Deck 10: Bond Prices and Yields

Question 1

A ________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

A) callable
B) coupon
C) puttable
D) Treasury

Answer 1

C

Question 2

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is ________.

A) $30
B) $33
C) $32.78
D) $30.90

Answer 2

C
Explanation: ($30)(1.02)(1.03)(1.04) = $32.78

Question 3

In regard to bonds, convexity relates to the ________.

A) shape of the bond price curve with respect to interest rates
B) shape of the yield curve with respect to maturity
C) slope of the yield curve with respect to liquidity premiums
D) size of the bid-ask spread

Answer 3

A

Question 4

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________.

A) declining liquidity premiums
B) an expectation of an upcoming recession
C) a decline in future inflation expectations
D) an increase in expected interest rate volatility

Question 5

Bonds issued in the currency of the issuer's country but sold in other national markets are called ________.

A) Eurobonds
B) Yankee bonds
C) Samurai bonds
D) foreign bonds

Question 6

________ are examples of synthetically created zero-coupon bonds.

A) COLTS
B) OPOSSMS
C) STRIPS
D) ARMs

Question 7

The primary difference between Treasury notes and bonds is ________.

A) maturity at issue
B) default risk
C) coupon rate
D) tax status

Question 8

A collateral trust bond is ________.

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured

Question 9

Floating-rate bonds have a ________ that is adjusted with current market interest rates.

A) maturity date
B) coupon payment date
C) coupon rate
D) dividend yield

Question 10

TIPS offer investors inflation protection by ________ by the inflation rate each year.

A) increasing only the coupon rate
B) increasing only the par value
C) increasing both the par value and the coupon payment
D) increasing the promised yield to maturity

Question 11

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct?

A) Both bonds are examples of Eurobonds.
B) The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.
C) The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.
D) Neither bond is a Eurobond.

Question 12

Sinking funds are commonly viewed as protecting the ________ of the bond.

A) issuer
B) underwriter
C) holder
D) dealer

Question 13

To earn a high rating from the bond rating agencies, a company would want to have:
I) A low times-interest-earned ratio
II) A low debt-to-equity ratio
III) A high quick ratio

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

Question 14

TIPS are an example of ________.

A) Eurobonds
B) convertible bonds
C) indexed bonds
D) catastrophe bonds

Question 15

If you are holding a premium bond, you must expect a ________ each year until maturity. If you are holding a discount bond, you must expect a ________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

A) capital gain; capital loss
B) capital gain; capital gain
C) capital loss; capital gain
D) capital loss; capital loss

Question 16

You would typically find all but which one of the following in a bond contract?

A) a dividend restriction clause
B) a sinking fund clause
C) a requirement to subordinate any new debt issued
D) a price-earnings ratio

Question 17

Inflation-indexed Treasury securities are commonly called ________.

A) PIKs
B) CARs
C) TIPS
D) STRIPS

Question 18

A mortgage bond is ________.

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured

Question 19

A debenture is ________.

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured

Question 20

The invoice price of a bond is the ________.

A) stated or flat price in a quote sheet plus accrued interest
B) stated or flat price in a quote sheet minus accrued interest
C) bid price
D) average of the bid and ask price

Question 21

A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is ________.

A) $1,000
B) $884
C) $933
D) $980

Question 22

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

A) callable feature
B) convertible feature
C) subordination clause
D) sinking fund

Question 23

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is ________.

A) $50
B) $190
C) $200
D) $240

Question 24

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

A) an asset-backed
B) a TIPS
C) a catastrophe
D) a pay-in-kind

Question 25

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to ________ in the future.

A) increase
B) decrease
C) not change
D) change in an unpredictable manner

Question 26

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are ________.

A) high grade
B) intermediate grade
C) investment grade
D) junk bonds

Question 27

________ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

A) Asset-backed bonds
B) TIPS
C) Catastrophe
D) Pay-in-kind

Question 28

Everything else equal, the ________ the maturity of a bond and the ________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

A) longer; higher
B) longer; lower
C) shorter; higher
D) shorter; lower

Question 29

Which one of the following statements is correct?

A) invoice price = flat price - accrued interest
B) invoice price = flat price + accrued interest
C) flat price = invoice price + accrued interest
D) invoice price = settlement price - accrued interest

Question 30

Bonds with coupon rates that fall when the general level of interest rates rise are called ________.

A) asset-backed bonds
B) convertible bonds
C) inverse floaters
D) index bonds

Question 31

A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

A) callable
B) coupon
C) puttable
D) Treasury

Question 32

Bonds rated ________ or better by Standard & Poor's are considered investment grade.

A) AA
B) BBB
C) BB
D) CCC

Question 33

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require ________.

A) a higher yield on short-term bonds than on long-term bonds
B) a higher yield on long-term bonds than on short-term bonds
C) the same yield on both short-term bonds and long-term bonds
D) none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

Question 34

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________.

A) both bonds will increase in value but bond A will increase more than bond B
B) both bonds will increase in value but bond B will increase more than bond A
C) both bonds will decrease in value but bond A will decrease more than bond B
D) both bonds will decrease in value but bond B will decrease more than bond A

Question 35

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

A) mortgage bonds
B) senior debentures
C) preferred stock
D) equipment obligation bonds

Question 36

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is ________.

A) 7.24%
B) 8.82%
C) 9.12%
D) 9.62%

Question 37

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

A) zero-coupon bonds
B) coupon bonds selling at a discount
C) coupon bonds selling at a premium
D) floating-rate bonds

Question 38

Serial bonds are associated with ________.

A) staggered maturity dates
B) collateral
C) coupon payment dates
D) conversion features

Question 39

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is ________.

A) 6%
B) 7.23%
C) 8.12%
D) 9.45%

Question 40

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is ________.

A) 6%
B) 6.49%
C) 6.73%
D) 7%

Question 41

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is ________.

A) 6%
B) 6.58%
C) 7.2%
D) 8%

Question 42

The ________ of a bond is computed as the ratio of the annual coupon payment to the market price.

A) nominal yield
B) current yield
C) yield to maturity
D) yield to call

Question 43

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of ________ today.

A) $458.11
B) $641.11
C) $789.11
D) $1,100.11

Question 44

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately ________.

A) 5%
B) 5.5%
C) 7.6%
D) 8.9%

Question 45

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?

A) )72%
B) 1.85%
C) 2.58%
D) 3.42%

Question 46

A 1% decline in yield will have the least effect on the price of a bond with a ________.

A) 10-year maturity, selling at 80
B) 10-year maturity, selling at 100
C) 20-year maturity, selling at 80
D) 20-year maturity, selling at 100

Question 47

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be ________.

A) $1,000
B) $1,062.81
C) $1,081.82
D) $1,100.03

Question 48

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 1-year interest rate 1 year from now should be about ________.

A) 6%
B) 7.5 %
C) 9.02%
D) 10.08%

Question 49

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be ________.

A) $1,140
B) $1,170
C) $1,180
D) $1,200

Question 50

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be ________.

A) $856.04
B) $891.86
C) $926.47
D) $1,000

Question 51

Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 2 years from now should be ________.

A) 7%
B) 8%
C) 9%
D) 10%

Question 52

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ________.

A) multiyear analysis
B) horizon analysis
C) maturity analysis
D) reinvestment analysis

Question 53

Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 3 years from now should be ________.

A) 7%
B) 8%
C) 9%
D) 10%

Question 54

You can be sure that a bond will sell at a premium to par when ________.

A) its coupon rate is greater than its yield to maturity
B) its coupon rate is less than its yield to maturity
C) its coupon rate is equal to its yield to maturity
D) its coupon rate is less than its conversion value

Question 55

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

One year from now bond C should sell for ________ (to the nearest dollar).

A) $857
B) $894
C) $835
D) $821

Question 56

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 2-year interest rate 3 years from now should be ________.

A) 9.55%
B) 11.74%
C) 14.89%
D) 13.73%

Question 57

A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, ________ and ________.

A) )4%; .3%
B) )4%; .5%
C) )5%; .5%
D) )5%; .8%

Question 58

Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 4 years from now should be ________.

A) 16%
B) 18%
C) 20%
D) 22%

Question 59

Yields on municipal bonds are typically ________ yields on corporate bonds of similar risk and time to maturity.

A) lower than
B) slightly higher than
C) identical to
D) twice as high as

Question 60

Which of the following bonds would most likely sell at the lowest yield?

A) a callable debenture
B) a puttable mortgage bond
C) a callable mortgage bond
D) a puttable debenture

Question 61

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the real rate of return on the TIPS bond in the first year?

A) 5%
B) 8.15%
C) 7.15%
D) 4%

Question 62

A discount bond that pays interest semiannually will:
I) Have a lower price than an equivalent annual payment bond
II) Have a higher EAR than an equivalent annual payment bond
III) Sell for less than its conversion value

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

Question 63

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is ________.

A) $581.97
B) $1,170.33
C) $2,327.87
D) $3,000

Question 64

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)

A) $13.21
B) $12.57
C) $15.44
D) $16.32

Question 65

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

A) $999.55
B) $1,002.01
C) $1,007.45
D) $1,012.13

Question 66

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is ________.

A) 4.8%
B) 6.1%
C) 7.7%
D) 10.4%

Question 67

If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________.

A) 102.237
B) 102.102
C) 102.375
D) 102.750

Question 68

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ________.

A) the price of the Wildwood bond would decline by more than the price of the Asbury bond
B) the price of the Wildwood bond would decline by less than the price of the Asbury bond
C) the price of the Wildwood bond would increase by more than the price of the Asbury bond
D) the price of the Wildwood bond would increase by less than the price of the Asbury bond

Question 69

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in ________.

A) marketability
B) risk
C) taxation
D) call protection

Question 70

If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is ________.

A) $9,828.12
B) $9,925
C) $9,934.37
D) $9,955.43

Question 71

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

If the volatility of interest rates is expected to increase, then Joe Hill should ________.

A) prefer the Wildwood bond to the Asbury bond
B) prefer the Asbury bond to the Wildwood bond
C) be indifferent between the Wildwood bond and the Asbury bond
D) The answer cannot be determined from the information given.

Question 72

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?

A) 6.72%
B) 9.17%
C) 4.49%
D) 8.98%

Question 73

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at ________.

A) $97.22
B) $104.49
C) $364.08
D) $732.14

Question 74

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?

A) 2.07%
B) 8.03%
C) 9.01%
D) 11.12%

Question 75

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be ________.

A) higher
B) lower
C) the same
D) indeterminate

Question 76

The yield to maturity on a bond is:
I) Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium
II) The discount rate that will set the present value of the payments equal to the bond price
III) Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

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

Question 77

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the nominal rate of return on the TIPS bond in the first year?

A) 5%
B) 5.15%
C) 8.15%
D) 9%

Question 78

If the quote for a Treasury bond is listed in the newspaper as 98.2812 bid, 98.4062 ask, the actual price at which you can purchase this bond given a $10,000 par value is ________.

A) $9,828.12
B) $9,809.38
C) $9,840.62
D) $9,813.42

Question 79

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

If interest rates are expected to rise, then Joe Hill should ________.

A) prefer the Wildwood bond to the Asbury bond
B) prefer the Asbury bond to the Wildwood bond
C) be indifferent between the Wildwood bond and the Asbury bond
D) The answer cannot be determined from the information given.

Question 80

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate ________.

A) expected increases in inflation over time
B) expected decreases in inflation over time
C) the presence of a liquidity premium
D) that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market