Deck 6: Bonds

Question 1

How are the cash flows of a coupon bond different from an amortizing loan?

Answer 1

A coupon bond pays interest over the life of the bond and returns the principal at the end of the term. Thus the cash flows are smaller over the life of the bond with a lump-sum payment at the end. In contrast, an amortizing loan has identical cash flows over its life with a part of the cash flow going toward interest and the balance as return of principal.

Question 2

A bond is said to mature on the date when the issuer repays its notional value.

Answer 2

True

Question 3

Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period?

A)Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.
B)Since a bond's price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence.
C)Since interest rates will rise and fall in response to the movement in bond prices.
D)Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.

Answer 3

Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.

Question 4

Use the figure for the question(s)below.
The current zero-coupon yield curve for risk-free bonds is shown above. What is the risk-free interest rate on a 4-year maturity?

A)3.00%
B)3.15%
C)3.25%
D)6.34%

Question 5

Prior to its maturity date, the price of a zero-coupon bond is its face value.

Question 6

Maturity (years)1 2 3 4 5 Price $97.25 $94.53 $91.83 $89.23 $87.53
The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown?

A)1.43%
B)5.71%
C)0.05%
D)2.85%

Question 7

Use the figure for the question(s)below.
The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond of $100?

A)$85.64
B)$87.99
C)$92.15
D)$96.67

Question 8

A bond certificate includes ________.

A)the terms of the bond
B)the individual to whom payments will be made
C)the yield to maturity of the bond
D)the price of the bond

Question 9

How are investors in zero-coupon bonds compensated for making such an investment?

A)Such bonds are purchased at their face value and sold at a premium on a later date.
B)Such bonds make regular interest payments.
C)Such bonds are purchased at a discount, below their face value.
D)Such bonds have a lower face value as compared to other bonds of similar term.

Question 10

What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments?

A)$150.00
B)$450
C)$900.00
D)$1800.00

Question 11

The coupon value of a bond is the face value of the bond.

Question 12

An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?

A)$2606.25
B)$5000.00
C)$5212.50
D)$5425.00

Question 13

What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments?

A)$3.75
B)$11.25
C)$22.50
D)$45.00

Question 14

What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face value and a price of $9400 when released?

A)3.191%
B)6.000%
C)6.383%
D)0.009%

Question 15

A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond?

A)a 10-year bond with a face value of $2,000 and a coupon rate of 4.8% with monthly payments
B)a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments
C)a 10-year bond with a face value of $2,009.67 and a coupon rate of 4.8% with monthly payments
D)a 10-year bond with a face value of $2,009.67 and a coupon rate of 5.8% with monthly payments

Question 16

Which of the following best illustrates why a bond is a type of loan?

A)The issuers of bonds make regular payments to bondholders.
B)When a company issues a bond, the buyer of that bond becomes an owner of the issuing company.
C)Funds raised are used to finance long-term projects.
D)When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future.

Question 17

Which of the following is true about the face value of a bond?

A)It is the notional amount we use to compute coupon payments.
B)It is the amount that is repaid at maturity.
C)It is usually denominated in standard increments, such as $1,000.
D)All of the above are true.

Question 18

A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25. How frequently are coupon payments made in this case?

A)monthly
B)quarterly
C)semiannually
D)annually

Question 19

The only cash payment an investor in a zero-coupon bond receives is the face value of the bond on its maturity date.

Question 20

Which of the following statements regarding bonds and their terms is FALSE?

A)Bonds are securities sold by governments and corporations to raise money from investors today in exchange for a promised future payment.
B)By convention, the coupon rate is expressed as an effective annual rate.
C)Bonds typically make two types of payments to their holders.
D)The time remaining until the repayment date is known as the term of the bond.

Question 21

Which of the following statements regarding bonds and their terms is FALSE?

A)The amount of each coupon payment is determined by the coupon rate of the bond.
B)Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
C)The zero-coupon bond has no periodic interest payments.
D)Treasury bills are U.S. government bonds with a maturity of up to one year.

Question 22

Under what situation can a zero-coupon bond be selling at par to its face value?

Question 23

Bond traders generally quote bond yields rather than bond prices, since yield to maturity depends on the face value of the bond.

Question 24

What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93?

A)7.79%
B)9.08%
C)6.49%
D)3.24%

Question 25

What is the yield to maturity of a(n)eight-year, $5000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4723.70?

A)6.31%
B)5.26%
C)7.36%
D)2.63%

Question 26

A bond has five years to maturity, a $1000 face value, and a 5.5% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $846.11?

A)11.41%
B)13.31%
C)7.61%
D)9.51%

Question 27

Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the YTM of this bond is 10.2%, then the price of this bond is closest to ________.

A)$1000
B)$454.32
C)$530.04
D)$379

Question 28

Consider a zero-coupon bond with a $1000 face value and 15 years left until maturity. If the bond is currently trading for $431, then the yield to maturity on this bond is closest to ________.

A)2.89%
B)56.90%
C)43.10%
D)5.77%

Question 29

Under what situation can a zero-coupon bond be selling at a premium?

Question 30

Which of the following statements regarding bonds and their terms is FALSE?

A)Zero-coupon bonds are also called pure discount bonds.
B)The internal rate of return (IRR)of an investment opportunity is the discount rate at which the net present value (NPV)of the investment opportunity is equal to zero.
C)The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment.
D)When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.

Question 31

Which of the following risk-free, zero-coupon bonds could be bought for the lowest price?

A)one with a face value of $1,000, a YTM of 4.8%, and 5 years to maturity
B)one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity
C)one with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity
D)one with a face value of $1,000, a YTM of 5.9%, and 20 years to maturity

Question 32

A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at?

A)$4937
B)$5760
C)$6582
D)$4114

Question 33

Which of the following statements regarding bonds and their terms is FALSE?

A)The internal rate of return (IRR)of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default-free bond at its current price and hold it to maturity.
B)The yield to maturity of a bond is the discount rate that sets the future value (FV)of the promised bond payments equal to the current market price of the bond.
C)Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields.
D)When we calculate a bond's yield to maturity by solving the formula, Price of an n-period bond = + + ... + ,
The yield we compute will be a rate per coupon interval.

Question 34

Which of the following statements regarding bonds and their terms is FALSE?

A)The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.
B)The bond certificate indicates the amounts and dates of all payments to be made.
C)The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date.
D)The face value of a bond is repaid at maturity.

Question 35

Consider a zero-coupon bond with $100 face value and 15 years to maturity. If the YTM is 7.4%, this bond will trade at a price closest to ________.

A)$41.13
B)$34.27
C)$47.98
D)$54.83

Question 36

A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%?

A)$663.78
B)$774.42
C)$553.15
D)$885.05

Question 37

Which of the following statements regarding bonds and their terms is FALSE?

A)One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond.
B)Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.
C)Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably.
D)The internal rate of return (IRR)of a bond is given a special name, the yield to maturity (YTM).

Question 38

How are the cash flows of a zero-coupon bond different from those of a coupon bond?

Question 39

A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750. What is the yield to maturity of this bond?

A)1.936%
B)0.968%
C)62.500%
D)75.000%

Question 40

Treasury bonds have original maturities from one to ten years, while Treasury notes have original maturities of more than ten years.

Question 41

A $5000 bond with a coupon rate of 5.7% paid semiannually has ten years to maturity and a yield to maturity of 6.4%. If interest rates fall and the yield to maturity decreases by 0.8%, what will happen to the price of the bond?

A)The price of the bond will fall by $293.50.
B)The price of the bond will fall by $352.20.
C)The price of the bond will rise by $410.90.
D)The price of the bond will rise by $293.50.

Question 42

The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Based upon the information provided in the table above, you can conclude ________.

A)that the yield curve is flat
B)nothing about the shape of the yield curve
C)that the yield curve is downward sloping
D)that the yield curve is upward sloping

Question 43

Use the information for the question(s)below.
Shown above is information from FINRA regarding one of Bank of America's bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually?

A)$1.49
B)$2.15
C)$2.32
D)$4.30

Question 44

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.3%, then the price that this bond trades for will be closest to ________.

A)$1063
B)$850
C)$1276
D)$1488

Question 45

What care, if any, should be taken regarding the sign of the cash flows while drawing the timeline and associated cash flows of a coupon bond?

Question 46

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.
How much are each of the semiannual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%, then at what price should this bond trade for?

Question 47

What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR?

A)$8494.26
B)$10,193.11
C)$11,891.97
D)$6795.41

Question 48

What is the coupon rate of an eight-year, $10,000 bond with semiannual coupons and a price of $9006.6568, if it has a yield to maturity of 6.5%?

A)4.888%
B)5.87%
C)6.84%
D)3.91%

Question 49

A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond?

A)The price of the bond will fall by $18.93.
B)The price of the bond will fall by $15.78.
C)The price of the bond will rise by $15.78.
D)The price of the bond will not change.

Question 50

The Sisyphean Company has a bond outstanding with a face value of $5000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $4541.53, then the YTM for this bond is closest to ________.

A)7.9%
B)11.9%
C)13.8%
D)9.9%

Question 51

The Sisyphean Company has a bond outstanding with a face value of $5000 that matures in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.9% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be?

A)$445.0
B)$222.5
C)$667.5
D)$890.0

Question 52

What care, if any, should be taken regarding the timing of the cash flows while drawing the timeline and associated cash flows of a coupon bond?

Question 53

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in five years. The bond certificate indicates that the stated coupon rate for this bond is 8.5% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1081.73, then the YTM for this bond is closest to ________.

A)5.2%
B)7.87%
C)6.56%
D)9.18%

Question 54

What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR?

A)$960.82
B)1120.95
C)$800.68
D)$640.54

Question 55

The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): The yield to maturity for the three-year zero-coupon bond is closest to ________.

A)5.40%
B)2.70%
C)10.80%
D)0.15%

Question 56

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 8.1% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 10.6%, then this bond will trade at ________.

A)a premium
B)a discount
C)par
D)none of the above

Question 57

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually.
Assuming that this bond trades for $1,035.44, then the YTM for this bond is equal to ________.

Question 58

Use the information to answer the question(s)below.
Shown above is information from FINRA regarding one of Caterpillar Financial Services' bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually?

A)$1.38
B)$3.95
C)$4.00
D)$4.36

Question 59

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 11.1%, then the price that this bond trades for will be closest to ________.

A)$652
B)$816
C)$979
D)$1142

Question 60

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at ________.

A)par
B)a discount
C)a premium
D)none of the above

Question 61

Which of the following bonds is trading at a premium?

A)a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually
B)a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually
C)a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually
D)a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly

Question 62

A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.1% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity)is 8.1%. What is the new price of the bond?

A)$883.91
B)$1060.69
C)$1237.47
D)$1,000.00

Question 63

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?

A)3%
B)5%
C)6%
D)7%

Question 64

An investor purchases a 30-year, zero-coupon bond with a face value of $5000 and a yield to maturity of 8.4%. He sells this bond ten years later. What is the rate of return on his investment, assuming yield to maturity does not change?

A)6.72%
B)5.04%
C)8.40%
D)4.20%

Question 65

Which of the following bonds is trading at par?

A)a bond with a $2,000 face value trading at $1,987
B)a bond with a $1,000 face value trading at $999
C)a bond with a $1,000 face value trading at $1,000
D)a bond with a $2,000 face value trading at $2,012

Question 66

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?

A)a ten-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually
B)a ten-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually
C)a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually
D)a 20-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually

Question 67

Before it matures, the price of any bond is always less than its face value.

Question 68

A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.7% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity)is 8.1%. What was the percentage change in the price of the bond over the past two years?

A)-6.50%
B)-9.75%
C)-8.13%
D)-11.38%

Question 69

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 8%, which of the following coupon rates will cause the bond to be issued at a premium?

A)7%
B)6%
C)8%
D)10%

Question 70

How can the financial calculator be used to calculate the price of a coupon bond from its yield to maturity?

Question 71

If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value?

A)a bond with a $10,000 face value, four years to maturity and 6.2% semiannual coupon payments
B)a bond with a $500 face value, seven years to maturity and 5.2% annual coupon payments
C)a bond with a $5,000 face value, seven years to maturity and 5.5% annual coupon payments
D)a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments

Question 72

A bond is currently trading below par. Which of the following must be true about that bond?

A)The bond's yield to maturity is less than its coupon rate.
B)The bond is a zero-coupon bond.
C)The bond's yield to maturity is greater than its coupon rate.
D)B or C above

Question 73

Which of the following statements is true of bond prices?

A)A fall in bond prices causes interest rates to fall.
B)A fall in interest rates causes a fall in bond prices.
C)A rise in interest rates causes bond prices to fall.
D)Bond prices and interest rates are not connected.

Question 74

What issues should one be careful of when calculating the bond price from its yield to maturity using the "time value of money" (TVM)keys of a financial calculator?

Question 75

What issues should one be careful of when calculating the bond price from its yield to maturity using the "cash flow" (CF)keys of a financial calculator?

Question 76

A bond will trade at a discount if its coupon rate is less than its yield to maturity.

Question 77

A ten-year, zero-coupon bond with a yield to maturity of 4% has a face value of $1000. An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change?

A)3.20%
B)2.40%
C)4.00%
D)2.00%

Question 78

Which of the following bonds will be least sensitive to a change in interest rates?

A)a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually
B)a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually
C)a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually
D)a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually

Question 79

A bond has a $10,000 face value, ten years to maturity, and 8% semiannual coupon payments. What would be the expected difference in this bond's price immediately before and immediately after the next coupon payment?

A)$800
B)$400
C)$1200
D)$200

Question 80

Which of the following bonds will be most sensitive to a change in interest rates?

A)a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually
B)a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually
C)a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually
D)a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually