74

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

Question 75

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 four 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 semiannually and a par value of $5,000.)

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

Question 76

A 5.125 percent TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is the par value of the TIPS?

A)$981.75
B)$1,018.60
C)$992.75
D)$1,042.95

Question 77

A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity. You believe that in one year, the yield to maturity will be 8 percent. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

A)$97.75
B)$101.50
C)$129.25
D)$137.75

Question 78

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

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

Question 79

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

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

Question 80

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

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