Deck 6: Interest Rates and Bond Valuation

Question 1

The coupon rate is best defined as:

A)the semi-annual interest payment divided by the par value
B)the semi-annual interest payment divided by the market price
C)the periodic payment divided by the premium value of a bond
D)the annual coupon divided by the face value of a bond
E)the annual coupon divided by the current price of a bond

Answer 1

the annual coupon divided by the face value of a bond

Question 2

A convertible bond has features of both debt and equity because:

A)the bond can be exchanged for shares
B)the bondholder is granted an equity position in the firm and receives interest income
C)the bond pays both interest and dividends
D)the bondholder can force the firm to redeem the bond at any time
E)the bondholders have voting rights

Answer 2

the bond can be exchanged for shares

Question 3

When interest payments on a bond are made directly to the owner of record,the bond is said to be in _______ form.

A)registered
B)secure
C)street
D)coupon
E)bearer

Answer 3

registered

Question 4

The liquidity premium is the portion of a nominal interest rate that represents
Compensation for:

A)the lack of the ability to sell the bond at its fair value in a timely manner
B)the difference between short-term and long-term tax rates
C)the fluctuation in market prices throughout the trading day
D)the difference in the maturity term of a short-term versus a long-term bond
E)the changes in interest rates and the resulting changes in bond prices

Question 5

Aussie Investments Pty Ltd is an investor in the money market and regularly buys and sells bank-accepted bills.Today they are selling a bill that matures in 60 days.Sixty-day bills of a similar risk are priced at an interest rate of 6.00% per annum.What price can Aussie Investments expect to receive if the face value is $100 000?

A)$90 923
B)$95 250
C)$94 340
D)$99 023
E)$99 019

Question 6

Bond ratings primarily help potential investors measure the likelihood that the bond
Issuer will:

A)pay both the bond interest and principal in a timely fashion
B)call the bond prior to maturity
C)increase the size of the firm in a significant manner
D)convert the bond prior to maturity
E)increase the coupon rate

Question 7

A corporate bond has a face value of $10 000,a coupon rate of interest of 8.25% per annum,payable semi-annually,and six-and-a-half years remaining to maturity.The market interest rate for bonds of similar risk and maturity is currently 9.5% per annum,what is the present value of the bond?

A)$10 000
B)$11 437.15
C)$9403.96
D)$10 828.96
E)$9707.03

Question 8

The interest rate of return that has not been adjusted for inflation is called:

A)a nominal rate
B)a yield to maturity
C)a real rate
D)a floating rate
E)a coupon rate

Question 9

Which party to a bill of exchange is primarily responsible for the payment of the face value to the holder at maturity?

A)the discounter
B)the borrower
C)the drawer
D)the acceptor
E)the endorser

Question 10

The interest rate risk premium is the compensation investors require for their assumption of the risk related to:

A)inflation rate fluctuations
B)the convertibility of a bond
C)a potential default on the bond
D)changes in interest rates
E)the taxability of a bond

Question 11

When interest payments are made to whoever holds the bond,the bond is said to be in _____ form.

A)street
B)secure
C)bearer
D)coupon
E)registered

Question 12

Investors of government bonds require an 8% per annum real return.The inflation rate (CPI)is 5.50%.What is the exact nominal rate?

A)2.50%
B)10.50%
C)13.94%
D)13.50%
E)12.91%

Question 13

The Fisher effect illustrates the relationship between:

A)nominal returns,real returns and inflation
B)the coupon rate and yield to maturity
C)interest rate premium,inflation premium and term structure of interest rates
D)present and face value of the bond
E)yields on particular securities relative to their maturities

Question 14

Bondi Beachwear Pty Ltd takes out a short term loan through Witch Bank using a bill of exchange.The face value of the bill is $100 000 and it will mature in 90 days.If the interest rate quoted by the bank is 7.00% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar)?

A)$93 803
B)$93 458
C)$92 889
D)$98 289
E)$98 303

Question 15

The portion of a bond's yield that compensates investors for the possibility that the bond's interest or principal might not be paid is called the:

A)interest rate risk premium
B)yield to maturity
C)missed coupon rate
D)default risk premium
E)liquidity premium

Question 16

The general purpose of protective covenants is to help protect:

A)the lenders,from company actions contrary to the lenders' benefit
B)the company,in the case of rapid growth
C)the company,in the case of rising interest rates
D)the lenders,from early calls of their bonds
E)the lenders,from increased equity in the firm

Question 17

The rate required in the market on a bond is called the:

A)risk premium
B)current yield
C)yield to maturity
D)call yield
E)liquidity premium

Question 18

A 7% Commonwealth Government bond has three years to maturity.Given that the bond pays interest semi-annually (i.e.twice a year)and an interest payment has just been made,what is the present value of the bond if the market interest rate is 9% and the face value of the bond is $100 000?

A)$94 842.13
B)$88 693.18
C)$99 817.53
D)$105 875.28
E)$101 522.78

Question 19

When you refer to a bond's coupon,you are referring to which one of the following?

A)difference between the bid and the ask price
B)principal amount of the bond
C)annual interest divided by the current bond price
D)annual interest payment
E)difference between the purchase price and the face value

Question 20

A bond that pays no regular interest payments is called a(n)_____ bond.

A)income
B)convertible
C)exotic
D)put
E)zero coupon

Question 21

The price at which a dealer will purchase a bond is called the _____ price.

A)bid
B)call
C)ask
D)put
E)face

Question 22

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

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

Question 23

The government bond yield curve plots the yields on government bonds relative to the ____ of those securities.

A)market price
B)issue date
C)face value
D)maturity
E)coupon rate

Question 24

A protective covenant:

A)limits the actions of the borrower
B)prevents a bond from being called
C)guarantees that a bond will be repaid in full with interest
D)is designed to protect the bond dealer from potential legal liability related to the bond issue
E)protects the borrower from unscrupulous practices by the lender

Question 25

The yield to maturity on a discount bond is:

A)less than both the current yield and the coupon rate
B)greater than both the current yield and the coupon rate
C)equal to the current yield but greater than the coupon rate
D)less than the current yield but greater than the coupon rate
E)equal to both the coupon rate and the current yield

Question 26

The price at which an investor can purchase a bond from a dealer is called the _____ price.

A)ask
B)face
C)call
D)coupon
E)bid

Question 27

Which one of the following might be included in a bond's list of negative covenants?

A)maintaining a current ratio of 1.2 or more
B)providing audited financial statements in a timely manner
C)limiting cash dividends to $1 per share or less
D)maintaining a times interest earned ratio of 2 or more
E)maintaining a minimum cash balance of $1.2 million

Question 28

Changes in interest rates affect bond prices.Which one of the following compensates bond investors for this risk?

A)real rate of return
B)default risk premium
C)taxability risk premium
D)interest rate risk premium
E)bond premium

Question 29

The primary purpose of protective covenants is to help:

A)convert bearer bonds into registered form
B)reduce interest rate risk
C)the issuer in case of default
D)protect bondholders from issuer actions
E)bondholders whose bonds are called

Question 30

The term structure of interest rates represents the relationship between which of the following?

A)market and coupon rates on default-free,pure discount bonds
B)real rates on risk-free and risky bonds
C)nominal and real rates on default-free,pure discount bonds
D)nominal rates on default-free,pure discount bonds and time to maturity
E)nominal rates on risk-free and risky bonds

Question 31

The written agreement that contains the specific details related to a bond issue is called the bond:

A)registration statement
B)debenture
C)document
D)issue paper
E)trust deed

Question 32

What is the principal amount of a bond that is repaid at the end of the loan term called?

A)market price
B)dirty price
C)accrued price
D)coupon
E)face value

Question 33

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

A)call account
B)sinking fund
C)premium fund
D)registered account
E)bearer account

Question 34

When a bond's yield to maturity is less than the bond's coupon rate,the bond:

A)is selling at a discount
B)is priced at par
C)had to be recently issued
D)is selling at a premium
E)has reached its maturity date

Question 35

A call provision grants the bond issuer:

A)the right to automatically extend the bond's maturity date
B)the option to exchange the bonds for equity securities
C)the option of repurchasing the bonds prior to maturity at a pre-specified price
D)the right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds
E)the right to repurchase the bonds on the open market prior to maturity

Question 36

On which one of the following dates is the principal amount of a bond repaid?

A)discount date
B)issue date
C)coupon date
D)maturity date
E)face date

Question 37

Which one of the following is the rate of return an investor earns on a bond before adjusting for inflation?

A)real rate
B)nominal rate
C)coupon rate
D)clean rate
E)dirty rate

Question 38

The inflation premium:

A)compensates investors for expected price increases
B)increases the real return
C)rewards investors for accepting interest rate risk
D)is inversely related to the time to maturity
E)remains constant over time

Question 39

Manning Inc. ,a US company,originally issued bonds that were rated investment grade.These bonds have now been downgraded to junk status.Which one of the following terms applies to this situation?

A)fallen angel
B)called bond
C)protected covenant
D)floating bond
E)converted bond

Question 40

Which one of the following refers to the relationship between nominal returns,real returns,and inflation?

A)conversion ratio
B)bid-ask spread
C)fisher effect
D)call premium
E)clean-dirty spread

Question 41

Which of the following ratings indicate that a bond is low quality?
I.Baa
II.BB
III.B
IV.Ba

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

Question 42

Bondi Beachwear Pty Ltd takes out a short-term loan through Witch Bank using a bill of exchange.The face value of the bill is $200 000 and it will mature in 60 days.If the interest rate quoted by the bank is 6.50% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar)?

A)$198 786
B)$197 875
C)$187 793
D)$178 793
E)$197 886

Question 43

An unsecured note is:

A)long-term debt secured by part,or all,of the assets of the borrower
B)debt that is secured by a borrower's accounts receivables
C)unsecured debt that is generally payable within the next ten years
D)a formal type of loan that is secured by real estate
E)the written agreement which details the information relative to a bond issue

Question 44

Aussie Investments Pty Ltd is an investor in the money market and regularly buys and sells bank-accepted bills.Today they are selling a bill that matures in 60 days.Sixty-day bills of a similar risk are priced at an interest rate of 6.00% per annum.What price can Aussie Investments expect to receive if the face value is $250 000?

A)$235 850
B)$238 125
C)$247 558
D)$227 308
E)$247 548

Question 45

Zero-coupon bonds:

A)create a tax deduction for the issuer only at maturity
B)create annual taxable income to individual bondholders
C)are only issued by the Australian Government
D)are issued at a premium
E)are valued using simple interest

Question 46

A $1000 face value bond currently has a yield to maturity of 6.69 per cent.The bond matures in 3 years and pays interest annually.The coupon rate is 7 per cent.What is the current price of this bond?

A)$1005.26
B)$948.01
C)$1008.18
D)$949.60
E)$1010.13

Question 47

An Australian Government 5.5%,$1000 bond matures in 7 years,pays interest semi-annually,and has a yield to maturity of 6.23 per cent.What is the current market price of the bond if a coupon payment has just been made?

A)$959.60
B)$962.40
C)$947.21
D)$959.09
E)$945.08

Question 48

Which party to a bill is the borrower?

A)the acceptor
B)the drawer
C)the bank
D)the endorser
E)the discounter

Question 49

A bond has a $1000 face value,a market price of $1036,and pays interest payments of $70 every year.What is the coupon rate?

A)7.00 per cent
B)14.00 per cent
C)13.51 per cent
D)6.76 per cent
E)7.12 per cent