BUS 350 Principles of finacechapter 7 smartbook questions
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Which of these statements is correct?
a) The U. S. bond market consists of only government-issued bonds.
b) The bond market is an insignificant source of funds for business firms.
c) The average daily trading volume of the U. S. bond market reached over $760 billion in 2017.
d) The value of the bond market is about half of the value of the stock market.
c) The average daily trading volume of the U. S. bond market reached over $760 billion in 2017.
Select all that apply
Which of the following are commonly included in an indenture agreement?
- Par value
- Coupon rate
- Bond price
- Call premium
- Par value
- Coupon rate
- Call premium
Select all that apply
Which of these are common features of a corporate bond?
- Semi-annual interest payments
- Publicly traded debt security
- Currently issued as bearer bonds
- Face value of $1,000
- Semi-annual interest payments
- Publicly traded debt security
- Face value of $1,000
Which of these is not the traditional bond issuers?
a) Municipal bonds
b) U.S Treasury bonds
c) Corporate bonds
d) Agency bonds
d) Agency Bonds
Why are U. S. Treasury bonds considered to be safe?
They are secured by the full-faith-and-credit of the U. S. government.
Which statement related to bonds is true?
a) All bonds are considered to be low-risk.
b) Bonds have varying levels of risk.
c) Bonds are rarely traded.
d) Bonds that offer high potential returns are low-risk.
b) Bonds have varying levels of risk.
What is an indenture agreement?
A legal contract between the issuer and the bondholders
Which one of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value.
Why might a corporation issue bonds?
Bonds may offer a lower after-tax cost than equity securities.
What is the shortest maturity for a newly issued U. S. Treasury bond?
10 years
Which one of these descriptions defines a Treasury inflation-protection security (TIPS)?
U. S. government bond with an inflation-adjusted par value and varying interest payments
Which one of these applies to agency bonds?
Relatively safe securities
Which of the following may be financed with corporate bonds?
- Inventory
- Research and development
- Plant and equipment
A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment?
$75.64
A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI?
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205.17
Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon and a face value at issuance of $1,000. The reference CPI is 202.34 and the current CPI is 203.18. What do you know for certain about
this bond?
The coupon rate is still 2 percent but the interest payments have increased.
Which one of these characteristics designates a premium bond?
Market price exceeds par value
Which of these represents the compensation earned by a bond dealer?
Bid-ask spread
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U. S. economy
A TIPS was issued with a par value of $1,000, a coupon rate of 2.5 percent, and a reference CPI of 204.89.
Which one of these is the correct calculation of the current interest payment if the CPI is now 205.44?
$1,000 × (205.44/204.89) × (0.025/2)
What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 203.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago.
$1,011.22
Which of these characteristics apply to a discount bond?
- Market price is less than the principal amount of the loan
- Selling for less than face value
An investor buys bonds at the ______ price and sells them at the ______ price.
ask; bid
True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
true
Which one of the following bond quotes indicates a corporate bond is selling at a premium?
101.49
A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond.
The municipal bond is selling at a discounted price of $4,933.50.
Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par?
- Bond term
- Market rates of interest
- Default risk
Which of these best explains the current value of a bond?
The current value is the present value of the bond's expected future cash flows discounted at the market
rate of interest.
A $1,000 corporate bond has an asked price of 97.82 and a bid price of 97.81. What price will you receive
if you sell this bond now?
$978.10
A typical municipal bond is selling at a price of $5,114.20. What is the price quote for this bond?
102.284
How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250?
$99,625.00
The market rate of interest that is used to compute the present value of a bond is affected by which of the following?
- Tax status of the bond
- Credit quality of the bond
What is a zero coupon bond?
A zero coupon bond is sold at a steep discount and pays no semiannual interest payments.
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What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446?
$102,144.60
Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent?
PV = $1,000/[1 + (0.08/2)]^20
Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless
the problem states otherwise?
Semiannual interest payments
Face value = $1,000
Which one of these is the best description of a 5-year zero coupon bond?
A bond with a current value equal to its discounted par value
Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?
-$38.07
If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own?
Short-term, high coupon
You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs?
FV = 1,000
N = 10
You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond?
N = 14
What is the definition of current yield?
The return provided by the annual interest payments if the bond is purchased at the current price
Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.
-$13.43; -$47.45
Which of the following correctly explains how a factor affects interest rate risk?
- The longer the term to maturity, the greater the interest rate risk will be.
- The lower the coupon rate, the greater the interest rate risk will be.
Which one of the following should be used to compare various corporate bonds if you plan to purchase a
bond today, hold it until maturity, and want to select the bond with the highest rate of return?
Yield to maturity
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Which one of these defines the yield to call?
Rate earned by buying a bond at today's price and holding it until the first call date
True or false: If you buy a bond today at par value and sell it one year from today, also at par value, the rate of return you will earn will equal to current yield.
True
Which one of these formulas correctly computes the equivalent taxable yield?
Muni yield/(1 - Tax rate)
Which one of these is correct if a bond is selling at a premium?
Coupon rate > Current yield > Yield to maturity
What is the definition of yield to maturity?
The rate that will be earned if a bond is purchased today and held until maturity
A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity?
7.2547 percent
How does the yield to call differ from the yield to maturity for the same bond?
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- The call price used in the yield to call usually exceeds the face value used in the yield to maturity.
- There are fewer time periods in the yield to call.
You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why?
The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.
Which of the following yields or rates are inversely related to a bond's market price?
Current yield and yield to maturity only
What is the definition of credit quality risk?
The chance that an issuer will either be late paying or will not pay an interest or principal payment
A corporate bond has a yield to maturity of 6.48 percent, a current price of $916.58, and matures in 5 years. What is the coupon rate?
4.50 percent
What is the yield spread?
Difference between the yield to maturity on bonds with differing levels of credit risk
Which of these statements correctly applies to the NYSE bond market?
- The NYSE operates the largest centralized U. S. bond market.
- Corporate bonds are the primary source of bond trading volume on the NYSE.
Which of these statements is correct?
- If the market interest rate rises, bond prices will fall, and yields to maturity will rise.
- A Treasury bond should have a higher yield to maturity than a comparable muni bond.
What does a bond rating measure?
Credit quality, or default risk
A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-
rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds?
1.36 percent
Most secondary trades in the U. S. bond market occur between which two parties?
Bond dealers and large institutions
If a bond is selling at a premium which one of these rates will be the highest?
Coupon rate
Which of the following are sources of information on the bond markets?
- Merrill Lynch
- Internet
- The Wall Street Journal
What is a common means of reporting the daily direction of overall bond price movements?
Reporting the yield-to-maturity on the 10-year Treasury bonds
Which of these statements correctly applies to the NYSE bond market?
- Corporate bonds are the primary source of bond trading volume on the NYSE
Rationale:
The majority of the bond trading volume on the NYSE is in corporate debt.
- The NYSE operates the largest centralized U.S. bond market
Rationale:
The NYSE does operate the largest centralized U. S. bond market. However, the majority of bond trading volume occurs in the decentralized, over-the-counter markets.
Which one of these characteristics designates a premium bond?
Market price exceeds par value
The common-size values of both net income and costs of goods sold increased this year over last year. What does this mean?
As a percentage of sales, the cost of goods sold increased while the sum of total expenses, interest, and taxes decreased for the year.
The market rate of interest that is used to compute the present value of bond is affected by which of the following ?
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- Credit quality of the bond
- Tax status of the bond
Which one of the following should be used to compare various corporate bonds if you plan to purchase a
bond today, hold it until maturity, and want to select the bond with the highest rate of return?
Yield to maturity
Rationale:
The yield to maturity is the annual return that will be earned if a bond is purchased at the current price and held until maturity.
We have an expert-written solution to this problem!
Which of the following correctly explains how a factor interest rate risk?
- The lower the coupon rate, the greater the interest rate will be.
- The longer the term to maturity, the greater the interest rate risk will be.
Which of these are common features of a corporate bond? Select all that apply.
- Publicly traded debt security
- Semi-annual interest payments
- Face value of $1,000
Which one of these is the best description of a 5-year zero coupon bond?
A bond with a current value equal to its discounted par value
Where does the majority of trading volume in bonds in the secondary markets occur?
Over-the-counter
For a typical bond, which of the following values are expressed in semiannual terms when computing the
yield to maturity?
- Number of the period, N
- Discount rate, or rate of return, I
- Interest payments, PMT
Which of these best explains the current value of a bond?
The current value is the present value of the bonds expected future cash flows discounted at the market rate of interest.
Which of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value.
Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par? Select all that apply.
- Default risk
- Market rates of interest
- Bond term
For a typical corporate bond, which one of these applies to the calculation of the bond's yield to maturity? Assume the PMT is input as a positive amount.
PV = -(Current bond price)
Rationale:
The PV represents cash flowing in the opposite direction of the PMT.
What is interest rate risk?
Interest rate risk is the chance that a bond's value will decline due to a rise in market interest rates.
If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own?
Short-term, high coupon
Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless
the problem states otherwise?
- Face value= $1,000
- Semiannual interest payments
The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True or False?
True
Which of these characteristics apply to discount bond?
- Market price is less than the principal amount of the loan
- Selling for less than face value
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Which of the following may be financed with corporate bonds?
- Plants and equipment
- Research and development
-Inventory
Which of the following are sources of information on the bond markets? Select all that apply.
- Internet
Rationale:
This is a source of bond information.
- The Wall Street Journal
Rationale:
This is a source of bond information.
- Merrill Lynch
Rationale:
This is a source of bond information.
The market rate of interest that is used to compute the present value of a bond is affected which of the following?
- Credit quality of the bond
- Tax status of the bond
Why might a corporation issue bonds?
Bond may offer a lower aftertax cost than equity securities.
Which of the following correctly explains how a factor affects interest rate risk? Select all that apply.
- The longer the term to maturity, the greater the interest rate risk will be.
- The lower the coupon rate, the greater the interest rate risk will be.
Which one of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value.
Which of the following securities pay income which is exempt from federal income taxes?
- State bond to build a highway
- County bond to build a school
Which of these statements is correct? Select all that apply.
- A Treasury bond should have a higher yield to maturity than a comparable muni bond.
Rationale:
Muni bonds receive preferential tax treatment and thus have lower yields.
- If the market interest rate rises, bond prices will fall, and yields to maturity will rise.
Rationale:
Market interest rates and bond prices are inversely related. Bond prices and yields to maturity are also inversely related. Thus, market interest rates and yields to maturity are directly related.
Interest rate risk is only a concern when market interest rates decline.
False
Which of the following are classified as asset-backed securities?
- Debt security with payments originating from a pool of auto loans
- Security repaid from a group of credit card loans
- Mortgage-backed security
What is a common means of reporting the daily direction of overall bond price movements?
Reporting the yield-to-maturity on the 10-year Treasury bonds.
Rationale:
Since the rate of interest is the key factor that affects bond prices, it is common practice to report the latest rate and daily yield change for the 10-year Treasury. Remember, interest rates and bond prices are inversely related.
Which one of these characteristics designates a premium bond?
Market price exceeds par value
Which of the following yields or rates are inversely related to a bonds market price?
Current yield and yield to maturity only
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How does the yield to call differ from the yield to maturity for the same bond? Select all that apply.
- The call price used in the yield to call usually exceeds the face value used in the yield to maturity.
Rationale:
The call price equals the face value plus the call premium.
- There are fewer time periods in the yield to call.
Rationale:
Bonds are called prior to maturity, so there are less time periods when computing a yield to call as compared to a yield to maturity.
The market rate of interest that is used to compute the present value of a bond is affected by which of the following?
- Credit quality of the bond
- Tax status of the bond.
Which of these characteristics apply to a discount bond?
- Market price is less than the principal amount of the loan
- Selling for less than face value
Which specific characteristic identifies a security as an asset-backed security?
Repayment based on a pool of debt securities.
True or false: If you buy a bond today at par value and sell it one year from today, also at par value, the rate of return you will earn will equal to current yield.
True
Which of the following apply to high-yield bonds?
- Low quality
Rationale:
High-yield bonds are low--quality, high-risk bonds. The higher yields compensate bondholders for accepting the higher risks.
- Increased credit risk
Rationale:
High-yield bonds are low-quality, high-risk bonds. The higher yields compensate bondholders for accepting the higher risks.
Which of the following are commonly included in a indenture agreement?
- Coupon rate
- Call premium
- Par value
Why are U. S. Treasury bonds considered to be safe?
They are secured by the full-faith-and-credit of the U. S. government.
Which one of these defines the yield to call?
Rate earned by buying a bond at today's price and holding it until the first call date
What is an indenture agreement?
A legal contract between the issuer and the bondholders
One type of high-yield bond is a fallen angel. How is this type of bond defined?
Junk bond that was originally issued as a investment as an investment-grade bond.
Which one of these explains why issuers call bonds?
To refinance debt at a lower rate
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U.S. economy
Which one of these correctly defines equivalent taxable yield?
The pretax rate needed on a taxable bond to produce the same after-tax as a muni bond.
Which of the following are commonly included in an indenture agreement?
- Coupon rate
- Call premium
- Par value
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An investor buy bonds at the _______ price and sells them at the _____ price.
ask;bid
What is the purpose of a call premium?
To compensate bondholders who have their bonds redeemed prior to maturity.
What is the yield spread?
Difference between the yield to maturity on bonds with differing levels of credit risk
What is the definition of credit quality risk?
The chance that an issuer will either be late paying or will not pay an interest or principal payment.
Speculative bonds are frequently referred to as which type of bonds?
Junk bonds
The internet and par value payments of mortgage-backed securities originate
Real estate mortgage payments
Which one of these descriptions defines a Treasury inflation- protection security (TIPS)
U.S. government bond with an inflation-adjusted par value and varying interest payments.
Which one of these terms indicates a bond is unsecured?
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Debenture
Which statement related to bonds is true?
Bond have varying levels of risk
What is a call premium?
The additional amount an issuer pays in excess of par value if the issuer redeems a bond prior to maturity.
Which one of these characteristics fits the definition of an agency board?
Issued to support a sector of the U.S. economy
Which one of these is the key reason why issuers call bonds?
Significant drop in market interest rates
Which one of these applies to agency bonds?
Relatively safe securities
A bond's life span is typically referred to as (Blank 1) to (Blank 2)
Blank 1: time
Blank 2: maturity
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Which one of the following types of bonds is used to implement national monetary policy?
U. S. Treasury bonds
Which of these statements is correct?
The average daily trading volume of the U. S. bond market exceeds $800 billion.
A bond has a par value of $1,000, a call premium of one year's interest, a call provision after 5 years, a coupon rate of 5 percent, semiannual interest payments, and a maturity of 20 years. Which of these is (are) correct? Select all that apply.
-Each interest payment will be $25.
-The bond can be paid off in year 6 for a price of $1,050 plus any unpaid interest.
What is the shortest maturity for a newly issued U. S. Treasury bond
10 years
Rationale:
Treasury bonds are issued with maturities ranging from 10 to 30 years.
Which one of the following types of bonds is used to finance projects such as public buildings, schools and roads?
U.S. Treasury Bills
A TIPS was issued with a par value of $1,000, a coupon rate of 2.5 percent, and a reference CPI of 204.89.
Which one of these is the correct calculation of the current interest payment if the CPI is now 205.44?
$1,000 × (205.44/204.89) × (0.025/2)
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Rationale:
Current interest payment = $1,000 × (205.44/204.89) × (0.025/2)
Which one of the following types of bonds is used to implement national monetary policy?
U. S. Treasury bonds
A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI?
205.17
Rationale:
Current price = $1,000 × (Current CPI/204.89) = $1,001.37; Current CPI = 205.17
What is the shortest maturity for a newly issued U. S. Treasury bond?
10 years
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U. S. economy
The funding of which one of these would be provided by a general obligation municipal bond?
City school
Rationale:
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Schools are funded by general obligation bonds.
Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon and a face value at issuance of $1,000. The reference CPI is 202.34 and the current CPI is 203.18. What do you know for certain about
this bond?
The coupon rate is still 2 percent but the interest payments have increased.
A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment?
$75.64
Rationale:
Current interest payment = $5,000 × (203.14/201.42) × (0.03/2) = $75.64
What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 203.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago.
$1,011.22
Rationale:
Price = $1,000 × (205.47/203.19) = $1,011.22
The interest and par value payments of mortgage-backed securities originate from ______.
real estate mortgage payments
Which of the following securities pay income which is exempt from federal income taxes? Select all that apply.
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-County bond to build a school
-State bond to build a highway
Willis purchased a 5 percent, $3,000 corporate bond when the asked quote was 101.16 and the bid quote was 101.15. He sold the bond when the asked quote was 101.08 and the bid quote was 101.06. What was his capital gain/loss?
-$3.00
Rationale:
Capital loss = (101.06% of $3,000) - (101.16% of $3,000) = $3,031.80 - $3,034.80 = -$3
Which of the following securities pay income which is exempt from federal income taxes
-State bond to build a highway
-County bond to build a school
Which specific characteristic identifies a security as an asset-backed security?
Repayment based on a pool of debt securities
How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250
$99,625.00
Rationale:
99.6250% × $100,000 = $99,625.00
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True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True
Rationale:
The financial status of an issuer does affect the coupon rate on the issuer's bonds.
Which of these characteristics apply to a discount bond? Select all that apply.
-Selling for less than face value
Rationale:
Discount bonds sell for less than face, or par value.
-Market price is less than the principal amount of the loan
Rationale:
Discount bonds sell for less than face value, also called par value, or the principal amount.
Which of these represents the compensation earned by a bond dealer?
Bid-ask spread
Franco purchased a $10,000 bond at a price quote of 100.23 and sold it at a price quote of 99.87. What is his capital gain/loss?
-$36
Rationale:
Capital loss = (99.87% - 100.23%) × $10,000 = -0.36% × $100,000 = -$36
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The funding of which one of these would be provided by a general obligation municipal bond?
City school
Rationale:
Schools are funded by general obligation bonds.
What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446?
$102,144.60
Rationale:
102.1446% ×$100,000 = $102,144.60
Sue purchased a 3.5 percent, $100,000 U. S. Treasury bond 6 months ago when the bid quote was 124.1850 and the asked quote was 124.2025. Today, she sold that bond when the bid quote was 124.2175 and the asked quote was 124.2225. What was her total dollar return on this investment?
$1,765.00
Rationale:
Interest = [(0.035/2) × $100,000] = $1,750; Total return = [(124.2175% - 124.2025%) × $100,000] + $1,750 = $1,765
How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250?
$99,625.00
Rationale:
99.6250% × $100,000 = $99,625.00
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True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True
Rationale:
The financial status of an issuer does affect the coupon rate on the issuer's bonds.
Which one of the following bond quotes indicates a corporate bond is selling at a premium?
101.49
Rationale:
Premium bonds sell for more than par value so their quotes must be greater than 100.
A typical municipal bond is selling at a price of $5,114.20. What is the price quote for this bond?
102.284
Rationale:
Price quote = $5,114.20/$5,000 = 1.02284 = 102.284%, or a price quote of 102.284
Sue purchased a 2%, $100,000 U. S. Treasury bond 1 year ago when the bid quote was 104.1850 and the asked quote was 104.2225. Today, she sold that bond when the bid quote was 103.2175 and the asked quote was 103.2275. What was her total dollar return on this investment?
$995
Rationale:
Interest = [(0.02) × $100,000] = $2,000; Total return = [(103.2175% - 104.2225%) × $100,000] + $2,000 = $995
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What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446?
$102,144.60
Rationale:
102.1446% × $100,000 = $102,144.60
What is a zero coupon bond?
A zero coupon bond is sold at a steep discount and pays no semiannual interest payments.
A $1,000 corporate bond has an asked price of 97.82 and a bid price of 97.81. What price will you receive
if you sell this bond now
$978.10
Rationale:
You sell at the bid and buy at the asked. Selling price = 97.81% of $1,000 = $978.10
A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond.
The municipal bond is selling at a discounted price of $4,933.50.
Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent?
PV = $1,000/[1 + (0.08/2)]^20
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Sue purchased a 3.5 percent, $100,000 U. S. Treasury bond 6 months ago when the bid quote was 124.1850 and the asked quote was 124.2025. Today, she sold that bond when the bid quote was 124.2175 and the asked quote was 124.2225. What was her total dollar return on this investment?
$1,765.00
Rationale:
Interest = [(0.035/2) × $100,000 = $1,750; Total return = [(124.2175% - 124.2025%) × $100,000] + $1,750
= $1,765
A corporate bond matures in 11 years and carries a 6 percent coupon. Which of these represent correct calculator input for computing the bond's current value at a discount rate of 5 percent? Select all that apply.
FV = 1,000; PMT = 30
N = 22
You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply.
N = 10
Rationale:
Zero-coupon bonds are priced using semiannual compounding.
N = 5 × 2 = 10
FV = 1,000
Rationale:
The assumed par value of a corporate bond is $1,000.
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A corporate bond matures in 14.5 years and pays a 6.75 percent coupon. What is its current value if the market rate of interest is 7.5 percent?
$934.38
Rationale:
PV = [(0.0675/2) × $1,000] × {1−1[1+(0.075/2)](14.5×2)0.075/2}1-1[1+(0.075/2)](14.5×2)0.075/2 + $1,000[1+(0.075/2)](14.5×2)$1,000[1+(0.075/2)](14.5×2) = $590.55 + $343.83 = $934.38
Which one of these represents correct calculator input for computing the current value of a 5 percent coupon compounded semi-annually? The corporate bond matures in 12.5 years. The current discount rate is 6.5 percent. Assume the face value of the bond as $1,000.
PMT = 25
Rationale:
PMT = (0.05/2) × $1,000 = $25
Which one of the following bonds is subject to the greatest interest rate risk?
10-year, zero coupon
Rationale:
The longer the term and the lower the coupon rate, the greater the interest rate risk.
True or false: When computing the present value of a bond, both the par value and the interest payment
amount are input as positive values in a financial calculator.
True
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Rationale:
The interest payments and par value, or maturity value, are considered to be cash inflows and are input as positive values.
You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond?
N = 14
Rationale:
Since the interest payments are assumed to be paid semiannually, the problem is solved using semiannual time periods.
N = 7 × 2 = 14
Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?
-$38.07
Rationale:
When the coupon rate matches the market rate, a bond sells at par, which is assumed to be $1,000. Using a financial calculator, the price at 5.5 percent is: N = 20; I = 2.75; PMT = 25; FV = 1,000, CPT PV; PV = -961.93 Change in price = $961.93 - $1,000 = -$38.07
Which one of the following bonds is subject to the least interest rate risk?
5-year, 5 percent coupon
Rationale:
The longer the term and the lower the coupon rate, the greater the interest rate risk.
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Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.
-$13.43; -$47.45
Rationale:
Both bonds are currently selling at par, which is $1,000. At 6.5 percent: Bond A: N = 6; I = 3.25; PMT = 30;
FV = 1,000; CPT PV; PV = 986.57 Bond B: N = 30; I = 3.25; PMT = 30; FV = 1,000; CPT PV; PV = 952.55 Bond
B decreases more since it is the longer-term bond.
What is the definition of current yield?
The return provided by the annual interest payments if the bond is purchased at the current price
A corporate bond pays $45 in interest every six months and matures in 11 years. What is the yield to maturity if the bond currently sells for $1,213?
6.29 percent
Rationale:
N = 22; PV = -1,213; PMT = 45; FV = 1,000; CPT I, I = 3.144, which is the semiannual rate
Yield to maturity = 2 × 3.144% = 6.29%
What is the definition of yield to maturity?
The rate that will be earned if a bond is purchased today and held until maturity
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A $1,000 bond matures in 15 years and carries a 5 percent coupon. The bond is callable in 5 years at a premium equal to one year's interest payments. What is the correct formula for computing the current price given a market rate of 4.7 percent?
Price = $25 × {1−11.0235100.0235}1-11.0235100.0235 + $1,0501.023510
You purchased a $5,000 face value corporate bond today at an asked bid of 98.76. The bond matures in 7.5 years and carries a 7 percent coupon. What annual rate of return will you earn if you hold the bond until maturity?
7.22 percent
Rationale:
Using a financial calculator: N = 15; PV = -4,938; PMT = 175; FV = 5,000; CPT I; I = 3.61, which is the semiannual rate
Yield to maturity = 2 × 3.61% = 7.22%
Which one of these is a key reason why issuers call bonds?
Significant drop in market interest rates
Which one of these formulas correctly computes the equivalent taxable yield?
Muni yield/(1 - Tax rate)
A 20-year corporate bond is callable beginning in year 7 at a premium of $100. The coupon rate is 6 percent and the market rate is 5.5 percent. What is wrong with the following computation? Select all that apply.
-The call price should be $1,100.
Rationale:
The call price must include the call premium. Call price = Face value + Call premium = $1,000 + $100 = $1,100
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-The interest rate, i, should be 0.0275 in three places.
Rationale:
The interest rate, i, should be 0.055/2 = 0.0275, as that is the semiannual discount rate.
What are the taxable equivalent yields (ETY) at tax rates of 25 percent and 35 percent if the muni yield is 3.5 percent?
4.67 percent; 5.38 percent
Rationale:
ETY = 0.035/(1 - 0.25) = 0.0467 = 4.67% ETY = 0.035/(1 - 0.35) = 0.0538 = 5.38%
At what tax rate will an investor begin to prefer the 5.2% municipal bond over the 8% corporate bond?
> 35%
Rationale:
0.08 = 0.052/(1 - Tax rate); Tax rate > 35%
A corporate bond has a yield to maturity of 6.48 percent, a current price of $916.58, and matures in 5 years. What is the coupon rate?
4.50 percent
Rationale:
N = 10; I = 3.24; PV = -916.58; FV = 1,000; CPT PMT; PMT = 22.50, which is the semiannual interest payment.
Coupon rate = (2 × $22.50)/$1,000 = 0.045 = 4.50%
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If a bond is selling at a premium which one of these rates will be the highest?
Coupon rate
Rationale:
Premium bond: Coupon rate > Current yield > Yield to maturity
What rate does an investor need to earn on a corporate bond to earn the same return as he can on a 3.5 percent muni if his tax rate is 28 percent?
4.86 percent
Rationale:
Equivalent taxable yield = 0.035/(1 - 0.28) = 0.0486 = 4.86%
At what tax rate will an investor be indifferent between a 4.2 percent municipal bond and a 7 percent corporate bond?
40 percent
Rationale:
0.07 = 0.042/(1 - Tax rate); Tax rate = 40%
You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why?
The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.
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Rationale:
The yield to maturity is the annual rate of return an investor will earn by purchasing a bond at the current price and holding it until maturity.
A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity?
7.2547 percent
Rationale:
N = 32; PV = -1,023; PMT = 37.50; FV = 1,000; CPT I; I = 3.62735, which is the semiannual rate.
YTM = 2 × 3.62735% = 7.2547%
A 10-year corporate bond has a 6 percent coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 6.5 percent and are expected to rise for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond?
The yield to maturity as it is unlikely the bond will be called
Rationale:
With market interest rates exceed the coupon rate and are rising, a bond is unlikely to be called.
Which of the following yields or rates are inversely related to a bond's market price?
Current yield and yield to maturity only
Which one of these is correct if a bond is selling at a premium?
Coupon rate > Current yield > Yield to maturity
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You are in the 3rd year of a 10-year corporate bond has a 6% coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 5.75% and are expected to drop dramatically for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond?
The yield to call as the bond will most likely be called
You manage a trust fund and have a fiduciary responsibility to only purchase investment grade bonds. Which bond rating indicates a bond you could not purchase?
BB
Rationale:
BB bonds are below investment grade so you could not purchase them while complying with your fiduciary responsibilities.
A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-
rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds?
1.36 percent
Rationale:
Spread = 5.98% - 4.62% = 1.36%
What does a bond rating measure?
Credit quality, or default risk
Most secondary trades in the U. S. bond market occur between which two parties?
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Bond dealers and large institutions
Which of these Standard & Poor's bond ratings is the lowest investment grade rating of those shown here?
BBB
Rationale:
BBB is a medium grade rating which is classified as investment grade.
Which one of these tends to occur when a BBB bond is downgraded to BB?
The market price of the bond declines
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U. S. economy
Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par? Select all that apply.
Bond term
Default risk
Market rates of interest
A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment?
$75.64
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Which one of the following bond quotes indicates a corporate bond is selling at a premium?
101.49
A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI?
205.17
A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond.
The municipal bond is selling at a discounted price of $4,933.50.
Which one of these characteristics designates a premium bond?
Market price exceeds par value.
An investor buys bonds at the Blank______ price and sells them at the Blank______ price.
ask;bid
What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446?
$102,144.60
True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True
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A $1,000 corporate bond has an asked price of 97.82 and a bid price of 97.81. What price will you receive
if you sell this bond now?
$978.10
Which of these best explains the current value of a bond?
The current value is the present value of the bond's expected future cash flows discounted at the market
rate of interest.
Which one of these is the best description of a 5-year zero coupon bond?
A bond with a current value equal to its discounted par value
Which of these characteristics apply to a discount bond? Select all that apply.
Selling for less than face value
Market price is less than the principal amount of the loan
How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250?
$99,625.00.
The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply.
Tax status of the bond
Credit quality of the bond
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What is a zero coupon bond?
A zero coupon bond is sold at a steep discount and pays no semiannual interest payments.
You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond?
N=14
Which one of these characteristics designates a premium bond?
Coupon rate exceeds inflation rate
Coupon rate is lower than current rates
Market price exceeds par value
Market price is less than par value
Market price exceeds par value
Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?
-$38.07
You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply.
FV = 1,000
N = 10
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If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own?
Short-term, high coupon
Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless
the problem states otherwise?
Face value = $1,000
Semiannual interest payments
What is the definition of current yield?
The return provided by the annual interest payments if the bond is purchased at the current price
Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.
-$13.43; -$47.45
Which one of the following should be used to compare various corporate bonds if you plan to purchase a
bond today, hold it until maturity, and want to select the bond with the highest rate of return?
Yield to maturity
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Which one of these defines the yield to call?
The call premium expressed as a percentage of the par value
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Coupon rate compounded by the number of periods until a bond can be called
Purchasing a bond on its first call date and holding it until its maturity date
Rate earned by buying a bond at today's price and holding it until the first call date
Rate earned by buying a bond at today's price and holding it until the first call date
Which of the following correctly explains how a factor affects interest rate risk? Select all that apply.
The longer the term to maturity, the greater the interest rate risk will be.
The lower the coupon rate, the greater the interest rate risk will be.
Which one of these is the current yield formula?
Annual interest/Current value
Which one of these formulas correctly computes the equivalent taxable yield?
Muni yield/(1-tax rate).
What is the definition of yield to maturity?
The rate that will be earned if a bond is purchased today and held until maturity
How does the yield to call differ from the yield to maturity for the same bond? Select all that apply.
The call price used in the yield to call usually exceeds the face value used in the yield to maturity.
There are fewer time periods in the yield to call.
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You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why?
The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.
Which one of these correctly defines equivalent taxable yield?
The pretax rate needed on a taxable bond to produce the same after-tax rate as a muni bond
Which one of these defines the yield to call?
Rate earned by buying a bond at today's price and holding it until the first call date
A corporate bond has a current yield of 6.39 percent and a price quote of 97.8. What is the coupon rate?
6.25%
Which one of these is correct if a bond is selling at a premium?
Coupon rate > current yield > yield to maturity.
Which of the following yields or rates are inversely related to a bond's market price?
Yield to maturity only
Current yield, coupon rate, and yield to maturity
Current yield only
Current yield and yield to maturity only
Current yield and yield to maturity only
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What does a bond rating measure?
Credit quality, or default risk
Which of these statements correctly applies to the NYSE bond market? Select all that apply.
Corporate bonds are the primary source of bond trading volume on the NYSE.
The NYSE operates the largest centralized U. S. bond market.
If a bond is selling at a premium which one of these rates will be the highest?
Coupon Rate
Which of the following are sources of information on the bond markets? Select all that apply.
Merrill Lynch
Internet
The Wall Street Journal
What is the definition of credit quality risk?
The chance that an issuer will either be late paying or will not pay an interest or principal payment
What is the yield spread?
Difference between the yields to maturity on bonds with differing levels of credit risk
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Most secondary trades in the U. S. bond market occur between which two parties?
Bond dealers and large institutions.
What is a common means of reporting the daily direction of overall bond price movements?
Reporting the yield-to-maturity on the 10-year Treasury bonds
rms in this set (135)
Original
Which of these statements correctly applies to the NYSE bond market?
- Corporate bonds are the primary source of bond trading volume on the NYSE
Rationale:
The majority of the bond trading volume on the NYSE is in corporate debt.
- The NYSE operates the largest centralized U.S. bond market
Rationale:
The NYSE does operate the largest centralized U. S. bond market. However, the majority of bond trading volume occurs in the decentralized, over-the-counter markets.
Which one of these characteristics designates a premium bond?
Market price exceeds par value
The common-size values of both net income and costs of goods sold increased this year over last year. What does this mean?
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As a percentage of sales, the cost of goods sold increased while the sum of total expenses, interest, and taxes decreased for the year.
The market rate of interest that is used to compute the present value of bond is affected by which of the following ?
- Credit quality of the bond
- Tax status of the bond
Which one of the following should be used to compare various corporate bonds if you plan to purchase a
bond today, hold it until maturity, and want to select the bond with the highest rate of return?
Yield to maturity
Rationale:
The yield to maturity is the annual return that will be earned if a bond is purchased at the current price and held until maturity.
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Which of the following correctly explains how a factor interest rate risk?
- The lower the coupon rate, the greater the interest rate will be.
- The longer the term to maturity, the greater the interest rate risk will be.
Which of these are common features of a corporate bond? Select all that apply.
- Publicly traded debt security
- Semi-annual interest payments
- Face value of $1,000
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Which one of these is the best description of a 5-year zero coupon bond?
A bond with a current value equal to its discounted par value
Where does the majority of trading volume in bonds in the secondary markets occur?
Over-the-counter
For a typical bond, which of the following values are expressed in semiannual terms when computing the
yield to maturity?
- Number of the period, N
- Discount rate, or rate of return, I
- Interest payments, PMT
Which of these best explains the current value of a bond?
The current value is the present value of the bonds expected future cash flows discounted at the market rate of interest.
Which of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value.
Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par? Select all that apply.
- Default risk
- Market rates of interest
- Bond term
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For a typical corporate bond, which one of these applies to the calculation of the bond's yield to maturity? Assume the PMT is input as a positive amount.
PV = -(Current bond price)
Rationale:
The PV represents cash flowing in the opposite direction of the PMT.
What is interest rate risk?
Interest rate risk is the chance that a bond's value will decline due to a rise in market interest rates.
If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own?
Short-term, high coupon
Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless
the problem states otherwise?
- Face value= $1,000
- Semiannual interest payments
The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True or False?
True
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Which of these characteristics apply to discount bond?
- Market price is less than the principal amount of the loan
- Selling for less than face value
Which of the following may be financed with corporate bonds?
- Plants and equipment
- Research and development
-Inventory
Which of the following are sources of information on the bond markets? Select all that apply.
- Internet
Rationale:
This is a source of bond information.
- The Wall Street Journal
Rationale:
This is a source of bond information.
- Merrill Lynch
Rationale:
This is a source of bond information.
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The market rate of interest that is used to compute the present value of a bond is affected which of the following?
- Credit quality of the bond
- Tax status of the bond
Why might a corporation issue bonds?
Bond may offer a lower aftertax cost than equity securities.
Which of the following correctly explains how a factor affects interest rate risk? Select all that apply.
- The longer the term to maturity, the greater the interest rate risk will be.
- The lower the coupon rate, the greater the interest rate risk will be.
Which one of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value.
Which of the following securities pay income which is exempt from federal income taxes?
- State bond to build a highway
- County bond to build a school
Which of these statements is correct? Select all that apply.
- A Treasury bond should have a higher yield to maturity than a comparable muni bond.
Rationale:
Muni bonds receive preferential tax treatment and thus have lower yields.
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- If the market interest rate rises, bond prices will fall, and yields to maturity will rise.
Rationale:
Market interest rates and bond prices are inversely related. Bond prices and yields to maturity are also inversely related. Thus, market interest rates and yields to maturity are directly related.
Interest rate risk is only a concern when market interest rates decline.
False
Which of the following are classified as asset-backed securities?
- Debt security with payments originating from a pool of auto loans
- Security repaid from a group of credit card loans
- Mortgage-backed security
What is a common means of reporting the daily direction of overall bond price movements?
Reporting the yield-to-maturity on the 10-year Treasury bonds.
Rationale:
Since the rate of interest is the key factor that affects bond prices, it is common practice to report the latest rate and daily yield change for the 10-year Treasury. Remember, interest rates and bond prices are inversely related.
Which one of these characteristics designates a premium bond?
Market price exceeds par value
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Which of the following yields or rates are inversely related to a bonds market price?
Current yield and yield to maturity only
How does the yield to call differ from the yield to maturity for the same bond? Select all that apply.
- The call price used in the yield to call usually exceeds the face value used in the yield to maturity.
Rationale:
The call price equals the face value plus the call premium.
- There are fewer time periods in the yield to call.
Rationale:
Bonds are called prior to maturity, so there are less time periods when computing a yield to call as compared to a yield to maturity.
The market rate of interest that is used to compute the present value of a bond is affected by which of the following?
- Credit quality of the bond
- Tax status of the bond.
Which of these characteristics apply to a discount bond?
- Market price is less than the principal amount of the loan
- Selling for less than face value
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Which specific characteristic identifies a security as an asset-backed security?
Repayment based on a pool of debt securities.
True or false: If you buy a bond today at par value and sell it one year from today, also at par value, the rate of return you will earn will equal to current yield.
True
Which of the following apply to high-yield bonds?
- Low quality
Rationale:
High-yield bonds are low--quality, high-risk bonds. The higher yields compensate bondholders for accepting the higher risks.
- Increased credit risk
Rationale:
High-yield bonds are low-quality, high-risk bonds. The higher yields compensate bondholders for accepting the higher risks.
Which of the following are commonly included in a ?
- Coupon rate
- Call premium
- Par value
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Why are U. S. Treasury bonds considered to be safe?
They are secured by the full-faith-and-credit of the U. S. government.
Which one of these defines the yield to call?
Rate earned by buying a bond at today's price and holding it until the first call date
What is an indenture agreement?
A legal contract between the issuer and the bondholders
One type of high-yield bond is a fallen angel. How is this type of bond defined?
Junk bond that was originally issued as a investment as an investment-grade bond.
Which one of these explains why issuers call bonds?
To refinance debt at a lower rate
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U.S. economy
Which one of these correctly defines equivalent taxable yield?
The pretax rate needed on a taxable bond to produce the same after-tax as a muni bond.
Which of the following are commonly included in an indenture agreement?
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- Coupon rate
- Call premium
- Par value
An investor buy bonds at the _______ price and sells them at the _____ price.
ask;bid
What is the purpose of a call premium?
To compensate bondholders who have their bonds redeemed prior to maturity.
What is the yield spread?
Difference between the yield to maturity on bonds with differing levels of credit risk
What is the definition of credit quality risk?
The chance that an issuer will either be late paying or will not pay an interest or principal payment.
Speculative bonds are frequently referred to as which type of bonds?
Junk bonds
The internet and par value payments of mortgage-backed securities originate
Real estate mortgage payments
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Which one of these descriptions defines a Treasury inflation- protection security (TIPS)
U.S. government bond with an inflation-adjusted par value and varying interest payments.
Which one of these terms indicates a bond is unsecured?
Debenture
Which statement related to bonds is true?
Bond have varying levels of risk
What is a call premium?
The additional amount an issuer pays in excess of par value if the issuer redeems a bond prior to maturity.
Which one of these characteristics fits the definition of an agency board?
Issued to support a sector of the U.S. economy
Which one of these is the key reason why issuers call bonds?
Significant drop in market interest rates
Which one of these applies to agency bonds?
Relatively safe securities
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A bond's life span is typically referred to as (Blank 1) to (Blank 2)
Blank 1: time
Blank 2: maturity
Which one of the following types of bonds is used to implement national monetary policy?
U. S. Treasury bonds
Which of these statements is correct?
The average daily trading volume of the U. S. bond market exceeds $800 billion.
A bond has a par value of $1,000, a call premium of one year's interest, a call provision after 5 years, a coupon rate of 5 percent, semiannual interest payments, and a maturity of 20 years. Which of these is (are) correct? Select all that apply.
-Each interest payment will be $25.
-The bond can be paid off in year 6 for a price of $1,050 plus any unpaid interest.
What is the shortest maturity for a newly issued U. S. Treasury bond
10 years
Rationale:
Treasury bonds are issued with maturities ranging from 10 to 30 years.
Which one of the following types of bonds is used to finance projects such as public buildings, schools and roads?
U.S. Treasury Bills
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A TIPS was issued with a par value of $1,000, a coupon rate of 2.5 percent, and a reference CPI of 204.89.
Which one of these is the correct calculation of the current interest payment if the CPI is now 205.44?
$1,000 × (205.44/204.89) × (0.025/2)
Rationale:
Current interest payment = $1,000 × (205.44/204.89) × (0.025/2)
Which one of the following types of bonds is used to implement national monetary policy?
U. S. Treasury bonds
A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI?
205.17
Rationale:
Current price = $1,000 × (Current CPI/204.89) = $1,001.37; Current CPI = 205.17
What is the shortest maturity for a newly issued U. S. Treasury bond?
10 years
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U. S. economy
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The funding of which one of these would be provided by a general obligation municipal bond?
City school
Rationale:
Schools are funded by general obligation bonds.
Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon and a face value at issuance of $1,000. The reference CPI is 202.34 and the current CPI is 203.18. What do you know for certain about
this bond?
The coupon rate is still 2 percent but the interest payments have increased.
A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment?
$75.64
Rationale:
Current interest payment = $5,000 × (203.14/201.42) × (0.03/2) = $75.64
What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 203.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago.
$1,011.22
Rationale:
Price = $1,000 × (205.47/203.19) = $1,011.22
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The interest and par value payments of mortgage-backed securities originate from ______.
real estate mortgage payments
Which of the following securities pay income which is exempt from federal income taxes? Select all that apply.
-County bond to build a school
-State bond to build a highway
Willis purchased a 5 percent, $3,000 corporate bond when the asked quote was 101.16 and the bid quote was 101.15. He sold the bond when the asked quote was 101.08 and the bid quote was 101.06. What was his capital gain/loss?
-$3.00
Rationale:
Capital loss = (101.06% of $3,000) - (101.16% of $3,000) = $3,031.80 - $3,034.80 = -$3
Which of the following securities pay income which is exempt from federal income taxes
-State bond to build a highway
-County bond to build a school
Which specific characteristic identifies a security as an asset-backed security?
Repayment based on a pool of debt securities
How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250
$99,625.00
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Rationale:
99.6250% × $100,000 = $99,625.00
True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True
Rationale:
The financial status of an issuer does affect the coupon rate on the issuer's bonds.
Which of these characteristics apply to a discount bond? Select all that apply.
-Selling for less than face value
Rationale:
Discount bonds sell for less than face, or par value.
-Market price is less than the principal amount of the loan
Rationale:
Discount bonds sell for less than face value, also called par value, or the principal amount.
Which of these represents the compensation earned by a bond dealer?
Bid-ask spread
Franco purchased a $10,000 bond at a price quote of 100.23 and sold it at a price quote of 99.87. What is his capital gain/loss?
-$36
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Rationale:
Capital loss = (99.87% - 100.23%) × $10,000 = -0.36% × $100,000 = -$36
The funding of which one of these would be provided by a general obligation municipal bond?
City school
Rationale:
Schools are funded by general obligation bonds.
What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446?
$102,144.60
Rationale:
102.1446% ×$100,000 = $102,144.60
Sue purchased a 3.5 percent, $100,000 U. S. Treasury bond 6 months ago when the bid quote was 124.1850 and the asked quote was 124.2025. Today, she sold that bond when the bid quote was 124.2175 and the asked quote was 124.2225. What was her total dollar return on this investment?
$1,765.00
Rationale:
Interest = [(0.035/2) × $100,000] = $1,750; Total return = [(124.2175% - 124.2025%) × $100,000] + $1,750 = $1,765
How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250?
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$99,625.00
Rationale:
99.6250% × $100,000 = $99,625.00
True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True
Rationale:
The financial status of an issuer does affect the coupon rate on the issuer's bonds.
Which one of the following bond quotes indicates a corporate bond is selling at a premium?
101.49
Rationale:
Premium bonds sell for more than par value so their quotes must be greater than 100.
A typical municipal bond is selling at a price of $5,114.20. What is the price quote for this bond?
102.284
Rationale:
Price quote = $5,114.20/$5,000 = 1.02284 = 102.284%, or a price quote of 102.284
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Sue purchased a 2%, $100,000 U. S. Treasury bond 1 year ago when the bid quote was 104.1850 and the asked quote was 104.2225. Today, she sold that bond when the bid quote was 103.2175 and the asked quote was 103.2275. What was her total dollar return on this investment?
$995
Rationale:
Interest = [(0.02) × $100,000] = $2,000; Total return = [(103.2175% - 104.2225%) × $100,000] + $2,000 = $995
What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446?
$102,144.60
Rationale:
102.1446% × $100,000 = $102,144.60
What is a zero coupon bond?
A zero coupon bond is sold at a steep discount and pays no semiannual interest payments.
A $1,000 corporate bond has an asked price of 97.82 and a bid price of 97.81. What price will you receive
if you sell this bond now
$978.10
Rationale:
You sell at the bid and buy at the asked. Selling price = 97.81% of $1,000 = $978.10
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A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond.
The municipal bond is selling at a discounted price of $4,933.50.
Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent?
PV = $1,000/[1 + (0.08/2)]^20
Sue purchased a 3.5 percent, $100,000 U. S. Treasury bond 6 months ago when the bid quote was 124.1850 and the asked quote was 124.2025. Today, she sold that bond when the bid quote was 124.2175 and the asked quote was 124.2225. What was her total dollar return on this investment?
$1,765.00
Rationale:
Interest = [(0.035/2) × $100,000 = $1,750; Total return = [(124.2175% - 124.2025%) × $100,000] + $1,750
= $1,765
A corporate bond matures in 11 years and carries a 6 percent coupon. Which of these represent correct calculator input for computing the bond's current value at a discount rate of 5 percent? Select all that apply.
FV = 1,000; PMT = 30
N = 22
You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply.
N = 10
Rationale:
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Zero-coupon bonds are priced using semiannual compounding.
N = 5 × 2 = 10
FV = 1,000
Rationale:
The assumed par value of a corporate bond is $1,000.
A corporate bond matures in 14.5 years and pays a 6.75 percent coupon. What is its current value if the market rate of interest is 7.5 percent?
$934.38
Rationale:
PV = [(0.0675/2) × $1,000] × {1−1[1+(0.075/2)](14.5×2)0.075/2}1-1[1+(0.075/2)](14.5×2)0.075/2 + $1,000[1+(0.075/2)](14.5×2)$1,000[1+(0.075/2)](14.5×2) = $590.55 + $343.83 = $934.38
Which one of these represents correct calculator input for computing the current value of a 5 percent coupon compounded semi-annually? The corporate bond matures in 12.5 years. The current discount rate is 6.5 percent. Assume the face value of the bond as $1,000.
PMT = 25
Rationale:
PMT = (0.05/2) × $1,000 = $25
Which one of the following bonds is subject to the greatest interest rate risk?
10-year, zero coupon
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Rationale:
The longer the term and the lower the coupon rate, the greater the interest rate risk.
True or false: When computing the present value of a bond, both the par value and the interest payment
amount are input as positive values in a financial calculator.
True
Rationale:
The interest payments and par value, or maturity value, are considered to be cash inflows and are input as positive values.
You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond?
N = 14
Rationale:
Since the interest payments are assumed to be paid semiannually, the problem is solved using semiannual time periods.
N = 7 × 2 = 14
Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?
-$38.07
Rationale:
When the coupon rate matches the market rate, a bond sells at par, which is assumed to be $1,000. Using a financial calculator, the price at 5.5 percent is: N = 20; I = 2.75; PMT = 25; FV = 1,000, CPT PV; PV = -961.93 Change in price = $961.93 - $1,000 = -$38.07
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Which one of the following bonds is subject to the least interest rate risk?
5-year, 5 percent coupon
Rationale:
The longer the term and the lower the coupon rate, the greater the interest rate risk.
Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.
-$13.43; -$47.45
Rationale:
Both bonds are currently selling at par, which is $1,000. At 6.5 percent: Bond A: N = 6; I = 3.25; PMT = 30;
FV = 1,000; CPT PV; PV = 986.57 Bond B: N = 30; I = 3.25; PMT = 30; FV = 1,000; CPT PV; PV = 952.55 Bond
B decreases more since it is the longer-term bond.
What is the definition of current yield?
The return provided by the annual interest payments if the bond is purchased at the current price
A corporate bond pays $45 in interest every six months and matures in 11 years. What is the yield to maturity if the bond currently sells for $1,213?
6.29 percent
Rationale:
N = 22; PV = -1,213; PMT = 45; FV = 1,000; CPT I, I = 3.144, which is the semiannual rate
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Yield to maturity = 2 × 3.144% = 6.29%
What is the definition of yield to maturity?
The rate that will be earned if a bond is purchased today and held until maturity
A $1,000 bond matures in 15 years and carries a 5 percent coupon. The bond is callable in 5 years at a premium equal to one year's interest payments. What is the correct formula for computing the current price given a market rate of 4.7 percent?
Price = $25 × {1−11.0235100.0235}1-11.0235100.0235 + $1,0501.023510
You purchased a $5,000 face value corporate bond today at an asked bid of 98.76. The bond matures in 7.5 years and carries a 7 percent coupon. What annual rate of return will you earn if you hold the bond until maturity?
7.22 percent
Rationale:
Using a financial calculator: N = 15; PV = -4,938; PMT = 175; FV = 5,000; CPT I; I = 3.61, which is the semiannual rate
Yield to maturity = 2 × 3.61% = 7.22%
Which one of these is a key reason why issuers call bonds?
Significant drop in market interest rates
Which one of these formulas correctly computes the equivalent taxable yield?
Muni yield/(1 - Tax rate)
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A 20-year corporate bond is callable beginning in year 7 at a premium of $100. The coupon rate is 6 percent and the market rate is 5.5 percent. What is wrong with the following computation? Select all that apply.
-The call price should be $1,100.
Rationale:
The call price must include the call premium. Call price = Face value + Call premium = $1,000 + $100 = $1,100
-The interest rate, i, should be 0.0275 in three places.
Rationale:
The interest rate, i, should be 0.055/2 = 0.0275, as that is the semiannual discount rate.
What are the taxable equivalent yields (ETY) at tax rates of 25 percent and 35 percent if the muni yield is 3.5 percent?
4.67 percent; 5.38 percent
Rationale:
ETY = 0.035/(1 - 0.25) = 0.0467 = 4.67% ETY = 0.035/(1 - 0.35) = 0.0538 = 5.38%
At what tax rate will an investor begin to prefer the 5.2% municipal bond over the 8% corporate bond?
> 35%
Rationale:
0.08 = 0.052/(1 - Tax rate); Tax rate > 35%
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A corporate bond has a yield to maturity of 6.48 percent, a current price of $916.58, and matures in 5 years. What is the coupon rate?
4.50 percent
Rationale:
N = 10; I = 3.24; PV = -916.58; FV = 1,000; CPT PMT; PMT = 22.50, which is the semiannual interest payment.
Coupon rate = (2 × $22.50)/$1,000 = 0.045 = 4.50%
If a bond is selling at a premium which one of these rates will be the highest?
Coupon rate
Rationale:
Premium bond: Coupon rate > Current yield > Yield to maturity
What rate does an investor need to earn on a corporate bond to earn the same return as he can on a 3.5 percent muni if his tax rate is 28 percent?
4.86 percent
Rationale:
Equivalent taxable yield = 0.035/(1 - 0.28) = 0.0486 = 4.86%
At what tax rate will an investor be indifferent between a 4.2 percent municipal bond and a 7 percent corporate bond?
40 percent
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Rationale:
0.07 = 0.042/(1 - Tax rate); Tax rate = 40%
You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why?
The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.
Rationale:
The yield to maturity is the annual rate of return an investor will earn by purchasing a bond at the current price and holding it until maturity.
A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity?
7.2547 percent
Rationale:
N = 32; PV = -1,023; PMT = 37.50; FV = 1,000; CPT I; I = 3.62735, which is the semiannual rate.
YTM = 2 × 3.62735% = 7.2547%
A 10-year corporate bond has a 6 percent coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 6.5 percent and are expected to rise for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond?
The yield to maturity as it is unlikely the bond will be called
Rationale:
With market interest rates exceed the coupon rate and are rising, a bond is unlikely to be called.
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Which of the following yields or rates are inversely related to a bond's market price?
Current yield and yield to maturity only
Which one of these is correct if a bond is selling at a premium?
Coupon rate > Current yield > Yield to maturity
You are in the 3rd year of a 10-year corporate bond has a 6% coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 5.75% and are expected to drop dramatically for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond?
The yield to call as the bond will most likely be called
You manage a trust fund and have a fiduciary responsibility to only purchase investment grade bonds. Which bond rating indicates a bond you could not purchase?
BB
Rationale:
BB bonds are below investment grade so you could not purchase them while complying with your fiduciary responsibilities.
A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-
rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds?
1.36 percent
Rationale:
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Spread = 5.98% - 4.62% = 1.36%
What does a bond rating measure?
Credit quality, or default risk
Most secondary trades in the U. S. bond market occur between which two parties?
Bond dealers and large institutions
Which of these Standard & Poor's bond ratings is the lowest investment grade rating of those shown here?
BBB
Rationale:
BBB is a medium grade rating which is classified as investment grade.
Which one of these tends to occur when a BBB bond is downgraded to BB?
The market price of the bond declines
Which statement related to bonds is true?
Bonds have varying levels of risk.
The risk in bond funds is related to changes in:
interest rates
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U.S treasury bonds, corporate bonds, and municipal bonds are which types of securities?
Fixed-income securities
A __________bond is a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common __________ .
convertible, stock
Which one of these characteristics designates a premium bond?
Market price exceeds par value
Which of these statements is correct?
The average daily trading volume of the U. S. bond market reached over $760 billion in 2017.
Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par?
Select all that apply.
- Default risk
- Bond term
- Market rates of interest
__________ funds aim for safety of principal and income but are subject to capital gains and losses.
Bond
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Which of these best explains the current value of a bond?
The current value is the present value of the bond's expected future cash flows discounted at the market
rate of interest.
Which of these is not the traditional bond issuers?
Agency bonds
Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.
-$13.43; -$47.45
A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock is called a:
convertible bond
True or false: If you buy a bond today at par value and sell it one year from today, also at par value, the rate of return you will earn will equal to current yield.
True
Which of these characteristics apply to a discount bond? Select all that apply.
- Market price is less than the principal amount of the loan
- Selling for less than face value
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What is the definition of yield to maturity?
The rate that will be earned if a bond is purchased today and held until maturity
True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True
How does the yield to call differ from the yield to maturity for the same bond? Select all that apply.
- There are fewer time periods in the yield to call.
- The call price used in the yield to call usually exceeds the face value used in the yield to maturity.
The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply.
- Credit quality of the bond
- Tax status of the bond
Which one of these formulas correctly computes the equivalent taxable yield?
Muni yield/(1 - Tax rate)
Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?
-$38.07
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What is the definition of current yield?
The return provided by the annual interest payments if the bond is purchased at the current price
A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity?
7.2547 percent
Which one of the following should be used to compare various corporate bonds if you plan to purchase a
bond today, hold it until maturity, and want to select the bond with the highest rate of return?
Yield to maturity
What does a bond rating measure?
Credit quality, or default risk
Which one of these defines the yield to call?
Rate earned by buying a bond at today's price and holding it until the first call date
Rate earned by buying a bond at today's price and holding it until the first call date
1.36 percent
Which one of these correctly defines equivalent taxable yield?
The pretax rate needed on a taxable bond to produce the same after-tax rate as a muni bond
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Where does the majority of trading volume in bonds in the secondary markets occur?
Over-the-counter
What is a common means of reporting the daily direction of overall bond price movements?
Reporting the yield-to-maturity on the 10-year Treasury bonds
A corporate bond has a yield to maturity of 6.48 percent, a current price of $916.58, and matures in 5 years. What is the coupon rate?
4.50 percent
What is the definition of credit quality risk?
The chance that an issuer will either be late paying or will not pay an interest or principal payment
What is the yield spread?
Difference between the yields to maturity on bonds with differing levels of credit risk
Most secondary trades in the U. S. bond market occur between which two parties?
Bond dealers and large institutions
Which of the following are sources of information on the bond markets?
- Internet
- Merrill Lynch
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- The Wall Street Journal
Which of these statements is correct?
The average daily trading volume of the U. S. bond market reached over $760 billion in 2017.
If the market interest rate rises, bond prices will fall, and yields to maturity will rise.
A Treasury bond should have a higher yield to maturity than a comparable muni bond.
funds aim for safety of principal and income but are subject to capital gains and losses.
Bond
-income securities are securities that promise to make set payments according to some preset schedule.
Fixed
Which of the following are commonly included in an indenture agreement?
Par value
Call premium
Coupon rate
A bond has a par value of $1,000, a call premium of one year's interest, a call provision after 5 years, a coupon rate of 5 percent, semiannual interest payments, and a maturity of 20 years. Which of these is (are) correct?
Each interest payment will be $25.
The bond can be paid off in year 6 for a price of $1,050 plus any unpaid interest.
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Which statement related to bonds is true?
Bonds have varying levels of risk.
Which of these are common features of a corporate bond?
Face value of $1,000
Semi-annual interest payments
Publicly traded debt security
The risk in bond funds is related to changes in:
interest rates
Fixed-income securities are Blank______-term debt obligations.
longer
What is an indenture agreement?
A legal contract between the issuer and the bondholders
A bond's life span is typically referred to as to .
Blank 1: time
Blank 2: maturity
Which one of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value.
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What is the purpose of a call premium?
To compensate bondholders who have their bonds redeemed prior to maturity.
U.S treasury bonds, corporate bonds, and municipal bonds are which types of securities?
Fixed-income securities
Why are U. S. Treasury bonds considered to be safe?
They are secured by the full-faith-and-credit of the U. S. government.
What is a call premium?
The additional amount an issuer pays in excess of par value if the issuer redeems a bond prior to maturity.
Which one of the following types of bonds is used to finance projects such as public buildings, schools and roads?
State general obligation bond
Which of these is not the traditional bond issuers?
Agency bonds
Which of the following may be financed with corporate bonds?
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Plant and equipment
Inventory
Research and development
Which of the following securities pay income which is exempt from federal income taxes?
State bond to build a highway
County bond to build a school
What is the shortest maturity for a newly issued U. S. Treasury bond?
10 years
Which one of the following types of bonds is used to implement national monetary policy?
U. S. Treasury bonds
Why might a corporation issue bonds?
Bond may offer a lower aftertax cost than equity securities.
The funding of which one of these would be provided by a general obligation municipal bond?
City school
Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon and a face value at issuance of $1,000. The reference CPI is 202.34 and the current CPI is 203.18. What do you know for certain about
this bond?
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The coupon rate is still 2 percent but the interest payments have increased.
A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI?
205.17
Reason:
Current price = $1,000 × (Current CPI/204.89) = $1,001.37; Current CPI = 205.17
A TIPS was issued with a par value of $1,000, a coupon rate of 2.5 percent, and a reference CPI of 204.89.
Which one of these is the correct calculation of the current interest payment if the CPI is now 205.44?
$1,000 × (205.44/204.89) × (0.025/2)
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U. S. economy
A mortgage-backed security is an aggregation of mortgages where the holder of the security is paid from
mortgage payments of .
home owners
Which one of these descriptions defines a Treasury inflation-protection security (TIPS)?
U. S. government bond with an inflation-adjusted par value and varying interest payments
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What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 203.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago.
$1,011.22
Reason:
Price = $1,000 × (205.47/203.19) = $1,011.22
A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment?
$75.64
Reason:
Current interest payment = $5,000 × (203.14/201.42) × (0.03/2) = $75.64
Which one of these applies to agency bonds?
Relatively safe securities
The interest and par value payments of mortgage-backed securities originate from Blank______.
real estate mortgage payments
Which of the following are classified as asset-backed securities?
Mortgage-backed security
Debt security with payments originating from a pool of auto loans
Security repaid from a group of credit card loans
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A bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common stock is called a:
convertible bond
Which one of these characteristics designates a premium bond?
Market price exceeds par value
Which specific characteristic identifies a security as an asset-backed security?
Repayment based on a pool of debt securities
A bond is a bond that can be exchanged, at the owner's option, for a specified number of shares of the corporation's common .
Blank 1: convertible
Blank 2: stock
Which of these characteristics apply to a discount bond?
Selling for less than face value
Market price is less than the principal amount of the loan
Franco purchased a $10,000 bond at a price quote of 100.23 and sold it at a price quote of 99.87. What is his capital gain/loss?
-$36
Reason:
Capital loss = (99.87% - 100.23%) × $100,000 = -0.36% × $10,000 = -$36
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Which of these represents the compensation earned by a bond dealer?
Bid-ask spread
Willis purchased a 5 percent, $3,000 corporate bond when the asked quote was 101.16 and the bid quote was 101.15. He sold the bond when the asked quote was 101.08 and the bid quote was 101.06. What was his capital gain/loss?
-$3.00
Reason:
Capital loss = (101.06% of $3,000) - (101.16% of $3,000) = $3,031.80 - $3,034.80 = -$3
An investor buys bonds at the Blank______ price and sells them at the Blank______ price.
ask; bid
True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds.
True
What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446?
$102,144.60
Reason:
102.1446% ×$100,000 = $102,144.60
Sue purchased a 2%, $100,000 U. S. Treasury bond 1 year ago when the bid quote was 104.1850 and the asked quote was 104.2225. Today, she sold that bond when the bid quote was 103.2175 and the asked quote was 103.2275. What was her total dollar return on this investment?
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$995
Reason:
Interest = [(0.02) × $100,000] = $2,000; Total return = [(103.2175% - 104.2225%) × $100,000] + $2,000 = $995
Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par?
Default risk
Market rates of interest
Bond term
How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250?
$99,625.00
Reason:
99.6250% × $100,000 = $99,625.00
Sue purchased a 3.5 percent, $100,000 U. S. Treasury bond 6 months ago when the bid quote was 124.1850 and the asked quote was 124.2025. Today, she sold that bond when the bid quote was 124.2175 and the asked quote was 124.2225. What was her total dollar return on this investment?
$1,765.00
Reason:
Interest = [(0.035/2) × $100,000] = $1,750; Total return = [(124.2175% - 124.2025%) × $100,000] + $1,750 = $1,765
A $1,000 corporate bond has an asked price of 97.82 and a bid price of 97.81. What price will you receive
if you sell this bond now?
$978.10
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Reason:
You sell at the bid and buy at the asked. Selling price = 97.81% of $1,000 = $978.10
A typical municipal bond is selling at a price of $5,114.20. What is the price quote for this bond?
102.284
Reason:
Price quote = $5,114.20/$5,000 = 1.02284 = 102.284%, or a price quote of 102.284
The market rate of interest that is used to compute the present value of a bond is affected by which of the following?
Tax status of the bond
Credit quality of the bond
Which one of the following bond quotes indicates a corporate bond is selling at a premium?
101.49
A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond.
The municipal bond is selling at a discounted price of $4,933.50.
Which one of these is the best description of a 5-year zero coupon bond?
A bond with a current value equal to its discounted par value
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Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent?
PV = $1,000/[1 + (0.08/2)]20
Which of these best explains the current value of a bond?
The current value is the present value of the bond's expected future cash flows discounted at the market
rate of interest.
Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless
the problem states otherwise?
Semiannual interest payments
Face value = $1,000
A corporate bond matures in 11 years and carries a 6 percent coupon that pays semiannual interest. Which of these represent correct calculator input for computing the bond's current value at a discount rate of 5 percent? Select all that apply.
N = 22
FV = 1,000; PMT = 30
What is a zero coupon bond?
A zero coupon bond is sold at a steep discount and pays no semiannual interest payments.
Which one of these represents correct calculator input for computing the current value of a 5 percent coupon compounded semi-annually? The corporate bond matures in 12.5 years. The current discount rate is 6.5 percent. Assume the face value of the bond as $1,000.
PMT = 25
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You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply.
N = 10
FV = 1,000
You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond?
N = 14
A corporate bond matures in 14.5 years and pays a 6.75 percent coupon. What is its current value if the market rate of interest is 7.5 percent?
$934.38
Reason:
PV = [(0.0675/2) × $1,000] × {1−1[1+(0.075/2)](14.5×2)0.075/2}1-1[1+(0.075/2)](14.5×2)0.075/2 +
$1,000[1+(0.075/2)](14.5×2)$1,000[1+(0.075/2)](14.5×2) = $590.55 + $343.83 = $934.38
True or false: When computing the present value of a bond, both the par value and the interest payment
amount are input as positive values in a financial calculator.
True
Which one of the following bonds is subject to the least interest rate risk?
5-year, 5 percent coupon
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Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.
-$13.43; -$47.45
Reason:
Both bonds are currently selling at par, which is $1,000. At 6.5 percent: Bond A: N = 6; I = 3.25; PMT = 30;
FV = 1,000; CPT PV; PV = 986.57 Bond B: N = 30; I = 3.25; PMT = 30; FV = 1,000; CPT PV; PV = 952.55 Bond
B decreases more in value because it is the longer-term bond.
Which one of the following bonds is subject to the greatest interest rate risk?
10-year, zero coupon
Reason:
The longer the term and the lower the coupon rate, the greater the interest rate risk.
Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?
-$38.07
Reason:
When the coupon rate matches the market rate, a bond sells at par, which is assumed to be $1,000. Using a financial calculator, the price at 5.5 percent is: N = 20; I = 2.75; PMT = 25; FV = 1,000, CPT PV; PV = -961.93 Change in price = $961.93 - $1,000 = -$38.07
If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own?
Short-term, high coupon
Reason:
Short-term, high coupon bonds have the lowest interest rate risk. This means that these bonds will decrease the least in value as interest rates rise.
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What is interest rate risk?
Interest rate risk is the chance that a bond's value will decline due to a rise in market interest rates.
True or false: If you buy a bond today at par value and sell it one year from today, also at par value, the rate of return you will earn will equal to current yield.
True
Reason:
If you sell a bond for the same price as you purchased it, there is no capital gain. Thus, the only return is the interest earnings. Current yield = Annual interest/Current price
Which one of the following should be used to compare various corporate bonds if you plan to purchase a
bond today, hold it until maturity, and want to select the bond with the highest rate of return?
Yield to maturity
For a typical corporate bond, which one of these applies to the calculation of the bond's yield to maturity? Assume the PMT is input as a positive amount.
PV = -(Current bond price)
Which of the following correctly explains how a factor affects interest rate risk?
The longer the term to maturity, the greater the interest rate risk will be.
The lower the coupon rate, the greater the interest rate risk will be.
True or false: Interest rate risk is only a concern when market interest rates decline.
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False
Reason:
Interest rate risk is a concern when market rates increase since increasing interest rates cause bond prices to decline.
Which one of these is the current yield formula?
Annual interest / Current value
What is the definition of yield to maturity?
The rate that will be earned if a bond is purchased today and held until maturity
For a typical bond, which of the following values are expressed in semiannual terms when computing the
yield to maturity?
Number of time periods, N
Interest payments, PMT
Discount rate, or rate of return, I
A corporate bond pays $45 in interest every six months and matures in 11 years. What is the yield to maturity if the bond currently sells for $1,213?
6.29 percent
Reason:
N = 22; PV = -1,213; PMT = 45; FV = 1,000; CPT I; I = 3.144, which is the semiannual rate
Yield to maturity = 2 × 3.144% = 6.29%
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A $1,000 bond matures in 15 years and carries a 5 percent coupon. The bond is callable in 5 years at a premium equal to one year's interest payments. What is the correct formula for computing the current price given a market rate of 4.7 percent?
Price = $25 × {1−11.0235100.0235}1-11.0235100.0235 + $1,050/1.023510
Which one of these is a key reason why issuers call bonds?
Significant drop in market interest rates
Which one of these defines the yield to call?
Rate earned by buying a bond at today's price and holding it until the first call date
You purchased a $5,000 face value corporate bond today at an asked bid of 98.76. The bond matures in 7.5 years and carries a 7 percent coupon. What annual rate of return will you earn if you hold the bond until maturity?
7.22 percent
Reason:
Using a financial calculator: N = 15; PV = -4,938; PMT = 175; FV = 5,000; CPT I; I = 3.61, which is the semiannual rate
Yield to maturity = 2 × 3.61% = 7.22%
A 20-year corporate bond is callable beginning in year 7 at a premium of $100. The coupon rate is 6 percent and the market rate is 5.5 percent. What is wrong with the following computation? Select all that apply.
Price = $30 × {1−11.03140.03}1-11.03140.03 + $1,0001.0314
The call price should be $1,100.
The interest rate, i, should be 0.0275 in three places.
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Which one of these explains why issuers call bonds?
To refinance debt at a lower rate
How does the yield to call differ from the yield to maturity for the same bond?
There are fewer time periods in the yield to call.
The call price used in the yield to call usually exceeds the face value used in the yield to maturity.
Which one of these correctly defines equivalent taxable yield?
The pretax rate needed on a taxable bond to produce the same after-tax rate as a muni bond
What are the taxable equivalent yields (ETY) at tax rates of 25 percent and 35 percent if the muni yield is 3.5 percent?
4.67 percent; 5.38 percent
At what tax rate will an investor begin to prefer the 5.2% municipal bond over the 8% corporate bond?
> 35%
Reason:
0.08 = 0.052/(1 - Tax rate); Tax rate > 35%
You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why?
The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.
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Which one of these formulas correctly computes the equivalent taxable yield?
Muni yield/(1 - Tax rate)
What rate does an investor need to earn on a corporate bond to earn the same return as he can on a 3.5 percent muni if his tax rate is 28 percent?
4.86 percent
Reason:
Equivalent taxable yield = 0.035/(1 - 0.28) = 0.0486 = 4.86%
A 20-year corporate bond is callable beginning in year 7 at a premium of $100. The coupon rate is 6 percent and the market rate is 5.5 percent. What is wrong with the following computation? Select all that apply.
Price = $30 × {1−1/1.03140.03}1-1/1.0314/0.03 + $1,000/1.0314
The call price should be $1,100.
The interest rate, i, should be 0.0275 in three places.
A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity?
7.2547 percent
Reason:
N = 32; PV = -1,023; PMT = 37.50; FV = 1,000; CPT I; I = 3.62735, which is the semiannual rate.
YTM = 2 × 3.62735% = 7.2547%
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At what tax rate will an investor be indifferent between a 4.2 percent municipal bond and a 7 percent corporate bond?
40 percent
Reason:
0.07 = 0.042/(1 - Tax rate); Tax rate = 40%
Which one of these is correct if a bond is selling at a premium?
Coupon rate > Current yield > Yield to maturity
If a bond is selling at a premium which one of these rates will be the highest?
Coupon rate
A corporate bond has a current yield of 6.39 percent and a price quote of 97.8. What is the coupon rate?
6.25 percent
Reason:
0.0639 = Annual interest/$978; Annual interest = $62.49 Coupon rate = $62.49/$1,000 = 0.0625 = 6.25%
You are in the 3rd year of a 10-year corporate bond has a 6% coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 5.75% and are expected to drop dramatically for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond?
The yield to call as the bond will most likely be called
Which of the following yields or rates are inversely related to a bond's market price?
Current yield and yield to maturity only
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What does a bond rating measure?
Credit quality, or default risk
A corporate bond has a yield to maturity of 6.48 percent, a current price of $916.58, and matures in 5 years. What is the coupon rate?
4.50 percent
Reason:
N = 10; I = 3.24; PV = -916.58; FV = 1,000; CPT PMT; PMT = 22.50, which is the semiannual interest payment.
Coupon rate = (2 × $22.50)/$1,000 = 0.045 = 4.50%
Which of these Standard & Poor's bond ratings is the lowest investment grade rating of those shown here?
BBB
A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-
rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds?
1.36 percent
Reason:
Spread = 5.98% - 4.62% = 1.36%
A 10-year corporate bond has a 6 percent coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 6.5 percent and are expected to rise for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond?
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The yield to maturity as it is unlikely the bond will be called
What is the definition of credit quality risk?
The chance that an issuer will either be late paying or will not pay an interest or principal payment
Which one of these tends to occur when a BBB bond is downgraded to BB?
The market price of the bond declines
You manage a trust fund and have a fiduciary responsibility to only purchase investment grade bonds. Which bond rating indicates a bond you could not purchase?
BB
What is the yield spread?
Difference between the yield to maturity on bonds with differing levels of credit risk
Most secondary trades in the U. S. bond market occur between which two parties?
Bond dealers and large institutions
One type of high-yield bond is a fallen angel. How is this type of bond defined?
Junk bond that was originally issued as an investment-grade bond
Where does the majority of trading volume in bonds in the secondary markets occur?
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Over-the-counter
What is a common means of reporting the daily direction of overall bond price movements?
Reporting the yield-to-maturity on the 10-year Treasury bonds
Which of the following are sources of information on the bond markets?
Internet
Merrill Lynch
The Wall Street Journal
Which of the following apply to high-yield bonds?
- Low quality
- Increased credit risk
For a typical bond, which of the following values are expressed in semiannual terms when computing the
yield to maturity? Select all that apply.
Number of time periods, N; Discount rate, or rate of return, I; Interest payments, PMT
You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond and assuming that the interest is paid semiannually?
N=14 (Since the interest payments are assumed to be paid semiannually, the problem is solved using semiannual time periods. (N=7x2=14))
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If you expect interest rates to increase significantly within the next two years, which one of these bonds would you prefer to own?
Short-term, high coupon (Short-term, high coupon bonds have the lowest interest rate risk. This means that these bonds will decrease the least in value as interest rates rise.)
You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply.
N=10; FV=1,000 (The assumed par value of a corporate bond is $1,000)
A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity?
7.2547 percent
A corporate bond matures in 11 years and carries a 6 percent coupon payable semiannually. Assume that
its maturity value is $1,000. Which of these represent correct calculator input for computing the bond's current value at a discount rate of 5 percent? Select all that apply.
N=22; FV=1,000, PMT=30
How much will you pay to purchase a $100,000 U.S. Treasury bond that is quoted at 99.6250?
$99,625.00
Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par? Select all that apply.
Market rates of interest; Default risk; Bond term
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A corporate bond has a current yield of 6.39 percent and a price quote of 97.8. What is the coupon rate?
6.25 percent (0.0639= Annual interest/$978; Annual interest= $62.49 Coupon rate= $62.49/$1,000=0.0625=6.25%)
Most secondary trades in the U.S. bond market occur between which two parties?
Bond dealers and large institutions
Which of these are common features of a corporate bond? Select all that apply.
Publicly traded debt security; Face value of $1,000; Semi-annual interest payments
Which one of the following bond quotes indicates a corporate bond is selling at a premium?
101.49
Which of these characteristics apply to a discount bond? Select all that apply.
Market price is less than the principal amount of the loan; Selling for less than face value
A corporate bond pays $45 in interest every six months and matures in 11 years. What is the yield to maturity if the bond currently sells for $1,213?
6.29 percent (N=22; PV=-1,213; PMT= 45; FV= 1,000; CPT I, I=3.144, which is the semiannual rate; Yield to maturity= 2 x 3.144%= 6.29%)
Assume a corporate bond pays a 5 percent coupon, has a par value of $1,000 and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent?
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-$38.07 (When the coupon rate matches the market rate, a bond sells at par, which is assumed to be $1,000. Using a financial calculator, the price at 5.5 percent is: N=20; I=2.75; PMT=25; FV=1,000, CPT PV; PV -961.93; Change in price= $961.93-$1,000=-$38.07)
Which one of these is the best description of a 5-year zero coupon bond?
A bond with a current value equal to its discounted par value
Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless
the problem states otherwise?
Semiannual interest payments; Face value=$1,000
Which of the following are classified as asset-backed securities? Select all that apply.
Mortgage-backed security; Debt security with payments originating from a pool of auto loans; Security repaid from a group of credit card loans
One type of high-yield bond is a fallen angel. How is this type of bond defined?
Junk bond that was originally issued as an investment-grade bond
A typical municipal bond with a $5,000 face value is selling at a price of $5,114.20. What is the price quote for this bond?
102.284 (Price quote=$5,114.20/$5,000=1.02284=102.284% or a price quote of 102.284)
Which of the following correctly explains how a factor affects interest rate risk? Select all that apply.
The longer the term to maturity, the greater the interest rate risk will be; The lower the coupon rate, the greater the interest rate risk will be.
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What is a common means of reporting the daily direction of overall bond price movements?
Reporting the yield-to-maturity on the 10-year Treasury bonds (Since the rate of interest is the key factor
that affects bond prices, it is common practice to report the latest rate and daily yield change for the 10-
year Treasury. Remember, interest rates and bond prices are inversely related.)
Which of the following securities pay income which is exempt from federal income taxes? Select all that apply.
State bond to build a highway; County bond to build a school
Which of these Standard & Poor's bond ratings is the lowest investment grade rating of those shown here?
BBB
What rate does an investor need to earn on a corporate bond to earn the same return as he can on a 3.5 percent muni if his tax rate is 28 percent?
4.86 percent (Equivalent taxable yield=0.035/(1-0.28)=0.0486=4.86%)
Which one of these explains why issuers call bonds?
To refinance debt at a lower rate
How does the yield to call differ from the yield to maturity for the same bond? Select all that apply.
The call price used in the yield to call usually exceeds the face value used in the yield to maturity; There are fewer time periods in the yield to call
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Which of the following are commonly included in an indenture agreement? Select all that apply.
Call premium; Par value; Coupon rate
Which one of these correctly defines a bond feature?
The principal value of a bond is referred to as the par value, or face value.
A corporate bond matures in 11 years and carries a 6 percent coupon payable semiannually. Assume that
its maturity value is $1,000. Which of these represent correct calculator input for computing the bond's current value at a discount rate of 5 percent? Select all that apply.
N=22; FV=1,000, PMT=30
Which of these statements correctly applies to the NYSE bond market? Select all that apply.
Corporate bonds are the primary source of bond trading volume on the NYSE; The NYSE operates the largest centralized U.S. bond market.
Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000.
-$13.43;-$47.45
(Both bonds are currently selling at par, which is $1,000. At 6.5 percent:
Bond A: N=6; I=3.25; PMT=30; FV=1,000; CPT PV; PV=986.57
Bond B: N=30; I=3.25; PMT=30; FV=1,000; CPT PV; PV=952.55
Bond B decreases more since it is the longer-term bond.)
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Which one of these characteristics designates a premium bond?
Market price exceeds par value
Which one of these represents correct calculator input for computing the current value of a 5 percent coupon compounded semi-annually? The corporate bond matures in 12.5 years. The current discount rate is 6.5 percent. Assume the face value of the bond as $1,000.
PMT=25 (0.05/2)x$1,000=$25
The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply.
Tax status of the bond; Credit quality of the bond
Which of the following may be financed with corporate bonds? Select all that apply.
Plant and equipment; Inventory; Research and development
Which one of these descriptions defines a Treasury inflation-protection security (TIPS)?
U.S. government bond with an inflation-adjusted par value and varying interest payments
Which of the following apply to high-yield bonds? Select all that apply.
Increased credit risk; Low-quality
Which specific characteristic identifies a security as an asset-backed security?
Repayment based on a pool of debt securities
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Which one of these formulas correctly computes the equivalent taxable yield?
Muni yield/(1-Tax rate)
What is interest rate risk?
Interest rate risk is the chance that a bond's value will decline due to a rise in market interest rates.
Which of these best explains the current value of a bond?
The current value is the present value of the bond's expected future cash flows discounted at the market
rate of interest.
What is the definition of yield to maturity?
The rate that will be earned if a bond is purchased today and held until maturity
Which of the following are sources of information on the bond markets? Select all that apply.
Merrill Lynch; Internet; The Wall Street Journal
Which one of these terms indicates a bond is unsecured?
Debenture
Why are U.S. Treasury bonds considered to be safe?
They are secured by the full-faith-and-credit of the U.S. government.
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A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment?
$75.64
Current interest payment= $5,000 x (203.14/201.42) x (0.03/2)=$75.64
An investor buys bonds at the___price and sells them at the____price.
ask; bid
What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 203.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago.
$1,011.22
Price= $1,000 x (205.47/203.19)=$1,011.22
A corporate bond (paid semi-annually) has a yield to maturity of 6.48 percent, a current price of $916.58,
and matures in 5 years. What is the coupon rate?
4.50 percent
N=10; I=3.24; PV=-916.58; FV=1,000; CPT PMT; PMT=22.50, which is the semiannual interest payment.
Coupon rate=(2x$22.50)/$1,000=0.045=4.50%
Which of the following affect the coupon rate a firm must set on its bonds of the bonds are to be sold at par? Select all that apply.
Bond term; Default risk; Market rates of interest
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Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent?
PV=$1,000/[1+(0.08/2)]^20
The funding of which one of these would be provided by a general obligation municipal bond?
City school
A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI?
205.17
Current price=$1,000 x (Current CPI/204.89)=$1,001.37; Current CPI=205.17
Which one of these applies to agency bonds?
Relatively safe securities
Mortgage-backed securities are repaid from which funding source?
Homeowners' mortgage payments
A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond.
The municipal bond is selling at a discounted price of $4,933.50
Which one of these is a key reason why issuers call bonds?
Significant drop in market interest rates
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What is a call premium?
The additional amount an issuer pays in excess of par value if the issuer redeems a bond prior to maturity
Which one of these is the current yield formula?
Annual interest/Current value
What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 2013.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago.
$1,011.22
Price=$1,000 x (205.47/203.19)=$1,011.22
Which of these statements is correct? Select all that apply. (Treasury bond, yield to maturity)
A Treasury bond should have a higher yield to maturity than a comparable muni bond; If the market interest rate rises, bond prices will fall, and yields to maturity will rise
A bond has a par value of $1,000, a call premium of one year's interest, a call provision after 5 years, a coupon rate of 5 percent, semiannual interest payments, and a maturity of 20 years. Which one of these is (are) correct? Select all that apply.
Each interest payment will be $25; The bond can be paid off in year 6 for a price of $1,050 plus any unpaid interest
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A 20-year corporate bond is callable beginning in year 7 at a premium of $100. The coupon rate is 6 percent and the market rate is 5.5 percent. What is wrong with the following computation? Select all that apply.
Price=$30 x {(1-(1/1.03^14))/0.03}+($1,000/1.03^14)
The call price should be $1,100;
(The call price must include the call premium. Call price=Face value + Call premium= $1,000+
$100=$1,100) The interest rate, i, should be 0.0275 in three places (0.055/2=0.0275, as that is the semiannual discount rate.)
A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-
rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds?
1.36 percent
Spread=5.98%-4.62%=1.36%
Which statement related to bonds is true?
Bonds have varying levels of risk
Which of these statements is correct? (Bonds)
The average daily trading volume of all types of U.S. bonds reached over $730 billion.
Which one of these characteristics fits the definition of an agency bond?
Issued to support a sector of the U.S. economy
What is the purpose of a call premium?
To compensate bondholders who have their bonds redeemed prior to maturity
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What is the definition of credit quality risk?
The chance that an issuer will either be late paying or will not pay an interest or principal payment
Mortgage-backed securities are repaid from which funding sources?
Homeowners' mortgage payments
You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why?
The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years.
A TIPS was issued with a $1,000 par value, a 2 percent coupon rate, and a reference CPI of 204.39. You bought the bond on January 1, 2012 at a CPI of 205.26. You sold the bond on January 1, 2013 at a CPI of 204.89. What was your total return if the July 2012 CPI was 205.32?
1.86 percent
Total return={[$1,000 x (204.98/204.39)]-[$1,000 x (205.26/204.39)]+[$1,000 x (205.32/204.39) x (0.02/2)]+[$1,000 x (204.98/204.39) x (0.02/2)/[$1,000 x (205.26/204.39)]=0.0186=1.86%
A bond has a par value of $1,000, a call premium of one year's interest, a call provision after 5 years, a coupon rate of 5 percent, semiannual interest payments, and a maturity of 20 years. Which of these is (are) correct? Select all that apply.
Each interest payment will be $25; The bond can be paid off in year 6 for a price of $1,050 plus any unpaid interest
What does a bond rating measure?
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Credit quality, or default risk
Which one of these is correct if a bond is selling at a premium?
Coupon rate> Current yield> Yield to maturity
A 10-year corporate bond has a 6 percent coupon, a call premium of $60, and a first call date in year 4. Market interest rates are 6.5 percent and are expected to rise for an extended period. If you plan to hold the bond, which yield should you most consider before buying the bond?
The yield to maturity as it is unlikely the bond will be called
A corporate bond has a par value of $1,000, matures in 14.5 years, and pays a 6.75 percent coupon. What is its current value if the market rate of interest is 7.5 percent?
$934.38
PV=[(0.0675/2) x $1,000] x {((1-(1/[1+(0.075/2)]^(14.5x2))/0.075/2}+($1,000/
([1+(0.075/2)]^(14.5x2)=$590.55+$343.83=$934.38
Willis purchased a 5 percent, $3,000 corporate bond when the asked quote was 101.16 and the bid quote was 101.15. He sold the bond when the asked quote was 101.08 and the bid quote was 101.06. What was his capital gain/loss?
-$3.00
Capital loss=(101.06% of $3,000)-(101.16% of $3,000)=$3,031.80-$3,034.80=-$3
At what tax rate will an investor be indifferent between a 4.2 percent municipal bond and a 7 percent corporate bond?
40 percent
0.07=0.042/(1- Tax rate); Tax rate=40%
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Which one of the following types of bonds is used to implement national monetary policy?
U.S. Treasury bonds
Which one of the following bonds is subject to the greatest interest rate risk?
10-year, zero coupon
Sue purchased a 3.5 percent, $100,000 U.S. Treasury bond 6 months ago when the bid quote was 124.1850 and the asked quote was 124.2025. Today, she sold that bond when the bid quote was 124.2175 and the asked quote was 124.2225. What was her total dollar return on this investment?
$1,765.00
Interest=[(0.035/2)x$100,000]=$1,750; Total return=[(124.2175%-124.2025%)x$100,000]+
$1,750=$1,765
Franco purchased a $10,000 bond at a price quote of 100.23 and sold it at a price quote of 99.87. What is his capital gain/loss?
-$36
Capital loss=(99.87%-100.23%)x$10,000=-0.36%x$100,000=-$36
A TIPS was issued with a $1,000 par value, a 2 percent coupon rate, and a reference CPI of 204.39. You bought the bond on January 1, 2012 at a CPI of 205.26. You sold the bond on January 1, 2013 at a CPI of 204.98. What was your total return if the July 2012 CPI was 205.32?
1.86 percent
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Related Documents
Related Questions
Over the period of 1926-2014:
Multiple Choice
long-term government bonds underperformed long-term corporate bonds.
small-company stocks underperformed large-company stocks.
inflation exceeded the rate of return on U.S. Treasury bills.
U.S. Treasury bills outperformed long-term government bonds.
large-company stocks outperformed all other investment categories.
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Which of the following statements concerning a global view of the bond
market is correct? A. US dollar - denominated bonds distribute both interest
and principal payments in euros. B. Foreign bonds, like junk bonds, have
high default risk.C. Exchange rate fluctuations influence the returns eamed
on foreign - pay bond holdings.D. The United States today accounts for
about seventy-five percent of the available fixed-income securities
worldwide.
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Fixed-income securities consist of debt instruments and preferred stock. Bonds are debt securities in which a borrower promises to pay a specified interest rate and principal at a future date.
Which of the following types of bonds have the least default risk?
Municipal bonds
Corporate bonds
Treasury bonds
Based on the information given in the following statement, answer the questions that follow:
In July 2009, Hungary successfully issued 1 billion euros in bonds. The transaction was managed by Citigroup.
Who is the issuer of the bonds?
Citigroup
The Hungarian government
Hungary Bank
What type of bonds are these?
Government bonds
Corporate bonds
Municipal bonds
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Treasury securities are issued and backed by the U.S. government and, therefore, are considered to be the lowest-risk
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(which is paid at maturity) and the bond interest rate (which is paid semiannually) is regularly adjusted to account for
inflation. However, for this problem only, assume the semi-annual interest payment (called the bond dividend) remains the
same.
You purchased a 10-year $10,000 TIPS bond with dividend of 4% per year payable semiannually (i.e., $200 every 6
months). Assume there is no inflation adjustment for the first 5 years, but in years 6 through 10, the bond face value
increases by $850 each year. You use an expected investment return of 11% per year compounded semiannually.
NOTE: This is a multi-part question. Once an…
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Let's say that the data shows how the spread between the interest rates on corporate bonds and U.S. treasury bonds has been very large during the Covid - 19 pandemic . What would explain this difference ? Use the bond supply and demand analysis to answer this question . Be as specific as you can be and make sure you explain the channels clearly?
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1) Expectations of asset values by participants in financial markets 2) When market participants use all available information 3) Which of the following is NOT a way in which prices communicate information in the markets for bonds, stocks, foreign exchange, and financial instruments? 4) The gap between the yield on a corporate bond and the yield on a U.S. Treasury bond of the same maturity represents 5) If the interest rate on a ten-year bond issued by GM is 7.8% while the interest rate on a ten-year treasury bond is 4.6%, the risk premium is 6) If the dollar is expected to depreciate against the Japanese yen during the next 60 days, then 7) If the dollar is expected to depreciate against the British pound during the next 60 days, then 8) When the market price of a financial instrument equals its present value, savers and borrower can be sure that 9) If a company's sales begin to fall off so that it is now more likely to default on its bonds than financial markets had…
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What reforms to the financial system might reduce its exposure to systemic risk?
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9.
In 2016, when the interest rate on 10-year German government bonds
became negative, an article in the Wall Street Journal noted that the interest rate
on 10-year bonds depended in part on investors' expectations of future short-term
interest rates. The article also noted that "investors don't seem to have changed their
perception of... [short-term] interest rates in the future." If the article is correct, can
the expectations theory explain why the interest rate on 10-year German government
bonds declined? Can the risk premium theory? Briefly explain.
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In September 2012, the Argentinian central bank increased its benchmark interest rate via open market operations. The bank must have sold securities. True O False
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Suppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest ratesin Europe. What effect would this have on the price of an average company’s common stock?
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Suppose the Federal Reserve instructs the Trading Desk to purchase $1 billion of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial banks.
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Use the data in the tables below to answer the following questions:
Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2017.
Average Premium
Portfolio
Treasury bills
Treasury bonds
Common stocks
Average Annual
Rate of Return (%)
(Extra return
versus Treasury
bills) (%)
3.8
5.3
11.5
1.5
7.7
Standard deviation of returns, 1900-2017.
Standard
Portfolio
Deviation (%)
Treasury bills
2.9
Long-term government bonds
9.0
Common stocks
19.7
a. What was the average rate of return on large U.S. common stocks from 1900 to 2017?
b. What was the average risk premium on large stocks?
c. What was the standard deviation of returns on common stocks?
(Enter your answer as a percent rounded to 1 decimal place.)
a.
Average rate of return
11.5 %
b.
Average risk premium
7.7 %
C.
Standard deviation of returns
19.7 %
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8. Second Bank has the following balance sheet in millions of dollars, with the Basel risk
weights given in parentheses.
a. Does the bank have enough capital to meet the requirements as specified by Basel II?
b. The bank wishes to keep its Tier 1 ratio at 5%. They will sell a portion of their consumer
loans and invest them in U.S. government bonds. How much consumer loans should
they sell?
U.S. Govt T-Bonds (o%)
$10om Deposits
$ 950m
Govt. Agency FNMA Bonds (20%)
$200m Subordinated Debt ((Tier II)
$ 1om
University Dorm bonds (50%)
$30om Preferred Stock (Tier II)
$ 25m
Consumer Loans AAA-rated (20%)
$20om
Commercial Loans BBB-rated (100%)
$200m Equity (Tier I)
$ 15m
$100om
$1000m
Total
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Related Questions
- Over the period of 1926-2014: Multiple Choice long-term government bonds underperformed long-term corporate bonds. small-company stocks underperformed large-company stocks. inflation exceeded the rate of return on U.S. Treasury bills. U.S. Treasury bills outperformed long-term government bonds. large-company stocks outperformed all other investment categories.arrow_forwardWhich of the following statements concerning a global view of the bond market is correct? A. US dollar - denominated bonds distribute both interest and principal payments in euros. B. Foreign bonds, like junk bonds, have high default risk.C. Exchange rate fluctuations influence the returns eamed on foreign - pay bond holdings.D. The United States today accounts for about seventy-five percent of the available fixed-income securities worldwide.arrow_forwardFixed-income securities consist of debt instruments and preferred stock. Bonds are debt securities in which a borrower promises to pay a specified interest rate and principal at a future date. Which of the following types of bonds have the least default risk? Municipal bonds Corporate bonds Treasury bonds Based on the information given in the following statement, answer the questions that follow: In July 2009, Hungary successfully issued 1 billion euros in bonds. The transaction was managed by Citigroup. Who is the issuer of the bonds? Citigroup The Hungarian government Hungary Bank What type of bonds are these? Government bonds Corporate bonds Municipal bondsarrow_forward
- Treasury securities are issued and backed by the U.S. government and, therefore, are considered to be the lowest-risk securities on the market. As an investor looking for protection against inflation, you are considering the purchase of inflation-adjusted bonds known as U.S. Treasury Inflation-Protected Securities (TIPS). With these securities, the face value (which is paid at maturity) and the bond interest rate (which is paid semiannually) is regularly adjusted to account for inflation. However, for this problem only, assume the semi-annual interest payment (called the bond dividend) remains the same. You purchased a 10-year $10,000 TIPS bond with dividend of 4% per year payable semiannually (i.e., $200 every 6 months). Assume there is no inflation adjustment for the first 5 years, but in years 6 through 10, the bond face value increases by $850 each year. You use an expected investment return of 11% per year compounded semiannually. NOTE: This is a multi-part question. Once an…arrow_forwardLet's say that the data shows how the spread between the interest rates on corporate bonds and U.S. treasury bonds has been very large during the Covid - 19 pandemic . What would explain this difference ? Use the bond supply and demand analysis to answer this question . Be as specific as you can be and make sure you explain the channels clearly?arrow_forward1) Expectations of asset values by participants in financial markets 2) When market participants use all available information 3) Which of the following is NOT a way in which prices communicate information in the markets for bonds, stocks, foreign exchange, and financial instruments? 4) The gap between the yield on a corporate bond and the yield on a U.S. Treasury bond of the same maturity represents 5) If the interest rate on a ten-year bond issued by GM is 7.8% while the interest rate on a ten-year treasury bond is 4.6%, the risk premium is 6) If the dollar is expected to depreciate against the Japanese yen during the next 60 days, then 7) If the dollar is expected to depreciate against the British pound during the next 60 days, then 8) When the market price of a financial instrument equals its present value, savers and borrower can be sure that 9) If a company's sales begin to fall off so that it is now more likely to default on its bonds than financial markets had…arrow_forward
- Assume that over the past 88 years, U.S. Treasury bills had an average return of 3.5% as compared to 6.1% on long-term government bonds. What was the average risk premium on the long-term government bonds?arrow_forwardWhat reforms to the financial system might reduce its exposure to systemic risk?arrow_forward9. In 2016, when the interest rate on 10-year German government bonds became negative, an article in the Wall Street Journal noted that the interest rate on 10-year bonds depended in part on investors' expectations of future short-term interest rates. The article also noted that "investors don't seem to have changed their perception of... [short-term] interest rates in the future." If the article is correct, can the expectations theory explain why the interest rate on 10-year German government bonds declined? Can the risk premium theory? Briefly explain.arrow_forward
- In September 2012, the Argentinian central bank increased its benchmark interest rate via open market operations. The bank must have sold securities. True O Falsearrow_forwardSuppose interest rates on Treasury bonds rose from 5% to 9% as a result of higher interest ratesin Europe. What effect would this have on the price of an average company’s common stock?arrow_forwardSuppose the Federal Reserve instructs the Trading Desk to purchase $1 billion of securities. Show the result of this transaction on the balance sheets of the Federal Reserve System and commercial banks.arrow_forward
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