Deck 6: Bond Valuation

Question 1

A corporation issues a bond with a face value of $10 000 and a coupon rate of 5.65% that matures on 15/07/2015. The holder of such a bond receives coupon payments of $282.50. How frequently are coupon payments made in this case?

A)semi-annually
B)annually
C)quarterly
D)monthly

Answer 1

semi-annually

Question 2

A corporate bond makes payments of $10.50 every month for 10 years with a final payment of $2 010.50. Which of the following best describes this bond?

A)a 10-year bond with a face value of $2 010.50 and a coupon rate of 5.8% 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 $2 010.50 and a coupon rate of 6.3% with monthly payments
D)a 10-year bond with a face value of $2 000 and a coupon rate of 6.3% with monthly payments

Answer 2

a 10-year bond with a face value of $2 000 and a coupon rate of 6.3% with monthly payments

Question 3

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

Answer 3

False

Question 4

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

Question 5

How much will each coupon payment be of a 30-year $10 000 bond with a 5% coupon rate and semi-annual payments?

A)$450
B)$350
C)$500
D)$250

Question 6

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

Question 7

Which of the following statements is FALSE?

A)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.
B)When prices are quoted in the bond market, they are conventionally quoted in increments of $1 000.
C)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.
D)Zero-coupon bonds are also called 'pure discount bonds'.

Question 8

An investor holds a bond with a face value of $5 000, a coupon rate of 4%, and semi-annual payments that matures on 15/01/2012. How much will the investor receive on 15/01/2012?

A)$5 000
B)$5 100
C)$200
D)$5 200

Question 9

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

A)Federal and state governments issue bonds to finance long-term projects.
B)When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance it will be repaid at a date in the future.
C)The issuers of bonds regularly pay interest on the face value of the bond to the buyers of those bonds.
D)When a company issues a bond, the buyer of that bond becomes a part owner of the issuing company.

Question 10

Which of the following best shows the timeline for cash flows from a five-year bond with a face value of $2 000, a coupon rate of 4.2%, and semi-annual payments?

A)
B)
C)
D)

Question 11

How much will each coupon payment be of a 20-year $500 bond with a 10% coupon rate and quarterly payments?

A)$40.00
B)$50.00
C)$33.33

Question 12

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

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

Question 13

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

Question 14

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

Question 15

Use the figure for the question(s)below.
The current zero-coupon yield curve for risk-free bonds is shown above. The price per $100 face value of a three-year, zero-coupon, risk-free bond is closest to:

A)$90.86
B)$87.99
C)$92.15
D)$96.67

Question 16

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

A)Such bonds are purchased at a discount to their face value.
B)Such bonds are purchased at their face value and sold at a premium at a later date.
C)The bond makes regular interest payments.
D)The face value of these bonds is less than the value of the bond when the bond matures.

Question 17

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 interest rates will rise and fall in response to the movement in bond prices.
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 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.
D)Since such a bond provides a risk-free return over that period, the Law of One Price guarantees the
Risk-free interest rate be equal to this yield.

Question 18

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 $9 250 when released?

A)8.212%
B)8.810%
C)7.500%
D)8.108%

Question 19

A bond certificate indicates

A)the yield to maturity of the bond.
B)the individual to whom payments will be made.
C)the amounts and dates of all payments to be made.
D)the price of the bond.

Question 20

By convention, the coupon rate is expressed as an effective annual rate.

Question 21

Consider a zero-coupon bond with $1 000 face value and 20 years to maturity. The price this bond will trade if the YTM is 6% is closest to:

A)$312
B)$335
C)$215
D)$306

Question 22

Use the figure for the question(s)below.
A risk-free, zero-coupon bond with a $5 000 face value has 10 years to maturity. The bond currently trades at $3 650. What is the yield to maturity of this bond?

A)3.699%
B)3.465%
C)3.197%
D)3.284%

Question 23

The face value of the bond.

Question 24

The yield to maturity for the three-year zero-coupon bond is closest to:

A)5.6%
B)6.0%
C)5.4%
D)5.8%

Question 25

Which of the following statements is FALSE?

A)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.
B)Financial professionals also use the term 'spot interest rates' to refer to the default-free zero-coupon yields.
C)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.
D)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.

Question 26

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 5.9%, and 20 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 4.8%, and 5 years to maturity

Question 27

Treasury bonds have original maturities of less than one year.

Question 28

Use the figure for the question(s)below.
A risk-free, zero-coupon bond with a face value of $1 000 has 15 years to maturity. If the YTM is 5.8%, which of the following would be closest to the price this bond will trade at?

A)$429
B)$525
C)$721
D)$686

Question 29

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 3-year maturity?

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

Question 30

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.

Question 31

Consider a zero-coupon bond with a $1 000 face value and 10 years left until maturity. If the YTM of this bond is 10.4%, then the price of this bond is closest to:

A)$1 040
B)$1 000
C)$372
D)$602

Question 32

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

Question 33

Which of the following statements is FALSE?

A)The amount of each coupon payment is determined by the coupon rate of the bond.
B)The simplest type of bond is a zero-coupon bond.
C)Treasury bonds are Australian government bonds with a maturity greater than one year.
D)Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.

Question 34

Which of the following statements is FALSE?

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

Question 35

Consider a zero-coupon bond with a $1 000 face value and 10 years left until maturity. If the bond is currently trading for $459, then the yield to maturity on this bond is closest to:

A)8.1%
B)7.5%
C)9.7%
D)10.4%

Question 36

Use the figure for the question(s)below.
A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $100 of face value that the bond will trade at if the YTM is 7%?

A)$38.78
B)$36.24
C)$32.68
D)$29.55

Question 37

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

Question 38

The yield to maturity for the two-year zero-coupon bond is closest to:

A)5.6%
B)5.8%
C)5.5%
D)6.0%

Question 39

Based upon the information given above, you can conclude

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

Question 40

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

Question 41

What must be the price of a $1 000 bond with a 5.8% coupon rate, annual coupons, and 30 years to maturity if YTM is 7.5% APR?

A)$114.22
B)$1 005.26
C)$799.22
D)$685.00

Question 42

What is the yield to maturity of a five-year, $5 000 bond with a 4.5% coupon rate and semi-annual coupons if this bond is currently trading for a price of $4 876?

A)4.30%
B)8.60%
C)6.30%
D)5.07%

Question 43

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1 000 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 semi-annually.
Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then the price that this bond trades for will be closest to:

A)$1 045
B)$1 000
C)$691
D)$957

Question 44

A $5 000 bond with a coupon rate of 6.4% paid semi-annually has four years to maturity and a yield to maturity of 6.2%. If interest rates fall and the yield to maturity decreases by 0.8%, what will happen to the price of the bond?

A)fall by $40.49
B)fall by $98.64
C)rise by $84.46
D)rise by $142.78

Question 45

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1 000 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 semi-annually.
Assuming that this bond trades for $1 112, then the YTM for this bond is closest to:

A)9.2%
B)8.0%
C)6.8%
D)3.4%

Question 46

What is the yield to maturity of a 10-year, $1 000 bond with a 5.2% coupon rate and semi-annual coupons if this bond is currently trading for a price of $884?

A)6.23%
B)5.02%
C)12.46%
D)6.82%

Question 47

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1 000 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 semi-annually.
Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at

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

Question 48

Assuming that this bond trades for $1 035.44, then the YTM for this bond is equal to:

Question 49

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 50

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1 000 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 semi-annually.
Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at

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

Question 51

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

Question 52

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1 000 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 semi-annually.
Assuming the appropriate YTM on the Sisyphean bond is 9.0%, then the price that this bond trades for will be closest to:

A)$919
B)$1 000
C)$1 086
D)$946

Question 53

What must be the price of a $10 000 bond with a 6.5% coupon rate, semi-annual coupons, and two years to maturity if it has a yield to maturity of 8% APR?

A)$10 754.44
B)$9 819.74
C)$9 727.75
D)$10 619.63

Question 54

A $1 000 bond with a coupon rate of 5.4% paid semi-annually has five years to maturity and a yield to maturity of 7.5%. If interest rates rise and the yield to maturity increases to 7.8%, what will happen to the price of the bond?

A)fall by $11.59
B)rise by $12.16
C)fall by $9.82
D)The price of the bond will not change.

Question 55

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1 000 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 semi-annually.
Assuming that this bond trades for $903, then the YTM for this bond is closest to:

A)8.0%
B)9.2%
C)9.9%
D)6.8%

Question 56

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 57

A bond has three years to maturity, a $2 000 face value, and a 6.3% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $1 801?

A)6.30%
B)9.22%
C)10.32%
D)8.48%

Question 58

How much are each of the semi-annual coupon payments? Assuming the appropriate YTM on the Sisyphean bond is 8.8%, then at what price should this bond trade for?

Question 59

What is the coupon rate of a two-year, $10 000 bond with semi-annual coupons and a price of $9 543.45, if it has a yield to maturity of 6.8%?

A)5.60%
B)4.32%
C)6.25%
D)8.44%

Question 60

Use the information for the question(s)below.
The Sisyphean Company has a bond outstanding with a face value of $1 000 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 semi-annually.
How much will each semi-annual coupon payment be?

A)$120
B)$80
C)$60
D)$40

Question 61

A company releases a five-year bond with a face value of $1 000 and coupons paid semi-annually. If market interest rates imply a YTM of 6%, which of the following coupon rates will cause the bond to be issued at a premium?

A)8%
B)4%
C)6%
D)3%

Question 62

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

Question 63

A five-year bond with a $1 000 face value has a yield to maturity of 5.5% and its coupon rate is 6.0% paid annually. The dirty price of this bond exactly six months after its second coupon payment is closest to:

A)$1 043.49
B)$684.67
C)$1 005.87
D)$983.93

Question 64

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

A)a 110-year bond with a $2 000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semi-annually
B)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
C)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
D)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 semi-annually

Question 65

A company releases a five-year bond with a face value of $1 000 and coupons paid semi-annually. 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)4%
B)8%
C)6%
D)3%

Question 66

A 20-year bond with a $1 000 face value was issued with a yield to maturity of 4.5% and pays coupons semi-annually. After 10 years, the yield to maturity is still 4.5% and the clean price of the bond is $960.09. After three more months go by, what would you expect the dirty price to be?

A)$980.09
B)$970.09
C)$960.09
D)Cannot be determined from information given.

Question 67

A company issues a 10-year bond at par with a coupon rate of 6% paid semi-annually. The YTM at the beginning of the third year of the bond (8 years left to maturity)is 7.8%. What is the new price of the bond?

A)$1 000.00
B)$894.35
C)$722.06
D)$569.65

Question 68

Which of the following bonds is trading at par?

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

Question 69

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

A)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
B)a 10-year bond with a $2 000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semi-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 semi-annually
D)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

Question 70

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 20-year bond with a $1 000 face value whose coupon rate is 7.4% APR paid semi-annually
B)a 20-year bond with a $1 000 face value whose coupon rate is 5.8% APR paid semi-annually
C)a 10-year bond with a $1 000 face value whose coupon rate is 5.8% APR paid semi-annually
D)a 10-year bond with a $1 000 face value whose coupon rate is 7.4% APR paid semi-annually

Question 71

What is the 'dirty price' of a bond?

A)the bond's actual cash price
B)the bond's price based only on the bond's yield
C)the bond's price based only on coupon payments
D)the bond's price less an adjustment for changes in interest rates

Question 72

Which of the following bonds is trading at a premium?

A)a 2-year bond with a $50 000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly
B)a 10-year bond with a $4 000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semi-annually
C)a 5-year bond with a $2 000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semi-annually
D)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 semi-annually

Question 73

An investor purchases a 30-year, zero-coupon bond with a face value of $1 000 and a yield to maturity of 6.5%. He sells this bond 10 years later. What is the rate of return on his investment, assuming yield to maturity does not change?

A)6.50%
B)6.04%
C)6.62%
D)6.24%

Question 74

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

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

Question 75

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 and C above

Question 76

A company issues a 10-year bond at par with a coupon rate of 6% paid semi-annually. The YTM at the beginning of the third year of the bond (8 years left to maturity)is 7.8%. What was the percentage change in the price of the bond over the past two years?

A)11.81%
B)-10.56%
C)-43.04%
D)75.55%

Question 77

A bond has a $1 000 face value, 10 years to maturity, and 7% semi-annual coupon payments. What would be the expected difference in this bond's price immediately before and immediately after the next coupon payment?

A)$35
B)$70
C)$84
D)$18

Question 78

A rise in interest rates causes bond prices to fall.

Question 79

Under what situation should the clean price, dirty price, and the price calculated by the basic annuity and present value (PV)equations for a bond be equal?

Question 80

A 10-year, zero-coupon bond with a yield to maturity of 5% has a face value of $1 000. An investor purchases the bond when it is initially traded, and then sells it five years later. What is the rate of return of this investment, assuming the yield to maturity does not change?

A)4.07%
B)4.01%
C)4.26%
D)5.65%