ch7
Student: _______________________________________________________________________________________
Multiple Choice Questions
1. The stated interest payment, in dollars, made on a bond each period is called the bond's:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
2. The principal amount of a bond that is repaid at the end of the term is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
3. The specified date on which the principal amount of a bond is repaid is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
4. The rate of return required by investors in the market for owning a bond is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
5. The annual coupon divided by the face value of a bond is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
6. The annual coupon payment divided by the market price of a bond is called the:
A.
B.
C.
D.
E.
coupon rate.
current yield.
yield to maturity.
bid-ask spread.
capital gains yield.
7. An indenture is:
A. the annual amount which a bond issuer agrees to pay as interest on the debt.
B. the written record of the original and all subsequent holders of each individual bond comprising a
debt issue.
C. a bond which is past its maturity date but has yet to be repaid.
D. a bond which is secured by the fixed assets which are owned by the bond issuer.
E. the written agreement between the bond issuer and the bondholders which details the terms of the
debt issue.
8. A bond for which the registrar of the issuer records ownership and for which payments are made
directly to the owner of record is said to be in:
A.
B.
C.
D.
E.
new-issue condition.
registered form.
bearer form.
debenture status.
collateral status.
9. A bond which is issued without recording of the owner's name and for which payments are made to
whomever has physical possession of the bond is said to be in:
A.
B.
C.
D.
E.
new-issue condition.
registered form.
bearer form.
debenture status.
collateral status.
10. An unsecured debt of a firm with a maturity of 10 years or more is called a(n):
A.
B.
C.
D.
E.
unfunded liability.
sinking funds.
blanket bond.
note.
debenture.
11. An unsecured debt of a firm with a maturity of less than 10 years is called a(n):
A.
B.
C.
D.
E.
unfunded liability.
sinking fund.
blanket bond.
note.
debenture.
12. An account managed by a bond trustee for early bond redemption payments is called a:
A.
B.
C.
D.
E.
sinking fund.
collateral payment account.
deed in trust account.
call provision account.
conversion fund.
13. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to
maturity is the _____ provision.
A.
B.
C.
D.
E.
sinking fund
call
seniority
collateral
debenture
14. The amount by which the call price exceeds the bond's par value is the:
A.
B.
C.
D.
E.
coupon rate.
redemption value.
call premium.
original-issue discount.
call rate.
15. A deferred call provision refers to the:
A. requirement that a bond issuer pay the current market price should they decide to call a bond.
B. ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt.
C. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to
maturity.
D. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.
E. requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon
should that issuer decide to call a bond.
16. A bond which currently cannot be called but is eligible for a call at a later date is referred to as a:
A.
B.
C.
D.
E.
premium call bond.
call-protected bond.
no-call bond.
call-in-waiting bond.
postponed callable bond.
17. Parts of the indenture limiting certain actions that might be taken during the term of the loan to
protect the interests of the lender are called:
A.
B.
C.
D.
trustee relationships.
sinking funds provisions.
bond ratings.
deferred call provisions.
E. protective covenants.
18. A bond that makes no coupon payments and is initially sold at a deep discount is called a _____
bond.
A.
B.
C.
D.
E.
debenture
callable
floating-rate
junk
zero coupon
19. The price a dealer is willing to pay for a security is called the:
A.
B.
C.
D.
E.
equilibrium price.
asked price.
bid price.
bid-ask spread.
auction price.
20. The price at which a dealer is willing to sell a security is called the:
A.
B.
C.
D.
E.
equilibrium price.
auction price.
bid price.
asked price.
bid-ask spread.
21. The difference between the price which a dealer is willing to pay and the price at which the dealer is
willing to sell is called the:
A.
B.
C.
D.
E.
equilibrium bid.
auction premium.
bid price.
asked price.
bid-ask spread.
22. The quoted price of a bond is referred to as the _____ price.
A.
B.
C.
D.
E.
coupon
spread
clean
dirty
wholesale
23. The price a buyer actually pays to purchase a bond is called the _____ price.
A.
B.
C.
D.
coupon
spread
clean
dirty
E. retail
24. A real rate is a nominal rate which has been adjusted for:
A.
B.
C.
D.
E.
inflation.
interest rate risk.
accrued interest.
changes in the market rate of interest.
both inflation and interest rate risk.
25. Interest rates that have not been adjusted for inflation are called _____ rates.
A.
B.
C.
D.
E.
coupon
stripped
effective
real
nominal
26. The relationship between nominal rates, real rates, and inflation is known as the:
A.
B.
C.
D.
E.
Miller and Modigliani theorem.
Fisher effect.
Gordon growth model.
term structure of interest rates.
interest rate risk premium.
27. The pure time value of money is known as the:
A.
B.
C.
D.
E.
liquidity effect.
Fisher effect.
term structure of interest rates.
inflation factor.
interest rate factor.
28. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for expected future overall price appreciation.
A.
B.
C.
D.
E.
default risk
taxability
liquidity
inflation
interest rate risk
29. The interest rate risk premium is the:
A.
B.
C.
D.
E.
additional compensation paid to investors to offset rising prices.
compensation investors demand for accepting interest rate risk.
difference between the yield to maturity and the current yield.
difference between the market interest rate and the coupon rate.
difference between the coupon rate and the current yield.
30. A Treasury yield curve is defined as the plotting of the yields on Treasury securities relative to:
A.
B.
C.
D.
E.
market interest rates.
comparable corporate bond yields.
the risk-free rate.
inflation.
maturity.
31. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for the possibility of nonpayment by the bond issuer.
A.
B.
C.
D.
E.
default risk
taxability
liquidity
inflation
interest rate risk
32. The taxability premium compensates investors when a bond:
A.
B.
C.
D.
E.
yield decreases in response to market changes.
pays no coupon payments.
defaults.
has an unfavorable tax status.
pays tax-free income.
33. The liquidity premium is compensation to investors for:
A.
B.
C.
D.
E.
purchasing a bond in the secondary market.
the lack of an active market wherein a bond can be sold for its actual value.
acquiring a bond with an unfavorable tax status.
redeeming a bond prior to maturity.
purchasing a bond which has defaulted on its coupon payments.
34. Which of the following are normal features of a corporate bond?
I. quarterly interest payments
II. interest-only loan
III. level coupon
IV. $1,000 par value
A.
B.
C.
D.
E.
I and III only
II and IV only
I, II, and III only
II, III, and IV only
I, II, III, IV
35. A bond with a 9 percent coupon that pays interest semi-annually and is priced at par will have a
market price of _____ and interest payments in the amount of _____ each.
A. $1,009; $90
B. $1,090; $45
C. $1,090; $90
D. $1,000; $90
E. $1,000; $45
36. All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
A.
B.
C.
D.
E.
a premium; less than
a premium; equal to
a discount; less than
a discount; higher than
par; less than
37. Assume that a fixed, semi-annual coupon bond is outstanding. An increase in market interest rates
will:
A.
B.
C.
D.
E.
increase the coupon rate of the bond.
decrease the coupon rate of the bond.
increase the market price of the bond.
decrease the market price of the bond.
not affect the market price of the bond.
38. All else constant, a coupon bond that is selling at a premium, must have:
A.
B.
C.
D.
E.
a coupon rate that is equal to the yield to maturity.
a market price that is less than par value.
semi-annual interest payments.
a yield to maturity that is less than the coupon rate.
a coupon rate that is less than the yield to maturity.
39. The market price of an interest-bearing bond is equal to the present value of the:
A.
B.
C.
D.
E.
face amount.
par value.
coupon payments plus $1,000.
face amount minus the present value of the coupon payments.
face amount plus the present value of the coupon payments.
40. Which one of the following correctly describes the effect of an increase in a bond's yield to
maturity?
A.
B.
C.
D.
E.
time to maturity increases
coupon rate decreases
coupon amount increases
bond's price increases
bond's price decreases
41. Blue Water Designs is preparing a bond offering with a 7 percent coupon rate and a face value of
$1,000. The bonds will be repaid in 5 years. The company plans to issue the bonds at par value and
pay interest semiannually. Given this, which one of the following statements is correct?
A.
B.
C.
D.
E.
The bonds will be sold at a discount.
The bonds will pay five interest payments of $70 each.
The bonds will sell at a premium if the market rate is 7.5 percent.
The bonds will initially sell for $965 each.
The final payment will be in the amount of $1,035.
42. A newly issued bond has a 6 percent coupon with semiannual interest payments. The bonds are
currently priced at par value. The effective annual rate provided by these bonds must be:
A.
B.
C.
D.
E.
equal to 3 percent.
greater than 3 percent but less than 4 percent.
equal to 6 percent.
greater than 6 percent but less than 7 percent.
equal to 12 percent.
43. Interest rate risk increases as the:
I. time to maturity decreases.
II. time to maturity increases.
III. coupon rate decreases.
IV. coupon rate increases.
A.
B.
C.
D.
E.
II only
I and III only
I and IV only
II and III only
II and IV only
44. Which one of the following bonds has the greatest interest rate risk?
A.
B.
C.
D.
E.
3-year; 4 percent coupon
3-year; 6 percent coupon
5-year; 6 percent coupon
7-year; 6 percent coupon
7-year; 4 percent coupon
45. As the time to maturity increases, interest rate risk:
A.
B.
C.
D.
E.
increases at an increasing rate.
increases at a decreasing rate.
increases at a constant rate.
decreases at an increasing rate.
decreases at a decreasing rate.
46. You own a bond that has an 8 percent coupon and matures 8 years from now. You purchased this
bond at par value when it was originally issued. If the current market rate for this type and quality of
bond is 8.25 percent, then you would expect:
A. the yield to maturity on your bond to be 8.12 percent today.
B. the current yield to maturity to be 8 percent.
C. to realize a capital loss if you sold the bond at the market price today.
D. next semi-annual interest payment to be $41.25.
E. the current yield today to be less than 8 percent.
47. You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices.
To realize your maximum gain, all else constant, you should purchase _____ bonds.
A.
B.
C.
D.
E.
short-term; low coupon
short-term; high coupon
long-term; zero coupon
long-term; low coupon
long-term; high coupon
48. All else constant, as the market price of a bond increases the current yield _____ and the yield to
maturity _____.
A.
B.
C.
D.
E.
increases; increases
increases; decreases
remains constant; increases
decreases; increases
decreases; decreases
49. Which of the following statements concerning bonds are correct?
I. Bonds receive more favorable tax treatment than equity securities.
II. Firms increase their risk of financial failure by issuing bonds.
III. The repayment of the bond principle is tax-deductible.
IV. Bondholders have a residual claim on the bond issuer.
A.
B.
C.
D.
E.
II only
I and II only
III and IV only
II and IV only
I, II, and III only
50. Which of the following items are generally included in a bond indenture?
I. call provision
II. amount of the bond issue
III. security description
IV. protective covenants
A.
B.
C.
D.
E.
I and II only
II and IV only
II, III, and IV only
I, II, and IV only
I, II, III, and IV
51. Which one of the following statements is correct concerning bond classifications?
A. A debenture is a long-term bond secured by the issuer's inventory.
B. A mortgage security is a bond issued solely by a home builder.
C. A note is a bond which has an original maturity date of 10 years or more.
D. A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.
E. A callable bond can be repurchased by the issuer prior to the initial maturity date.
52. Callable bonds generally:
A.
B.
C.
D.
E.
grant the bondholder the option to determine if and when the bond should be called.
are callable at par as soon as the call-protection period ends.
have a deferred call feature if they have a make-whole call provision.
are called within the first couple of years after issuance.
have a call price that decreases as the market rate of interest increases when the bond has a makewhole call provision.
53. Which of the following are negative covenants that might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.5 or better.
II. The company must limit the amount of dividends it pays according to the stated formula.
III. The company cannot lease any major assets without approval by the lender.
IV. The company must maintain the loan collateral in good working order.
A.
B.
C.
D.
E.
I and II only
II and III only
III and IV only
II, III, and IV only
I, II, and III only
54. Protective covenants:
A.
B.
C.
D.
E.
are primarily designed to protect the issuing corporation from unreasonable demands of bondholders.
generally apply only to government bonds.
are limited to stating actions which a firm must take.
only apply to bonds that have a deferred call provision.
are primarily designed to protect bondholders from future actions of the bond issuer.
55. Which one of the following statements concerning bond ratings is correct?
A.
B.
C.
D.
E.
Standard and Poor's and Value Line are the primary bond rating agencies.
Bond ratings assess the default risk and volatility of a bond.
A crossover bond is rated differently by various rating agencies.
Bond ratings evaluate the expected price volatility of a bond issue.
A "fallen angel" is a split rated bond.
56. A "fallen angel" is a bond that:
A. lowered its annual interest payment.
B. has moved from being a long-term obligation to being a short-term obligation.
C. has moved from having a yield to maturity in excess of the coupon rate to having a yield to maturity
that is less than the coupon rate.
D. has moved from being an investment-grade bond to being a junk bond.
E. is rated as Baa by one rating agency and rated as BBB by another rating agency.
57. Bonds issued by the U.S. government:
A.
B.
C.
D.
E.
are considered to be free of default risk.
are considered to be free of interest rate risk.
provide totally tax-free income.
pay interest that is exempt from federal income taxes.
are zero-coupon bonds.
58. Treasury bonds are:
A.
B.
C.
D.
E.
issued by any governmental agency in the U.S.
issued only on the first day of each fiscal year by the U.S. Department of Treasury.
offer the best tax benefits of any bonds currently available.
generally issued as semi-annual coupon bonds.
totally risk-free.
59. Municipal bonds:
A.
B.
C.
D.
E.
have no risk of default.
generally pay a higher rate of return than corporate bonds.
are those bonds issued only by local municipalities, such as a city or a borough.
are generally callable.
pay interest that is automatically tax-free at all levels.
60. The break-even tax rate between a taxable corporate bond yielding 6.5 percent and a comparable
nontaxable municipal bond yielding 4 percent can be expressed as:
A. .065 (1 t*) = .04.
B. .04 (1 t*) = .065.
C. .065 + (1 t*) = .04.
D. .065 (1 t*) = .04.
E. .04
(1
t*) = .065.
61. A zero coupon bond:
A.
B.
C.
D.
E.
is sold at a large premium.
provides a deductible interest expense to the issuer on an annual basis.
can only be issued by the U.S. Treasury.
has less interest rate risk than a comparable coupon bond.
provides no taxable income to the bondholder until the bond matures.
62. The total interest paid on a zero-coupon bond is equal to:
A.
B.
C.
D.
E.
zero.
the face value minus the issue price.
the face value minus the market price on the maturity date.
$1,000 minus the face value.
$1,000 minus the par value.
63. The collar of a floating-rate bond refers to the minimum and maximum:
A.
B.
C.
D.
E.
call periods.
maturity dates.
market prices.
coupon rates.
yields to maturity.
64. A floating-rate bond:
A.
B.
C.
D.
E.
rarely has an interest rate cap.
generally has a put provision.
has a rate that adjusts on a daily basis.
usually pays interest based solely on the rate of inflation.
is a unique security issued strictly by the Canadian government.
65. A convertible bond:
A.
B.
C.
D.
E.
must be converted on or before the maturity date.
grants the holder the option to switch a fixed coupon bond into a floating-rate bond.
grants the holder the option to switch a floating-rate bond into a fixed rate bond.
can be exchanged for shares of common stock.
generally has a collar.
66. "Cat" bonds are primarily designed to help:
A.
B.
C.
D.
E.
cities recover from economic recessions.
corporations recover from overseas competition.
the federal government cope with huge deficits.
animal shelters build facilities to house stray animals.
insurance companies recover from natural disasters.
67. Investors generally tend to buy:
A.
B.
C.
D.
E.
Treasury bonds for their high coupons.
municipal bonds for their high coupons.
convertible bonds for their potential price appreciation.
corporate bonds for their tax-free income.
income bonds for their high fixed-rate cash flows.
68. A put bond is a bond that can be:
A.
B.
C.
D.
E.
redeemed at any time by either the issuer or the bondholder.
exchanged for a stated number of shares of common stock of the bond issuer.
redeemed prior to maturity at the option of the issuer.
submitted to the issuer for redemption prior to maturity.
redeemed prior to maturity if the bondholder is subjected to a natural disaster.
69. A put provision in a bond indenture allows:
A. a bond issuer to recall the bond after a specified period of time but only at a price that exceeds the
face amount.
B. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a
specified amount.
C. the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.
D. the issuer to convert a coupon bond into a zero coupon bond at their discretion.
E. the issuer to suspend interest payments for any year in which the interest expense exceeds the net
income of the firm.
70. If you want to sell a bond issued by a smaller corporation, you:
A.
B.
C.
D.
E.
can always do so quite easily by trading it on the New York Stock Exchange.
may encounter difficulties in executing the trade.
can usually do so quite efficiently due to the high liquidity of the bond market.
can do so quite quickly due to the high volume of trading in the bond markets.
will only be able to do so if the bond has a put provision.
71. One basis point is equal to:
A.
B.
C.
D.
E.
.01 percent.
.10 percent.
1.0 percent.
10 percent.
100 percent.
72. The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the:
A.
B.
C.
D.
E.
yield to maturity.
current yield.
difference between the bond's yield and the yield of a particular Treasury issue.
difference between the yield to maturity and the coupon rate.
difference between the yield to call and the yield to maturity.
73. A U.S. Treasury bond that is quoted at 100:05 is selling:
A.
B.
C.
D.
E.
at 5 percent over the face amount.
at a 5 percent discount.
at a 5 percent premium.
at par and pays a 5 percent coupon.
for about $1.56 over face value.
74. U.S. Treasury bonds are:
A.
B.
C.
D.
E.
traded principally on the NSYE.
traded in the largest securities market in the world.
quoted in dollars and cents.
quoted in eights of a percent.
rarely traded once they are issued.
75. A $1,000 Treasury bond has an asked quote of 100:07 and a bid quote of 100:05. One bond:
A. can be sold to a dealer at a price of $1,000.70.
B.
C.
D.
E.
can be purchased from a dealer at a price of $1,001.56.
has a spread of 200 basis points.
is trading at a discount between 5 and 7 percent.
provides the dealer a profit of $0.625.
76. Today, February 21, you want to buy a bond with a quoted price of 100.42. The bond pays interest
on September 1 and March 1. The price you will pay to purchase this bond is equal to the:
A.
B.
C.
D.
E.
clean price.
muddy price.
dirty price.
par value price.
bid price.
77. The increase in buying power you realize as a result of owning a bond is referred to as the _____
rate of return.
A.
B.
C.
D.
E.
inflated
realized
nominal
real
risk-free
78. The Fisher formula is expressed as:
A. 1 + r = (1 + R)
B. 1 + r = (1 + R)
(1 + h).
(1 + h).
C. 1 + h = (1 + r)
D. 1 + R = (1 + r)
(1 + R).
E. 1 + R = (1 + r)
(1 + h).
(1 + h).
79. The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.
A.
B.
C.
D.
E.
default
market
interest rate
inflation
maturity
80. You are trying to determine the present value of two separate streams of cash flows. One stream is
expressed in nominal values and the other stream is expressed in real values. You should discount
the nominal cash flows using a _____ rate and discount the real cash flows using _____ rate.
A.
B.
C.
D.
E.
nominal; the same nominal
real; the same real
nominal; an equivalent inflation
real; the identical inflation
nominal; an equivalent real
81. Which of the following statements are correct concerning the term structure of interest rates?
I. The outlook for future inflation influences the shape of the term structure of interest rates.
II. The term structure of interest rates includes only the real rate of return and the inflation premium.
III. The interest rate risk premium is included in the term structure of interest rates.
IV. The term structure of interest rates can be downsloping.
A.
B.
C.
D.
E.
I and II only
II and IV only
III and IV only
I, III, and IV only
I, II, and IV only
82. Two of the primary differences between the yields on a corporate bond and a Treasury bond with
identical maturity dates are related to:
A.
B.
C.
D.
E.
interest rate risk and time value of money.
time value of money and inflation.
taxes and potential default.
taxes and inflation.
inflation and interest rate risk.
83. The bonds issued by Jordache Jewelers bear a 7.5 percent coupon, payable semiannually. The bonds
mature in 13 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield
to maturity?
A.
B.
C.
D.
E.
7.33 percent
7.41 percent
7.46 percent
7.50 percent
7.67 percent
84. Wesley-Townsend bonds have an 8.25 percent coupon and pay interest annually. The face value is
$1,000 and the current market price is $1,004.60 per bond. The bonds mature in 17.5 years. What is
the yield to maturity?
A.
B.
C.
D.
E.
7.82 percent
7.97 percent
8.20 percent
8.25 percent
8.45 percent
85. Culpepper Supply has a bond issue outstanding that pays a 7.5 percent coupon and matures in 14
years. The bonds have a par value of $1,000 and a market price of $942.90. Interest is paid
semiannually. What is the yield to maturity?
A.
B.
C.
D.
E.
7.50 percent
7.67 percent
8.19 percent
8.60 percent
9.45 percent
86. Westover Ridge offers a 9 percent coupon bond with semiannual payments and a yield to maturity
of 11.68 percent. The bonds mature in 16 years. What is the market price per bond if the face value
is $1,000?
A.
B.
C.
D.
E.
$807.86
$863.08
$916.26
$1,453.10
$1,322.88
87. The Goodie Barn has a 7 percent coupon bond outstanding that matures in 13.5 years. The bond
pays interest semiannually. What is the market price per bond if the face value is $1,000 and the
yield to maturity is 14.78 percent?
A.
B.
C.
D.
E.
$255.27
$550.40
$674.66
$954.92
$967.38
88. Norwegian Adventures offers a 6.5 percent coupon bond with annual payments. The yield to
maturity is 6.71 percent and the maturity date is 7 years from today. What is the market price of this
bond if the face value is $1,000?
A.
B.
C.
D.
E.
$692.07
$811.63
$981.31
$988.57
$1,193.35
89. Beach Combers International has 5.75 percent coupon bonds outstanding with a current market price
of $689.40. The yield to maturity is 11.20 percent and the face value is $1,000. Interest is paid
semiannually. How many years is it until these bonds mature?
A.
B.
C.
D.
E.
8.64 years
9.33 years
18.66 years
23.25 years
37.32 years
90. Baker's Men's Wear has a 5.5 percent, semiannual coupon bond outstanding with a current market
price of $978.90. The bond has a par value of $1,000 and a yield to maturity of 5.76 percent. How
many years is it until this bond matures?
A.
B.
C.
D.
E.
11.10 years
12.27 years
22.19 years
27.21 years
44.38 years
91. You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1 percent and the face
value is $1,000. What is the current market price?
A.
B.
C.
D.
E.
$2.20
$69.27
$73.33
$263.20
$270.79
92. Today, you want to sell a zero coupon bond you currently own. The bond matures in 9 years. How
much will you receive for your bond if the market yield to maturity is currently 8.88 percent? Ignore
any accrued interest.
A.
B.
C.
D.
E.
$465.02
$468.10
$496.93
$676.39
$678.73
93. The zero coupon bonds of Cold Pak Transport have a market price of $460.23, a face value of
$1,000, and a yield to maturity of 8.42 percent. How many years is it until these bonds mature?
A.
B.
C.
D.
E.
9.41 years
9.60 years
9.97 years
18.82 years
19.20 years
94. A 15-year, 6 percent coupon bond pays interest annually. The bond has a face value of $1,000. What
is the change in the price of this bond if the market yield to maturity rises to 6.5 percent from the
current rate of 6.25 percent?
A.
B.
C.
D.
E.
2.37 percent decrease
2.43 percent decrease
2.37 percent increase
2.50 percent decrease
2.43 percent increase
95. Milner's Tools has a 9-year, 7 percent annual coupon bond outstanding with a $1,000 par value.
Carter's Tools has a 10-year, 6 percent annual coupon bond with a $1,000 par value. Both bonds
currently have a yield to maturity of 6.5 percent. Which of the following statements is correct if the
market yield increases to 6.75 percent?
A.
B.
C.
D.
E.
96.
Both bonds would decrease in value by 2.50 percent.
The Milner's bond will increase in value by $16.82.
The Milner's bond will increase in value by 1.63 percent.
The Carter's bond will decrease in value by 1.80 percent.
The Carter's bond will decrease in value by $16.82.
Barkstone Candies bonds have a face value of $1,000 and a current market price of $1,047.20. The
bonds have a 6 percent coupon rate. What is the current yield on these bonds?
A.
B.
C.
D.
E.
2.53 percent
2.86 percent
5.73 percent
6.0 percent
11.46 percent
97. The outstanding bonds of Jacksen Global Freight carry an 8 percent coupon and have a current
market price of $1,054. The bonds have a face value of $1,000. What is the current yield on these
bonds?
A.
B.
C.
D.
E.
2.47 percent
3.80 percent
4.00 percent
7.59 percent
8.00 percent
98. The bonds offered by Glenwood Studios are callable in 4 years at a quoted price of 106. What is the
amount of the call premium on a $1,000 par value bond?
A.
B.
C.
D.
E.
$30
$40
$50
$60
$70
99. A corporate bond is quoted at a current price of 103.68. What is the market price if the face value is
$5,000?
A.
B.
C.
D.
E.
$4,785.00
$4,822.53
$5,103.68
$5,184.00
$5,210.68
100. Atlas Movers is issuing $1,000 face value zero coupon bonds at a quoted price of 38.70. What is
the amount you would pay to purchase one of these bonds?
A.
B.
C.
D.
E.
$38.70
$387.00
$961.30
$1,000.00
$1,038.70
101. A Treasury bond is quoted at a price of 105:21. What is the market price of this bond if the face
value is $1,000?
A. $105.21
B. $106.56
C. $1,052.10
D. $1,056.56
E. $1,065.60
102. A Treasury bond is quoted at a price of 100:07 with a current yield of 6.4858 percent. What is the
coupon rate?
A.
B.
C.
D.
E.
5.50 percent
5.75 percent
6.00 percent
6.25 percent
6.50 percent
103. A corporate bond is quoted at a price of 96.48 and carries a 5.75 percent coupon. The bond pays
interest semiannually. What is the current yield on one of these bonds?
A.
B.
C.
D.
E.
5.87 percent
5.91 percent
5.96 percent
6.03 percent
6.08 percent
104. A Treasury bond is quoted at a price of 104:18 with a 4.75 percent coupon. The bond pays interest
semiannually. What is the current yield on one of these bonds?
A.
B.
C.
D.
E.
4.49 percent
4.54 percent
4.61 percent
4.64 percent
4.72 percent
105. A Treasury bond is quoted as 102:19 asked and 102:17 bid. What is the bid-ask spread in dollars on
a $1,000 face value bond?
A.
B.
C.
D.
E.
$.020
$.200
$.625
$2.00
$6.25
106. The semiannual, 12-year bonds of Tracey United are selling at par and have an effective annual
yield of 4.6529 percent. What is the amount of each interest payment if the face value of the bonds
is $1,000?
A.
B.
C.
D.
E.
$22.50
$22.75
$23.00
$23.27
$23.50
107. A bond that pays interest annually yields a 6.875 percent rate of return. The inflation rate for the
same period is 4.35 percent. What is the real rate of return on this bond?
A.
B.
C.
D.
E.
2.38 percent
2.42 percent
2.53 percent
2.61 percent
2.64 percent
108. Tri-County Hauling has bonds outstanding that pay a 6 percent coupon, have a 5.47 percent yield to
maturity, and a face value of $1,000. The current rate of inflation is 3.2 percent. What is the real
rate of return on these bonds?
A.
B.
C.
D.
E.
0.53 percent
2.20 percent
2.27 percent
2.71 percent
2.80 percent
109. The outstanding bonds of Frank's Welding provide a real rate of return of 2.87 percent. The current
rate of inflation is 4.64 percent. What is the nominal rate of return on these bonds?
A.
B.
C.
D.
E.
7.33 percent
7.46 percent
7.51 percent
7.64 percent
7.71 percent
110. The yield to maturity on a bond is currently 6.48 percent. The real rate of return is 2.87 percent.
What is the rate of inflation?
A.
B.
C.
D.
E.
3.47 percent
3.51 percent
3.57 percent
3.61 percent
3.67 percent
111. A zero coupon bond with a face value of $1,000 is issued with an initial price of $387.50. The bond
matures in 30 years. What is the implicit interest, in dollars, for the first year of the bond's life?
A.
B.
C.
D.
E.
$10.38
$12.44
$14.42
$18.79
$22.50
112. Steubenville Liquidators wants to raise $6.2 million to expand their business. To accomplish this,
they plan to sell 20-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield
9.5 percent. What is the minimum number of bonds they must sell to raise the $6.2 million they
need?
A.
B.
C.
D.
E.
38,078
42,500
54,500
57,500
61,333
113. You plan on depositing $10,000 a year in real terms into your investment account for the next four
years. The relevant nominal discount rate is 7.5 percent and the inflation rate is 4.2 percent. What
are these deposits worth in today's dollars?
A.
B.
C.
D.
E.
$36,418.02
$36,787.78
$37,023.49
$38,021.21
$38,504.19
114. You purchased an investment which will pay you $15,000, in real dollars, a year for the next three
years. The nominal discount rate is 8 percent and the inflation rate is 3.6 percent. What is the
present value of these payments?
A.
B.
C.
D.
E.
$41,431.91
$42,607.19
$43,333.33
$43,711.14
$44,008.16
Essay Questions
115. Explain liquidity risk, default risk, and taxability risk as they relate to bonds.
116. Interest rates have been rising over the past year but you believe rates are going to decrease over
the next eighteen months. Assume that you have reached this conclusion prior to other investors
reaching the same conclusion. How might you adjust your bond portfolio such that you can profit
assuming that interest rates do fall?
117. Explain the conditions that would need to exist for the Treasury yield curve to be downward
sloping.
118. Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest rate risk
and how it is related to the movements of a teeter-totter.
119. Describe the relationships that exist between the coupon rate, the yield to maturity, and the current
yield for both a discount bond and a premium bond.
ch7 KEY
Multiple Choice Questions
1. The stated interest payment, in dollars, made on a bond each period is called the bond's:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
Ross - Chapter 007 #1
SECTION: 7.1
TOPIC: COUPON
TYPE: DEFINITIONS
2. The principal amount of a bond that is repaid at the end of the term is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
Ross - Chapter 007 #2
SECTION: 7.1
TOPIC: FACE VALUE
TYPE: DEFINITIONS
3. The specified date on which the principal amount of a bond is repaid is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
Ross - Chapter 007 #3
SECTION: 7.1
TOPIC: MATURITY
TYPE: DEFINITIONS
4. The rate of return required by investors in the market for owning a bond is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
Ross - Chapter 007 #4
SECTION: 7.1
TOPIC: YIELD TO MATURITY
TYPE: DEFINITIONS
5. The annual coupon divided by the face value of a bond is called the:
A.
B.
C.
D.
E.
coupon.
face value.
maturity.
yield to maturity.
coupon rate.
Ross - Chapter 007 #5
SECTION: 7.1
TOPIC: COUPON RATE
TYPE: DEFINITIONS
6. The annual coupon payment divided by the market price of a bond is called the:
A.
B.
C.
D.
E.
coupon rate.
current yield.
yield to maturity.
bid-ask spread.
capital gains yield.
Ross - Chapter 007 #6
SECTION: 7.1
TOPIC: CURRENT YIELD
TYPE: DEFINITIONS
7. An indenture is:
A. the annual amount which a bond issuer agrees to pay as interest on the debt.
B. the written record of the original and all subsequent holders of each individual bond comprising a
debt issue.
C. a bond which is past its maturity date but has yet to be repaid.
D. a bond which is secured by the fixed assets which are owned by the bond issuer.
E. the written agreement between the bond issuer and the bondholders which details the terms of the
debt issue.
Ross - Chapter 007 #7
SECTION: 7.2
TOPIC: INDENTURE
TYPE: DEFINITIONS
8. A bond for which the registrar of the issuer records ownership and for which payments are made
directly to the owner of record is said to be in:
A.
B.
C.
D.
E.
new-issue condition.
registered form.
bearer form.
debenture status.
collateral status.
Ross - Chapter 007 #8
SECTION: 7.2
TOPIC: REGISTERED FORM
TYPE: DEFINITIONS
9. A bond which is issued without recording of the owner's name and for which payments are made to
whomever has physical possession of the bond is said to be in:
A. new-issue condition.
B.
C.
D.
E.
registered form.
bearer form.
debenture status.
collateral status.
Ross - Chapter 007 #9
SECTION: 7.2
TOPIC: BEARER FORM
TYPE: DEFINITIONS
10. An unsecured debt of a firm with a maturity of 10 years or more is called a(n):
A.
B.
C.
D.
E.
unfunded liability.
sinking funds.
blanket bond.
note.
debenture.
Ross - Chapter 007 #10
SECTION: 7.2
TOPIC: DEBENTURE
TYPE: DEFINITIONS
11. An unsecured debt of a firm with a maturity of less than 10 years is called a(n):
A.
B.
C.
D.
E.
unfunded liability.
sinking fund.
blanket bond.
note.
debenture.
Ross - Chapter 007 #11
SECTION: 7.2
TOPIC: NOTE
TYPE: DEFINITIONS
12. An account managed by a bond trustee for early bond redemption payments is called a:
A.
B.
C.
D.
E.
sinking fund.
collateral payment account.
deed in trust account.
call provision account.
conversion fund.
Ross - Chapter 007 #12
SECTION: 7.2
TOPIC: SINKING FUND
TYPE: DEFINITIONS
13. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to
maturity is the _____ provision.
A.
B.
C.
D.
E.
sinking fund
call
seniority
collateral
debenture
Ross - Chapter 007 #13
SECTION: 7.2
TOPIC: CALL PROVISION
TYPE: DEFINITIONS
14. The amount by which the call price exceeds the bond's par value is the:
A.
B.
C.
D.
E.
coupon rate.
redemption value.
call premium.
original-issue discount.
call rate.
Ross - Chapter 007 #14
SECTION: 7.2
TOPIC: CALL PREMIUM
TYPE: DEFINITIONS
15. A deferred call provision refers to the:
A. requirement that a bond issuer pay the current market price should they decide to call a bond.
B. ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt.
C. prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to
maturity.
D. prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date.
E. requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon
should that issuer decide to call a bond.
Ross - Chapter 007 #15
SECTION: 7.2
TOPIC: DEFERRED CALL PROVISION
TYPE: DEFINITIONS
16. A bond which currently cannot be called but is eligible for a call at a later date is referred to as a:
A.
B.
C.
D.
E.
premium call bond.
call-protected bond.
no-call bond.
call-in-waiting bond.
postponed callable bond.
Ross - Chapter 007 #16
SECTION: 7.2
TOPIC: CALL-PROTECTED BOND
TYPE: DEFINITIONS
17. Parts of the indenture limiting certain actions that might be taken during the term of the loan to
protect the interests of the lender are called:
A.
B.
C.
D.
E.
trustee relationships.
sinking funds provisions.
bond ratings.
deferred call provisions.
protective covenants.
Ross - Chapter 007 #17
SECTION: 7.2
TOPIC: PROTECTIVE COVENANT
TYPE: DEFINITIONS
18. A bond that makes no coupon payments and is initially sold at a deep discount is called a _____
bond.
A.
B.
C.
D.
E.
debenture
callable
floating-rate
junk
zero coupon
Ross - Chapter 007 #18
SECTION: 7.4
TOPIC: ZERO COUPON BOND
TYPE: DEFINITIONS
19. The price a dealer is willing to pay for a security is called the:
A.
B.
C.
D.
E.
equilibrium price.
asked price.
bid price.
bid-ask spread.
auction price.
Ross - Chapter 007 #19
SECTION: 7.5
TOPIC: BID PRICE
TYPE: DEFINITIONS
20. The price at which a dealer is willing to sell a security is called the:
A.
B.
C.
D.
E.
equilibrium price.
auction price.
bid price.
asked price.
bid-ask spread.
Ross - Chapter 007 #20
SECTION: 7.5
TOPIC: ASKED PRICE
TYPE: DEFINITIONS
21. The difference between the price which a dealer is willing to pay and the price at which the dealer is
willing to sell is called the:
A.
B.
C.
D.
E.
equilibrium bid.
auction premium.
bid price.
asked price.
bid-ask spread.
Ross - Chapter 007 #21
SECTION: 7.5
TOPIC: BID-ASK SPREAD
TYPE: DEFINITIONS
22. The quoted price of a bond is referred to as the _____ price.
A.
B.
C.
D.
E.
coupon
spread
clean
dirty
wholesale
Ross - Chapter 007 #22
SECTION: 7.5
TOPIC: CLEAN PRICE
TYPE: DEFINITIONS
23. The price a buyer actually pays to purchase a bond is called the _____ price.
A.
B.
C.
D.
E.
coupon
spread
clean
dirty
retail
Ross - Chapter 007 #23
SECTION: 7.5
TOPIC: DIRTY PRICE
TYPE: DEFINITIONS
24. A real rate is a nominal rate which has been adjusted for:
A.
B.
C.
D.
E.
inflation.
interest rate risk.
accrued interest.
changes in the market rate of interest.
both inflation and interest rate risk.
Ross - Chapter 007 #24
SECTION: 7.6
TOPIC: REAL RATES
TYPE: DEFINITIONS
25. Interest rates that have not been adjusted for inflation are called _____ rates.
A.
B.
C.
D.
E.
coupon
stripped
effective
real
nominal
Ross - Chapter 007 #25
SECTION: 7.6
TOPIC: NOMINAL RATES
TYPE: DEFINITIONS
26. The relationship between nominal rates, real rates, and inflation is known as the:
A.
B.
C.
D.
E.
Miller and Modigliani theorem.
Fisher effect.
Gordon growth model.
term structure of interest rates.
interest rate risk premium.
Ross - Chapter 007 #26
SECTION: 7.6
TOPIC: FISHER EFFECT
TYPE: DEFINITIONS
27. The pure time value of money is known as the:
A.
B.
C.
D.
E.
liquidity effect.
Fisher effect.
term structure of interest rates.
inflation factor.
interest rate factor.
Ross - Chapter 007 #27
SECTION: 7.7
TOPIC: TERM STRUCTURE OF INTEREST RATES
TYPE: DEFINITIONS
28. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for expected future overall price appreciation.
A.
B.
C.
D.
E.
default risk
taxability
liquidity
inflation
interest rate risk
Ross - Chapter 007 #28
SECTION: 7.7
TOPIC: INFLATION PREMIUM
TYPE: DEFINITIONS
29. The interest rate risk premium is the:
A.
B.
C.
D.
E.
additional compensation paid to investors to offset rising prices.
compensation investors demand for accepting interest rate risk.
difference between the yield to maturity and the current yield.
difference between the market interest rate and the coupon rate.
difference between the coupon rate and the current yield.
Ross - Chapter 007 #29
SECTION: 7.7
TOPIC: INTEREST RATE RISK PREMIUM
TYPE: DEFINITIONS
30. A Treasury yield curve is defined as the plotting of the yields on Treasury securities relative to:
A.
B.
C.
D.
E.
market interest rates.
comparable corporate bond yields.
the risk-free rate.
inflation.
maturity.
Ross - Chapter 007 #30
SECTION: 7.7
TOPIC: TREASURY YIELD CURVE
TYPE: DEFINITIONS
31. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for the possibility of nonpayment by the bond issuer.
A.
B.
C.
D.
E.
default risk
taxability
liquidity
inflation
interest rate risk
Ross - Chapter 007 #31
SECTION: 7.7
TOPIC: DEFAULT RISK PREMIUM
TYPE: DEFINITIONS
32. The taxability premium compensates investors when a bond:
A.
B.
C.
D.
E.
yield decreases in response to market changes.
pays no coupon payments.
defaults.
has an unfavorable tax status.
pays tax-free income.
Ross - Chapter 007 #32
SECTION: 7.7
TOPIC: TAXABILITY PREMIUM
TYPE: DEFINITIONS
33. The liquidity premium is compensation to investors for:
A.
B.
C.
D.
E.
purchasing a bond in the secondary market.
the lack of an active market wherein a bond can be sold for its actual value.
acquiring a bond with an unfavorable tax status.
redeeming a bond prior to maturity.
purchasing a bond which has defaulted on its coupon payments.
Ross - Chapter 007 #33
SECTION: 7.7
TOPIC: LIQUIDITY PREMIUM
TYPE: DEFINITIONS
34. Which of the following are normal features of a corporate bond?
I. quarterly interest payments
II. interest-only loan
III. level coupon
IV. $1,000 par value
A.
B.
C.
D.
E.
I and III only
II and IV only
I, II, and III only
II, III, and IV only
I, II, III, IV
Ross - Chapter 007 #34
SECTION: 7.1
TOPIC: BOND FEATURES
TYPE: CONCEPTS
35.
A bond with a 9 percent coupon that pays interest semi-annually and is priced at par will have a
market price of _____ and interest payments in the amount of _____ each.
A.
B.
C.
D.
E.
$1,009; $90
$1,090; $45
$1,090; $90
$1,000; $90
$1,000; $45
Ross - Chapter 007 #35
SECTION: 7.1
TOPIC: INTEREST RATES AND BOND PRICES
TYPE: CONCEPTS
36. All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
A.
B.
C.
D.
E.
a premium; less than
a premium; equal to
a discount; less than
a discount; higher than
par; less than
Ross - Chapter 007 #36
SECTION: 7.1
TOPIC: BOND PRICES AND YIELDS
TYPE: CONCEPTS
37. Assume that a fixed, semi-annual coupon bond is outstanding. An increase in market interest rates
will:
A.
B.
C.
D.
E.
increase the coupon rate of the bond.
decrease the coupon rate of the bond.
increase the market price of the bond.
decrease the market price of the bond.
not affect the market price of the bond.
Ross - Chapter 007 #37
SECTION: 7.1
TOPIC: INTEREST RATES AND BOND PRICES
TYPE: CONCEPTS
38. All else constant, a coupon bond that is selling at a premium, must have:
A.
B.
C.
D.
E.
a coupon rate that is equal to the yield to maturity.
a market price that is less than par value.
semi-annual interest payments.
a yield to maturity that is less than the coupon rate.
a coupon rate that is less than the yield to maturity.
Ross - Chapter 007 #38
SECTION: 7.1
TOPIC: BOND PRICES AND YIELDS
TYPE: CONCEPTS
39. The market price of an interest-bearing bond is equal to the present value of the:
A. face amount.
B. par value.
C. coupon payments plus $1,000.
D. face amount minus the present value of the coupon payments.
E. face amount plus the present value of the coupon payments.
Ross - Chapter 007 #39
SECTION: 7.1
TOPIC: BOND PRICES
TYPE: CONCEPTS
40. Which one of the following correctly describes the effect of an increase in a bond's yield to
maturity?
A.
B.
C.
D.
E.
time to maturity increases
coupon rate decreases
coupon amount increases
bond's price increases
bond's price decreases
Ross - Chapter 007 #40
SECTION: 7.1
TOPIC: BOND PRICES
TYPE: CONCEPTS
41. Blue Water Designs is preparing a bond offering with a 7 percent coupon rate and a face value of
$1,000. The bonds will be repaid in 5 years. The company plans to issue the bonds at par value and
pay interest semiannually. Given this, which one of the following statements is correct?
A.
B.
C.
D.
E.
The bonds will be sold at a discount.
The bonds will pay five interest payments of $70 each.
The bonds will sell at a premium if the market rate is 7.5 percent.
The bonds will initially sell for $965 each.
The final payment will be in the amount of $1,035.
Ross - Chapter 007 #41
SECTION: 7.1
TOPIC: SEMIANNNUAL BONDS
TYPE: CONCEPTS
42. A newly issued bond has a 6 percent coupon with semiannual interest payments. The bonds are
currently priced at par value. The effective annual rate provided by these bonds must be:
A.
B.
C.
D.
E.
equal to 3 percent.
greater than 3 percent but less than 4 percent.
equal to 6 percent.
greater than 6 percent but less than 7 percent.
equal to 12 percent.
Ross - Chapter 007 #42
SECTION: 7.1
TOPIC: SEMIANNUAL BONDS AND EFFECTIVE ANNUAL RATE
TYPE: CONCEPTS
43. Interest rate risk increases as the:
I. time to maturity decreases.
II. time to maturity increases.
III. coupon rate decreases.
IV. coupon rate increases.
A.
B.
C.
D.
E.
II only
I and III only
I and IV only
II and III only
II and IV only
Ross - Chapter 007 #43
SECTION: 7.1
TOPIC: INTEREST RATE RISK
TYPE: CONCEPTS
44. Which one of the following bonds has the greatest interest rate risk?
A.
B.
C.
D.
E.
3-year; 4 percent coupon
3-year; 6 percent coupon
5-year; 6 percent coupon
7-year; 6 percent coupon
7-year; 4 percent coupon
Ross - Chapter 007 #44
SECTION: 7.1
TOPIC: INTEREST RATE RISK
TYPE: CONCEPTS
45. As the time to maturity increases, interest rate risk:
A.
B.
C.
D.
E.
increases at an increasing rate.
increases at a decreasing rate.
increases at a constant rate.
decreases at an increasing rate.
decreases at a decreasing rate.
Ross - Chapter 007 #45
SECTION: 7.1
TOPIC: INTEREST RATE RISK
TYPE: CONCEPTS
46. You own a bond that has an 8 percent coupon and matures 8 years from now. You purchased this
bond at par value when it was originally issued. If the current market rate for this type and quality of
bond is 8.25 percent, then you would expect:
A.
B.
C.
D.
E.
the yield to maturity on your bond to be 8.12 percent today.
the current yield to maturity to be 8 percent.
to realize a capital loss if you sold the bond at the market price today.
next semi-annual interest payment to be $41.25.
the current yield today to be less than 8 percent.
Ross - Chapter 007 #46
SECTION: 7.1
TOPIC: INTEREST RATE RISK
TYPE: CONCEPTS
47. You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices.
To realize your maximum gain, all else constant, you should purchase _____ bonds.
A. short-term; low coupon
B. short-term; high coupon
C. long-term; zero coupon
D. long-term; low coupon
E. long-term; high coupon
Ross - Chapter 007 #47
SECTION: 7.1
TOPIC: INTEREST RATE RISK
TYPE: CONCEPTS
48. All else constant, as the market price of a bond increases the current yield _____ and the yield to
maturity _____.
A.
B.
C.
D.
E.
increases; increases
increases; decreases
remains constant; increases
decreases; increases
decreases; decreases
Ross - Chapter 007 #48
SECTION: 7.1
TOPIC: YIELD TO MATURITY AND CURRENT YIELD
TYPE: CONCEPTS
49. Which of the following statements concerning bonds are correct?
I. Bonds receive more favorable tax treatment than equity securities.
II. Firms increase their risk of financial failure by issuing bonds.
III. The repayment of the bond principle is tax-deductible.
IV. Bondholders have a residual claim on the bond issuer.
A.
B.
C.
D.
E.
II only
I and II only
III and IV only
II and IV only
I, II, and III only
Ross - Chapter 007 #49
SECTION: 7.2
TOPIC: BOND FEATURES
TYPE: CONCEPTS
50. Which of the following items are generally included in a bond indenture?
I. call provision
II. amount of the bond issue
III. security description
IV. protective covenants
A.
B.
C.
D.
E.
I and II only
II and IV only
II, III, and IV only
I, II, and IV only
I, II, III, and IV
Ross - Chapter 007 #50
SECTION: 7.2
TOPIC: BOND INDENTURE
TYPE: CONCEPTS
51. Which one of the following statements is correct concerning bond classifications?
A.
B.
C.
D.
E.
A debenture is a long-term bond secured by the issuer's inventory.
A mortgage security is a bond issued solely by a home builder.
A note is a bond which has an original maturity date of 10 years or more.
A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.
A callable bond can be repurchased by the issuer prior to the initial maturity date.
Ross - Chapter 007 #51
SECTION: 7.2
TOPIC: BOND CLASSIFICATIONS
TYPE: CONCEPTS
52. Callable bonds generally:
A.
B.
C.
D.
E.
grant the bondholder the option to determine if and when the bond should be called.
are callable at par as soon as the call-protection period ends.
have a deferred call feature if they have a make-whole call provision.
are called within the first couple of years after issuance.
have a call price that decreases as the market rate of interest increases when the bond has a makewhole call provision.
Ross - Chapter 007 #52
SECTION: 7.2
TOPIC: CALLABLE BONDS
TYPE: CONCEPTS
53. Which of the following are negative covenants that might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.5 or better.
II. The company must limit the amount of dividends it pays according to the stated formula.
III. The company cannot lease any major assets without approval by the lender.
IV. The company must maintain the loan collateral in good working order.
A.
B.
C.
D.
E.
I and II only
II and III only
III and IV only
II, III, and IV only
I, II, and III only
Ross - Chapter 007 #53
SECTION: 7.2
TOPIC: PROTECTIVE COVENANTS
TYPE: CONCEPTS
54. Protective covenants:
A.
B.
C.
D.
E.
are primarily designed to protect the issuing corporation from unreasonable demands of bondholders.
generally apply only to government bonds.
are limited to stating actions which a firm must take.
only apply to bonds that have a deferred call provision.
are primarily designed to protect bondholders from future actions of the bond issuer.
Ross - Chapter 007 #54
SECTION: 7.2
TOPIC: PROTECTIVE COVENANTS
TYPE: CONCEPTS
55. Which one of the following statements concerning bond ratings is correct?
A.
B.
C.
D.
E.
Standard and Poor's and Value Line are the primary bond rating agencies.
Bond ratings assess the default risk and volatility of a bond.
A crossover bond is rated differently by various rating agencies.
Bond ratings evaluate the expected price volatility of a bond issue.
A "fallen angel" is a split rated bond.
Ross - Chapter 007 #55
SECTION: 7.3
TOPIC: BOND RATINGS
TYPE: CONCEPTS
56. A "fallen angel" is a bond that:
A. lowered its annual interest payment.
B. has moved from being a long-term obligation to being a short-term obligation.
C. has moved from having a yield to maturity in excess of the coupon rate to having a yield to maturity
that is less than the coupon rate.
D. has moved from being an investment-grade bond to being a junk bond.
E. is rated as Baa by one rating agency and rated as BBB by another rating agency.
Ross - Chapter 007 #56
SECTION: 7.3
TOPIC: BOND RATINGS
TYPE: CONCEPTS
57. Bonds issued by the U.S. government:
A.
B.
C.
D.
E.
are considered to be free of default risk.
are considered to be free of interest rate risk.
provide totally tax-free income.
pay interest that is exempt from federal income taxes.
are zero-coupon bonds.
Ross - Chapter 007 #57
SECTION: 7.4
TOPIC: TREASURY BONDS
TYPE: CONCEPTS
58. Treasury bonds are:
A.
B.
C.
D.
E.
issued by any governmental agency in the U.S.
issued only on the first day of each fiscal year by the U.S. Department of Treasury.
offer the best tax benefits of any bonds currently available.
generally issued as semi-annual coupon bonds.
totally risk-free.
Ross - Chapter 007 #58
SECTION: 7.4
TOPIC: TREASURY BONDS
TYPE: CONCEPTS
59. Municipal bonds:
A. have no risk of default.
B. generally pay a higher rate of return than corporate bonds.
C. are those bonds issued only by local municipalities, such as a city or a borough.
D. are generally callable.
E. pay interest that is automatically tax-free at all levels.
Ross - Chapter 007 #59
SECTION: 7.4
TOPIC: MUNICIPAL BONDS
TYPE: CONCEPTS
60. The break-even tax rate between a taxable corporate bond yielding 6.5 percent and a comparable
nontaxable municipal bond yielding 4 percent can be expressed as:
A. .065 (1 t*) = .04.
B. .04 (1 t*) = .065.
C. .065 + (1 t*) = .04.
D. .065 (1 t*) = .04.
E. .04
(1
t*) = .065.
Ross - Chapter 007 #60
SECTION: 7.4
TOPIC: TAXABLE VERSUS MUNICIPAL BONDS
TYPE: CONCEPTS
61. A zero coupon bond:
A.
B.
C.
D.
E.
is sold at a large premium.
provides a deductible interest expense to the issuer on an annual basis.
can only be issued by the U.S. Treasury.
has less interest rate risk than a comparable coupon bond.
provides no taxable income to the bondholder until the bond matures.
Ross - Chapter 007 #61
SECTION: 7.4
TOPIC: ZERO COUPON BOND
TYPE: CONCEPTS
62. The total interest paid on a zero-coupon bond is equal to:
A.
B.
C.
D.
E.
zero.
the face value minus the issue price.
the face value minus the market price on the maturity date.
$1,000 minus the face value.
$1,000 minus the par value.
Ross - Chapter 007 #62
SECTION: 7.4
TOPIC: ZERO COUPON BOND
TYPE: CONCEPTS
63. The collar of a floating-rate bond refers to the minimum and maximum:
A.
B.
C.
D.
call periods.
maturity dates.
market prices.
coupon rates.
E. yields to maturity.
Ross - Chapter 007 #63
SECTION: 7.4
TOPIC: FLOATING-RATE BOND
TYPE: CONCEPTS
64. A floating-rate bond:
A.
B.
C.
D.
E.
rarely has an interest rate cap.
generally has a put provision.
has a rate that adjusts on a daily basis.
usually pays interest based solely on the rate of inflation.
is a unique security issued strictly by the Canadian government.
Ross - Chapter 007 #64
SECTION: 7.4
TOPIC: FLOATING-RATE BOND
TYPE: CONCEPTS
65. A convertible bond:
A.
B.
C.
D.
E.
must be converted on or before the maturity date.
grants the holder the option to switch a fixed coupon bond into a floating-rate bond.
grants the holder the option to switch a floating-rate bond into a fixed rate bond.
can be exchanged for shares of common stock.
generally has a collar.
Ross - Chapter 007 #65
SECTION: 7.4
TOPIC: CONVERTIBLE BOND
TYPE: CONCEPTS
66. "Cat" bonds are primarily designed to help:
A.
B.
C.
D.
E.
cities recover from economic recessions.
corporations recover from overseas competition.
the federal government cope with huge deficits.
animal shelters build facilities to house stray animals.
insurance companies recover from natural disasters.
Ross - Chapter 007 #66
SECTION: 7.4
TOPIC: CATASTROPHE BONDS
TYPE: CONCEPTS
67. Investors generally tend to buy:
A.
B.
C.
D.
E.
Treasury bonds for their high coupons.
municipal bonds for their high coupons.
convertible bonds for their potential price appreciation.
corporate bonds for their tax-free income.
income bonds for their high fixed-rate cash flows.
Ross - Chapter 007 #67
SECTION: 7.4
TOPIC: TYPES OF BONDS AND INVESTOR PREFERENCES
TYPE: CONCEPTS
68. A put bond is a bond that can be:
A.
B.
C.
D.
E.
redeemed at any time by either the issuer or the bondholder.
exchanged for a stated number of shares of common stock of the bond issuer.
redeemed prior to maturity at the option of the issuer.
submitted to the issuer for redemption prior to maturity.
redeemed prior to maturity if the bondholder is subjected to a natural disaster.
Ross - Chapter 007 #68
SECTION: 7.4
TOPIC: TYPES OF BONDS
TYPE: CONCEPTS
69. A put provision in a bond indenture allows:
A. a bond issuer to recall the bond after a specified period of time but only at a price that exceeds the
face amount.
B. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a
specified amount.
C. the bondholder to force the issuer to buy back the bond at a specified price prior to maturity.
D. the issuer to convert a coupon bond into a zero coupon bond at their discretion.
E. the issuer to suspend interest payments for any year in which the interest expense exceeds the net
income of the firm.
Ross - Chapter 007 #69
SECTION: 7.4
TOPIC: PUT PROVISION
TYPE: CONCEPTS
70. If you want to sell a bond issued by a smaller corporation, you:
A.
B.
C.
D.
E.
can always do so quite easily by trading it on the New York Stock Exchange.
may encounter difficulties in executing the trade.
can usually do so quite efficiently due to the high liquidity of the bond market.
can do so quite quickly due to the high volume of trading in the bond markets.
will only be able to do so if the bond has a put provision.
Ross - Chapter 007 #70
SECTION: 7.5
TOPIC: BOND TRADING
TYPE: CONCEPTS
71. One basis point is equal to:
A.
B.
C.
D.
E.
.01 percent.
.10 percent.
1.0 percent.
10 percent.
100 percent.
Ross - Chapter 007 #71
SECTION: 7.5
TOPIC: BASIS POINT
TYPE: CONCEPTS
72. The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds represents the:
A.
B.
C.
D.
E.
yield to maturity.
current yield.
difference between the bond's yield and the yield of a particular Treasury issue.
difference between the yield to maturity and the coupon rate.
difference between the yield to call and the yield to maturity.
Ross - Chapter 007 #72
SECTION: 7.5
TOPIC: CORPORATE BOND QUOTE
TYPE: CONCEPTS
73. A U.S. Treasury bond that is quoted at 100:05 is selling:
A.
B.
C.
D.
E.
at 5 percent over the face amount.
at a 5 percent discount.
at a 5 percent premium.
at par and pays a 5 percent coupon.
for about $1.56 over face value.
Ross - Chapter 007 #73
SECTION: 7.5
TOPIC: TREASURY BOND QUOTE
TYPE: CONCEPTS
74. U.S. Treasury bonds are:
A.
B.
C.
D.
E.
traded principally on the NSYE.
traded in the largest securities market in the world.
quoted in dollars and cents.
quoted in eights of a percent.
rarely traded once they are issued.
Ross - Chapter 007 #74
SECTION: 7.5
TOPIC: TREASURY BONDS
TYPE: CONCEPTS
75. A $1,000 Treasury bond has an asked quote of 100:07 and a bid quote of 100:05. One bond:
A.
B.
C.
D.
E.
can be sold to a dealer at a price of $1,000.70.
can be purchased from a dealer at a price of $1,001.56.
has a spread of 200 basis points.
is trading at a discount between 5 and 7 percent.
provides the dealer a profit of $0.625.
Ross - Chapter 007 #75
SECTION: 7.5
TOPIC: BID VERSUS ASKED PRICES
TYPE: CONCEPTS
76. Today, February 21, you want to buy a bond with a quoted price of 100.42. The bond pays interest
on September 1 and March 1. The price you will pay to purchase this bond is equal to the:
A.
B.
C.
D.
clean price.
muddy price.
dirty price.
par value price.
E. bid price.
Ross - Chapter 007 #76
SECTION: 7.5
TOPIC: CLEAN VERSUS DIRTY PRICES
TYPE: CONCEPTS
77. The increase in buying power you realize as a result of owning a bond is referred to as the _____
rate of return.
A.
B.
C.
D.
E.
inflated
realized
nominal
real
risk-free
Ross - Chapter 007 #77
SECTION: 7.6
TOPIC: REAL RATE OF RETURN
TYPE: CONCEPTS
78. The Fisher formula is expressed as:
A. 1 + r = (1 + R)
B. 1 + r = (1 + R)
(1 + h).
(1 + h).
C. 1 + h = (1 + r)
D. 1 + R = (1 + r)
(1 + R).
E. 1 + R = (1 + r)
(1 + h).
(1 + h).
Ross - Chapter 007 #78
SECTION: 7.6
TOPIC: FISHER EFFECT
TYPE: CONCEPTS
79. The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.
A.
B.
C.
D.
E.
default
market
interest rate
inflation
maturity
Ross - Chapter 007 #79
SECTION: 7.6
TOPIC: FISHER EFFECT
TYPE: CONCEPTS
80. You are trying to determine the present value of two separate streams of cash flows. One stream is
expressed in nominal values and the other stream is expressed in real values. You should discount
the nominal cash flows using a _____ rate and discount the real cash flows using _____ rate.
A.
B.
C.
D.
nominal; the same nominal
real; the same real
nominal; an equivalent inflation
real; the identical inflation
E. nominal; an equivalent real
Ross - Chapter 007 #80
SECTION: 7.6
TOPIC: INFLATION AND PRESENT VALUES
TYPE: CONCEPTS
81. Which of the following statements are correct concerning the term structure of interest rates?
I. The outlook for future inflation influences the shape of the term structure of interest rates.
II. The term structure of interest rates includes only the real rate of return and the inflation premium.
III. The interest rate risk premium is included in the term structure of interest rates.
IV. The term structure of interest rates can be downsloping.
A.
B.
C.
D.
E.
I and II only
II and IV only
III and IV only
I, III, and IV only
I, II, and IV only
Ross - Chapter 007 #81
SECTION: 7.7
TOPIC: TERM STRUCTURE OF INTEREST RATES
TYPE: CONCEPTS
82. Two of the primary differences between the yields on a corporate bond and a Treasury bond with
identical maturity dates are related to:
A.
B.
C.
D.
E.
interest rate risk and time value of money.
time value of money and inflation.
taxes and potential default.
taxes and inflation.
inflation and interest rate risk.
Ross - Chapter 007 #82
SECTION: 7.4 AND 7.7
TOPIC: CORPORATE VERSUS TREASURY BONDS
TYPE: CONCEPTS
83. The bonds issued by Jordache Jewelers bear a 7.5 percent coupon, payable semiannually. The bonds
mature in 13 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield
to maturity?
A.
B.
C.
D.
E.
7.33 percent
7.41 percent
7.46 percent
7.50 percent
7.67 percent
;
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can
then use the calculator answer as the rate in the formula just to verify that your answer is correct.
Answer is 7.50 percent.
Also, when a bond sells at par, the market rate must equal the coupon rate.
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #83
SECTION: 7.1
TOPIC: YIELD TO MATURITY
TYPE: PROBLEMS
84. Wesley-Townsend bonds have an 8.25 percent coupon and pay interest annually. The face value is
$1,000 and the current market price is $1,004.60 per bond. The bonds mature in 17.5 years. What is
the yield to maturity?
A.
B.
C.
D.
E.
7.82 percent
7.97 percent
8.20 percent
8.25 percent
8.45 percent
;
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can
then use the calculator answer as the rate in the formula just to verify that your answer is correct.
Answer is 8.20 percent.
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #84
SECTION: 7.1
TOPIC: YIELD TO MATURITY
TYPE: PROBLEMS
85. Culpepper Supply has a bond issue outstanding that pays a 7.5 percent coupon and matures in 14
years. The bonds have a par value of $1,000 and a market price of $942.90. Interest is paid
semiannually. What is the yield to maturity?
A.
B.
C.
D.
E.
7.50 percent
7.67 percent
8.19 percent
8.60 percent
9.45 percent
;
This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can
then use the calculator answer as the rate in the formula just to verify that your answer is correct.
Answer is 8.19 percent.
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #85
SECTION: 7.1
TOPIC: YIELD TO MATURITY
TYPE: PROBLEMS
86. Westover Ridge offers a 9 percent coupon bond with semiannual payments and a yield to maturity
of 11.68 percent. The bonds mature in 16 years. What is the market price per bond if the face value
is $1,000?
A.
B.
C.
D.
E.
$807.86
$863.08
$916.26
$1,453.10
$1,322.88
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #86
SECTION: 7.1
TOPIC: PRICE OF COUPON BOND
TYPE: PROBLEMS
87. The Goodie Barn has a 7 percent coupon bond outstanding that matures in 13.5 years. The bond
pays interest semiannually. What is the market price per bond if the face value is $1,000 and the
yield to maturity is 14.78 percent?
A.
B.
C.
D.
E.
$255.27
$550.40
$674.66
$954.92
$967.38
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #87
SECTION: 7.1
TOPIC: PRICE OF COUPON BOND
TYPE: PROBLEMS
88. Norwegian Adventures offers a 6.5 percent coupon bond with annual payments. The yield to
maturity is 6.71 percent and the maturity date is 7 years from today. What is the market price of this
bond if the face value is $1,000?
A.
B.
C.
D.
E.
$692.07
$811.63
$981.31
$988.57
$1,193.35
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #88
SECTION: 7.1
TOPIC: PRICE OF COUPON BOND
TYPE: PROBLEMS
89. Beach Combers International has 5.75 percent coupon bonds outstanding with a current market price
of $689.40. The yield to maturity is 11.20 percent and the face value is $1,000. Interest is paid
semiannually. How many years is it until these bonds mature?
A.
B.
C.
D.
E.
8.64 years
9.33 years
18.66 years
23.25 years
37.32 years
It's easiest to solve this problem is using a financial calculator. You can then use the calculator answer as
the time period in the formula just to verify that your answer is correct.
The number of six-month periods is 18.663. The number of years is 9.33 years.
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #89
SECTION: 7.1
TOPIC: TIME TO MATURITY OF COUPON BOND
TYPE: PROBLEMS
90. Baker's Men's Wear has a 5.5 percent, semiannual coupon bond outstanding with a current market
price of $978.90. The bond has a par value of $1,000 and a yield to maturity of 5.76 percent. How
many years is it until this bond matures?
A.
B.
C.
D.
E.
11.10 years
12.27 years
22.19 years
27.21 years
44.38 years
;
It's easiest to solve this problem is using financial calculator. You can then use the calculator answer as
the time period in the formula just to verify that your answer is correct.
The number of six-month periods is 22.191. The number of years is 11.0955 = 11.10 years.
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #90
SECTION: 7.1
TOPIC: TIME TO MATURITY OF COUPON BOND
TYPE: PROBLEMS
91. You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1 percent and the face
value is $1,000. What is the current market price?
A.
B.
C.
D.
E.
$2.20
$69.27
$73.33
$263.20
$270.79
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #91
SECTION: 7.1 AND 7.4
TOPIC: PRICE OF ZERO COUPON
TYPE: PROBLEMS
92. Today, you want to sell a zero coupon bond you currently own. The bond matures in 9 years. How
much will you receive for your bond if the market yield to maturity is currently 8.88 percent? Ignore
any accrued interest.
A.
B.
C.
D.
E.
$465.02
$468.10
$496.93
$676.39
$678.73
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #92
SECTION: 7.1 AND 7.4
TOPIC: PRICE OF ZERO COUPON BOND
TYPE: PROBLEMS
93. The zero coupon bonds of Cold Pak Transport have a market price of $460.23, a face value of
$1,000, and a yield to maturity of 8.42 percent. How many years is it until these bonds mature?
A.
B.
C.
D.
E.
9.41 years
9.60 years
9.97 years
18.82 years
19.20 years
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #93
SECTION: 7.1 AND 7.4
TOPIC: TIME TO MATURITY OF ZERO COUPON BOND
TYPE: PROBLEMS
94. A 15-year, 6 percent coupon bond pays interest annually. The bond has a face value of $1,000. What
is the change in the price of this bond if the market yield to maturity rises to 6.5 percent from the
current rate of 6.25 percent?
A.
B.
C.
D.
E.
2.37 percent decrease
2.43 percent decrease
2.37 percent increase
2.50 percent decrease
2.43 percent increase
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #94
SECTION: 7.1
TOPIC: INTEREST RATE RISK
TYPE: PROBLEMS
95. Milner's Tools has a 9-year, 7 percent annual coupon bond outstanding with a $1,000 par value.
Carter's Tools has a 10-year, 6 percent annual coupon bond with a $1,000 par value. Both bonds
currently have a yield to maturity of 6.5 percent. Which of the following statements is correct if the
market yield increases to 6.75 percent?
A.
B.
C.
D.
E.
Both bonds would decrease in value by 2.50 percent.
The Milner's bond will increase in value by $16.82.
The Milner's bond will increase in value by 1.63 percent.
The Carter's bond will decrease in value by 1.80 percent.
The Carter's bond will decrease in value by $16.82.
The correct answer states that the Carter's bond will decrease in value by 1.80 percent.
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #95
SECTION: 7.1
TOPIC: INTEREST RATE RISK
TYPE: PROBLEMS
96. Barkstone Candies bonds have a face value of $1,000 and a current market price of $1,047.20. The
bonds have a 6 percent coupon rate. What is the current yield on these bonds?
A.
B.
C.
D.
E.
2.53 percent
2.86 percent
5.73 percent
6.0 percent
11.46 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #96
SECTION: 7.1
TOPIC: CURRENT YIELD
TYPE: PROBLEMS
97. The outstanding bonds of Jacksen Global Freight carry an 8 percent coupon and have a current
market price of $1,054. The bonds have a face value of $1,000. What is the current yield on these
bonds?
A.
B.
C.
D.
E.
2.47 percent
3.80 percent
4.00 percent
7.59 percent
8.00 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #97
SECTION: 7.1
TOPIC: CURRENT YIELD
TYPE: PROBLEMS
98. The bonds offered by Glenwood Studios are callable in 4 years at a quoted price of 106. What is the
amount of the call premium on a $1,000 par value bond?
A.
B.
C.
D.
E.
$30
$40
$50
$60
$70
Call premium = (1.06
$1,000)
$1,000 = $60
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #98
SECTION: 7.2
TOPIC: CALL PREMIUM
TYPE: PROBLEMS
99. A corporate bond is quoted at a current price of 103.68. What is the market price if the face value is
$5,000?
A.
B.
C.
D.
E.
$4,785.00
$4,822.53
$5,103.68
$5,184.00
$5,210.68
Market price = 1.0368
$5,000 = $5,184.00
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #99
SECTION: 7.5
TOPIC: CORPORATE BOND QUOTE
TYPE: PROBLEMS
100. Atlas Movers is issuing $1,000 face value zero coupon bonds at a quoted price of 38.70. What is
the amount you would pay to purchase one of these bonds?
A.
B.
C.
D.
E.
$38.70
$387.00
$961.30
$1,000.00
$1,038.70
Market price = .3870
$1,000 = $387.00
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #100
SECTION: 7.5
TOPIC: ZERO COUPON BOND QUOTE
TYPE: PROBLEMS
101. A Treasury bond is quoted at a price of 105:21. What is the market price of this bond if the face
value is $1,000?
A.
B.
C.
D.
E.
$105.21
$106.56
$1,052.10
$1,056.56
$1,065.60
105:21 = 105 and 21/32% = 1.0565625; Market price = 1.0565625
$1,000 = $1,056.56
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #101
SECTION: 7.5
TOPIC: TREASURY BOND QUOTE
TYPE: PROBLEMS
102. A Treasury bond is quoted at a price of 100:07 with a current yield of 6.4858 percent. What is the
coupon rate?
A.
B.
C.
D.
5.50 percent
5.75 percent
6.00 percent
6.25 percent
E. 6.50 percent
.064858 =Annual dividend / (100 and 7 /32 percent of $1,000) = Annual dividend / ($1,002.1875);
Annual dividend = $64.9999; Coupon rate = $64.9999 / $1,000 = 6.50 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #102
SECTION: 7.1 AND 7.5
TOPIC: TREASURY BOND QUOTE AND COUPON RATE
TYPE: PROBLEMS
103. A corporate bond is quoted at a price of 96.48 and carries a 5.75 percent coupon. The bond pays
interest semiannually. What is the current yield on one of these bonds?
A.
B.
C.
D.
E.
5.87 percent
5.91 percent
5.96 percent
6.03 percent
6.08 percent
Current yield = (.0575
$1,000) / (.9648
$1,000) = 5.96 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #103
SECTION: 7.1 AND 7.5
TOPIC: CORPORATE QUOTE AND CURRENT YIELD
TYPE: PROBLEMS
104. A Treasury bond is quoted at a price of 104:18 with a 4.75 percent coupon. The bond pays interest
semiannually. What is the current yield on one of these bonds?
A.
B.
C.
D.
E.
4.49 percent
4.54 percent
4.61 percent
4.64 percent
4.72 percent
Current yield = (.0475
percent
$1,000) / (104 and 18/32 percent of $1,000) = $47.50 / $1,045.625 = 4.54
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #104
SECTION: 7.1 AND 7.5
TOPIC: TREASURY QUOTE AND CURRENT YIELD
TYPE: PROBLEMS
105. A Treasury bond is quoted as 102:19 asked and 102:17 bid. What is the bid-ask spread in dollars on
a $1,000 face value bond?
A.
B.
C.
D.
E.
$.020
$.200
$.625
$2.00
$6.25
Bid-ask spread = 102:19
102:17 = 2/32 of 1% of $1,000 = .000625
$1,000 = $.625
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #105
SECTION: 7.5
TOPIC: BID-ASK SPREAD
TYPE: PROBLEMS
106. The semiannual, 12-year bonds of Tracey United are selling at par and have an effective annual
yield of 4.6529 percent. What is the amount of each interest payment if the face value of the bonds
is $1,000?
A.
B.
C.
D.
E.
$22.50
$22.75
$23.00
$23.27
$23.50
r = .046; Because the bond is selling at par, the APR and the coupon rate are equal. Thus, the
semiannual interest payment =
; Semiannual interest payment = $23.00.
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #106
SECTION: 7.1
TOPIC: EFFECTIVE ANNUAL RATES AND INTEREST PAYMENTS
TYPE: PROBLEMS
107. A bond that pays interest annually yields a 6.875 percent rate of return. The inflation rate for the
same period is 4.35 percent. What is the real rate of return on this bond?
A.
B.
C.
D.
E.
2.38 percent
2.42 percent
2.53 percent
2.61 percent
2.64 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #107
SECTION: 7.6
TOPIC: FISHER EFFECT
TYPE: PROBLEMS
108. Tri-County Hauling has bonds outstanding that pay a 6 percent coupon, have a 5.47 percent yield to
maturity, and a face value of $1,000. The current rate of inflation is 3.2 percent. What is the real
rate of return on these bonds?
A.
B.
C.
D.
0.53 percent
2.20 percent
2.27 percent
2.71 percent
E. 2.80 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #108
SECTION: 7.6
TOPIC: FISHER EFFECT
TYPE: PROBLEMS
109. The outstanding bonds of Frank's Welding provide a real rate of return of 2.87 percent. The current
rate of inflation is 4.64 percent. What is the nominal rate of return on these bonds?
A.
B.
C.
D.
E.
7.33 percent
7.46 percent
7.51 percent
7.64 percent
7.71 percent
(1 + .0287)
(1 + .0464) -1 = .07643 = 7.64 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #109
SECTION: 7.6
TOPIC: FISHER EFFECT
TYPE: PROBLEMS
110. The yield to maturity on a bond is currently 6.48 percent. The real rate of return is 2.87 percent.
What is the rate of inflation?
A.
B.
C.
D.
E.
3.47 percent
3.51 percent
3.57 percent
3.61 percent
3.67 percent
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #110
SECTION: 7.6
TOPIC: FISHER EFFECT
TYPE: PROBLEMS
111. A zero coupon bond with a face value of $1,000 is issued with an initial price of $387.50. The bond
matures in 30 years. What is the implicit interest, in dollars, for the first year of the bond's life?
A.
B.
C.
D.
E.
$10.38
$12.44
$14.42
$18.79
$22.50
; r = 3.2106 percent;
Implicit interest = $399.94
$387.50 = $12.44
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #111
SECTION: 7.4
TOPIC: ZERO COUPON BOND AND IMPLICIT INTEREST
TYPE: PROBLEMS
112. Steubenville Liquidators wants to raise $6.2 million to expand their business. To accomplish this,
they plan to sell 20-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield
9.5 percent. What is the minimum number of bonds they must sell to raise the $6.2 million they
need?
A.
B.
C.
D.
E.
38,078
42,500
54,500
57,500
61,333
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #112
SECTION: 7.4
TOPIC: ZERO COUPON BOND PRICING
TYPE: PROBLEMS
113. You plan on depositing $10,000 a year in real terms into your investment account for the next four
years. The relevant nominal discount rate is 7.5 percent and the inflation rate is 4.2 percent. What
are these deposits worth in today's dollars?
A.
B.
C.
D.
E.
$36,418.02
$36,787.78
$37,023.49
$38,021.21
$38,504.19
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #113
SECTION: 7.6
TOPIC: INFLATION AND PRESENT VALUES
TYPE: PROBLEMS
114. You purchased an investment which will pay you $15,000, in real dollars, a year for the next three
years. The nominal discount rate is 8 percent and the inflation rate is 3.6 percent. What is the
present value of these payments?
A.
B.
C.
D.
E.
$41,431.91
$42,607.19
$43,333.33
$43,711.14
$44,008.16
AACSB TOPIC: ANALYTIC
Ross - Chapter 007 #114
SECTION: 7.6
TOPIC: INFLATION AND PRESENT VALUES
TYPE: PROBLEMS
Essay Questions
115. Explain liquidity risk, default risk, and taxability risk as they relate to bonds.
Liquidity risk is the inability to sell a bond for its actual value. This risk exists primarily in thinly traded
issues. Default risk is the likelihood the issuer will default on its bond obligations. Taxability risk
reflects the fact that some bonds are taxed disadvantageously compared to others. When these risks
apply to a particular bond, investors will require higher rates of return as compensation for assuming the
additional risk.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 007 #115
SECTION: 7.7
TOPIC: BOND YIELD PREMIUMS
116. Interest rates have been rising over the past year but you believe rates are going to decrease over
the next eighteen months. Assume that you have reached this conclusion prior to other investors
reaching the same conclusion. How might you adjust your bond portfolio such that you can profit
assuming that interest rates do fall?
You should purchase long-term, zero coupon bonds and sell your short-term, high coupon bonds. This
will allow you to realize the greatest price appreciation when rates decline.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 007 #116
SECTION: 7.1
TOPIC: INTEREST RATE RISK
117. Explain the conditions that would need to exist for the Treasury yield curve to be downward
sloping.
A downward sloping Treasury yield curve exists when current inflation rates are high but are expected
to decline in the future. The decline in the inflation premium must be significant enough to overcome the
rising interest rate risk premium as the time to maturity increases.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 007 #117
SECTION: 7.7
TOPIC: YIELD CURVE
118. Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest rate risk
and how it is related to the movements of a teeter-totter.
Interest rates sit on one end of the teeter-totter while bond prices sit on the other end. As interest rates
move up, bond prices move down as seen by the movements of a teeter-totter. Movement in the opposite
direction also applies.
In addition, short-term bonds are located a short distance from the fulcrum while long-term bonds are
situated towards the end of the teeter-totter illustrating that long-term bonds move further in reaction to a
change in interest rates than do short-term bonds.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 007 #118
SECTION: 7.1
TOPIC: INTEREST RATE RISK
119. Describe the relationships that exist between the coupon rate, the yield to maturity, and the current
yield for both a discount bond and a premium bond.
A discount bond has a yield to maturity that exceeds the coupon rate. A premium bond has a yield to
maturity that is less than the coupon rate. The current yield lies between the yield to maturity and the
coupon rate.
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 007 #119
SECTION: 7.1
TOPIC: DISCOUNT VERSUS PREMIUM BOND
ch7 Summary
Category
AACSB TOPIC: ANALYTIC
AACSB TOPIC: REFLECTIVE THINKING
Ross - Chapter 007
SECTION: 7.1
SECTION: 7.1 AND 7.4
SECTION: 7.1 AND 7.5
SECTION: 7.2
SECTION: 7.3
SECTION: 7.4
SECTION: 7.4 AND 7.7
SECTION: 7.5
SECTION: 7.6
SECTION: 7.7
TOPIC: ASKED PRICE
TOPIC: BASIS POINT
TOPIC: BEARER FORM
TOPIC: BID PRICE
TOPIC: BID VERSUS ASKED PRICES
TOPIC: BID-ASK SPREAD
TOPIC: BOND CLASSIFICATIONS
TOPIC: BOND FEATURES
TOPIC: BOND INDENTURE
TOPIC: BOND PRICES
TOPIC: BOND PRICES AND YIELDS
TOPIC: BOND RATINGS
TOPIC: BOND TRADING
TOPIC: BOND YIELD PREMIUMS
TOPIC: CALL PREMIUM
TOPIC: CALL PROVISION
TOPIC: CALL-PROTECTED BOND
TOPIC: CALLABLE BONDS
TOPIC: CATASTROPHE BONDS
TOPIC: CLEAN PRICE
TOPIC: CLEAN VERSUS DIRTY PRICES
TOPIC: CONVERTIBLE BOND
TOPIC: CORPORATE BOND QUOTE
TOPIC: CORPORATE QUOTE AND CURRENT YIELD
TOPIC: CORPORATE VERSUS TREASURY BONDS
TOPIC: COUPON
# of Questions
32
5
119
37
3
3
18
2
16
1
16
13
10
1
1
1
1
1
2
1
2
1
2
2
2
1
1
2
1
1
1
1
1
1
1
2
1
1
1
TOPIC: COUPON RATE
TOPIC: CURRENT YIELD
TOPIC: DEBENTURE
TOPIC: DEFAULT RISK PREMIUM
TOPIC: DEFERRED CALL PROVISION
TOPIC: DIRTY PRICE
TOPIC: DISCOUNT VERSUS PREMIUM BOND
TOPIC: EFFECTIVE ANNUAL RATES AND INTEREST PAYMENTS
TOPIC: FACE VALUE
TOPIC: FISHER EFFECT
TOPIC: FLOATING-RATE BOND
TOPIC: INDENTURE
TOPIC: INFLATION AND PRESENT VALUES
TOPIC: INFLATION PREMIUM
TOPIC: INTEREST RATE RISK
TOPIC: INTEREST RATE RISK PREMIUM
TOPIC: INTEREST RATES AND BOND PRICES
TOPIC: LIQUIDITY PREMIUM
TOPIC: MATURITY
TOPIC: MUNICIPAL BONDS
TOPIC: NOMINAL RATES
TOPIC: NOTE
TOPIC: PRICE OF COUPON BOND
TOPIC: PRICE OF ZERO COUPON
TOPIC: PRICE OF ZERO COUPON BOND
TOPIC: PROTECTIVE COVENANT
TOPIC: PROTECTIVE COVENANTS
TOPIC: PUT PROVISION
TOPIC: REAL RATE OF RETURN
TOPIC: REAL RATES
TOPIC: REGISTERED FORM
TOPIC: SEMIANNNUAL BONDS
TOPIC: SEMIANNUAL BONDS AND EFFECTIVE ANNUAL RATE
TOPIC: SINKING FUND
TOPIC: TAXABILITY PREMIUM
TOPIC: TAXABLE VERSUS MUNICIPAL BONDS
TOPIC: TERM STRUCTURE OF INTEREST RATES
TOPIC: TIME TO MATURITY OF COUPON BOND
TOPIC: TIME TO MATURITY OF ZERO COUPON BOND
TOPIC: TREASURY BOND QUOTE
TOPIC: TREASURY BOND QUOTE AND COUPON RATE
1
3
1
1
1
1
1
1
1
7
2
1
3
1
9
1
2
1
1
1
1
1
3
1
1
1
2
1
1
1
1
1
1
1
1
1
2
2
1
2
1
TOPIC: TREASURY BONDS
TOPIC: TREASURY QUOTE AND CURRENT YIELD
TOPIC: TREASURY YIELD CURVE
TOPIC: TYPES OF BONDS
TOPIC: TYPES OF BONDS AND INVESTOR PREFERENCES
TOPIC: YIELD CURVE
TOPIC: YIELD TO MATURITY
TOPIC: YIELD TO MATURITY AND CURRENT YIELD
TOPIC: ZERO COUPON BOND
TOPIC: ZERO COUPON BOND AND IMPLICIT INTEREST
TOPIC: ZERO COUPON BOND PRICING
TOPIC: ZERO COUPON BOND QUOTE
TYPE: CONCEPTS
TYPE: DEFINITIONS
TYPE: PROBLEMS
3
1
1
1
1
1
4
1
3
1
1
1
49
33
32