Deck 9: Bond Valuation

Question 1

The credit rating of a credit-wrapped bond depends on the reputation and financial strength of:

A)the issuer.
B)the investor.
C)the guarantor.
D)the borrower.

Answer 1

C

Question 2

A repurchase agreement calls for:

A)a firm to sell securities with the agreement to buy them back after a short period at a lower price.
B)a firm to buy securities with the agreement to sell them back after a short period at a lower price.
C)a firm to sell securities with the agreement to buy them back after a short period at a higher price.
D)a firm to buy securities with the agreement to sell them back after a short period at a higher price.

Answer 2

C

Question 3

Which one of the following statements is true?

A)Zero coupon bonds must sell for less than similar bonds that make coupon payments before maturity.
B)Zero coupon bonds sell well below their face value (at a deep discount)because they offer no coupons.
C)Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.
D)All of the above are true.

Answer 3

D

Question 4

Corporate bonds:

A)are discount securities.
B)do not need to be paid back.
C)pay interest at maturity date.
D)make periodic payments of interest and repay principal at the maturity date.

Question 5

Which of the following statements is not correct? Treasury indexed bonds:

A)pay coupons semi-annually.
B)are issued in periods of deflation.
C)pay inflation-adjusted coupons.
D)have an inflation-adjusted coupon rate.

Question 6

Some corporate bonds have sinking fund provisions or call provisions that:

A)reset the terms of the bond.
B)make the bond secured.
C)allow the investors to convert the bond into shares.
D)require that the bond issuer provide funds to a trustee to retire a specific dollar amount (face value amount)of bonds each year.

Question 7

Senior debt:

A)is the debt issued by good credit rated companies.
B)is debt issued by the commonwealth government.
C)has a higher probability of payment than junior debt.
D)is debt that has priority in the event of default of the issuer.

Question 8

The quality of a financial guarantee depends on the reputation and financial strength of the:

A)investor.
B)Federal government.
C)guarantor.
D)borrower.

Question 9

Everything else being equal,a corporate bond will sell at a higher yield if it:

A)is senior debt.
B)has a call provision.
C)has lower default risk.
D)can be converted to shares.

Question 10

In the tenders organised by the AOFM to issue Treasury bonds:

A)bidders win if the yield in their bid is among the highest.
B)AOFM serves the bidders with the lowest yields first and then accepts highest yields up to the exhaustion of the quantity on issue.
C)bidders bid quantities at the yield announced by AOFM.
D)bidders win if the quantity in their bid is among the highest.

Question 11

Convertible notes are hybrid securities that can be converted into:

A)shares of common stock at the discretion of the holder.
B)bonds at the discretion of the holder.
C)treasury notes at the discretion of the holder.
D)debentures at the discretion of the holder.

Question 12

Which of the following statements is not correct?

A)All bonds pay coupons.
B)Par value of a bond is its face value.
C)Bonds can be seen as annuities for the coupon payments.
D)A bond that trades above its face value is said to be sold at a premium.

Question 13

Convertible bonds are:

A)not long term IOUs.
B)bonds with no coupon payments.
C)the most common bonds issued by companies.
D)bonds that have the feature of convertibility into shares.

Question 14

A repurchase agreement is like a secured loan because:

A)it is backed by the real estate property of the borrower.
B)the Reserve Bank of Australia is the guarantor of the repo.
C)it involves a commercial bank and the Reserve Bank of Australia.
D)it involves a collateral,which is the underlying security in the repo.

Question 15

The insurer in a financial guarantee receives an upfront fee paid by:

A)the investor.
B)the issuer of the bond.
C)the bond market operator.
D)the proceeds of the asset sales of the defaulting company.

Question 16

Semis differ from CGS in important ways:

A)semis trade at a par.
B)semis trade at a discount.
C)semis trade at a higher yield.
D)both a and b above.

Question 17

State government bonds ________ than Commonwealth government bonds.

A)pay higher yields.
B)have higher liquidity.
C)have lower default risk.
D)have higher marketability.

Question 18

Hybrid securities are financial products that have characteristics of:

A)debt and equity.
B)discount securities.
C)government bonds.
D)credit-wrapped bonds.

Question 19

The RBA is a large investor in Treasury bonds and notes due to its role:

A)as a supervisor of the financial system.
B)in the conduct of monetary policy.
C)in the stability of the government.
D)as the bank of the government.

Question 20

Which of the following statements is not correct? In a repo:

A)the seller of the security is the borrower of funds.
B)the price of repurchase is known from the beginning of the financial arrangement.
C)the difference between the repurchase price and the selling price is the interest on the loan.
D)if the borrower defaults on the repayment of the loan he/she then has to deliver the underlying securities to the lender.

Question 21

A ten-year bond has a par value of $1,000; a 7.5 percent coupon rate; and a yield to maturity of 8.25 percent.Assuming the coupons are paid semi-annually,the market price is closest to:

A)$949.60.
B)$950.24.
C)$1,051.48.
D)$1,052.11.

Question 22

When the bond is sold below face value,it is known as:

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

Question 23

If a bond's coupon rate is equal to the market rate,then the bond will sell:

A)at a price less than its face value.
B)at a price equal to its face value.
C)at a price greater than its face value.
D)none of the above are true.

Question 24

Aletek Corp is issuing a 10-year bond with a face value of $1,000 and a coupon rate of 7 percent.The interest rate for similar bonds is currently 9 percent.Assuming annual payments,what is the present value of the bond? (Round to the nearest dollar.)

A)$872.
B)$945.
C)$990.
D)$1,066.

Question 25

Your friend recommends that you invest in a three-year bond issued by Morgans Ltd that will pay annual coupons of 10 percent and has a face value of $1,000.Similar investments today will yield 6 percent.How much should you pay for the bond? (Round to the nearest dollar.)

A)$886.
B)$979.
C)$1,024.
D)$1,107.

Question 26

In calculating the current price of a bond paying semiannual coupons,one needs to:

A)use half the annual coupon.
B)use double the number of payments.
C)use half the annual rate as the discount rate.
D)all of the above need to be done.

Question 27

Hitchcocks Ltd is issuing 20-year bonds that will pay coupons semiannually and have a face value of $1,000.The coupon rate on this bond is 7.8 percent.If the market rate for such bonds is 7 percent,what will the bonds sell for today? (Round to the nearest dollar.)

A)$1,037.
B)$1,085.
C)$861.
D)$923.

Question 28

Calculate the price of a 3-year bond with a face value of $50,000,an annual coupon rate of 8% and an annual market yield of 6%.Coupon payments are made semi-annually.

A)$47,379.
B)$52,673.
C)$52,709.
D)$54,917.

Question 29

Which one of the following statements about zero coupon bonds is not true?

A)Zero coupon bonds make coupon payments but no principal payment at maturity.
B)Zero coupon bonds have no coupon payments but promise a single payment at maturity.
C)Zero coupon bonds must sell for less than similar bonds that make periodic coupon payments.
D)All of the above statements are true.

Question 30

A zero-coupon bond with a face value of $1,000 is currently selling for $687.38.The bond has a market yield of 5.48 percent.What is the bond's term to maturity,assuming semi-annual compounding?

A)6.62 years.
B)6.93 years.
C)7.03 years.
D)7.42 years.

Question 31

For a 3-year bond with a face value of $50 and a coupon rate as well as a market rate of 8%:

A)not enough information provided.
B)the face value will be higher than the price of the bond.
C)the face value will equal the price of the bond.
D)the face value will be lower than the price of the bond.

Question 32

Bill wants to buy five-year zero coupon bonds with a face value of $1,000.His opportunity cost is 8.5 percent.Assuming annual compounding,what would be the current market price of these bonds? (Round to the nearest dollar.)

A)$665.
B)$890.
C)$1,023.
D)$1,113.

Question 33

Jerry is planning to sell a bond that he owns.This bond has four years to maturity,a face value of $1,000 and pays a coupon of 10 percent on a semi-annual basis.Similar bonds in the current market will yield 12 percent.What will be the price that he will get for his bond? (Round to the nearest dollar.)

A)$1,044.
B)$938.
C)$970.
D)$1,102.

Question 34

Jacqui has been offered a seven-year bond issued by Sunfam Ltd at a price of $943.22.The bond has a face value of $1,000 and a coupon rate of 9 percent and pays the coupon semi-annually.Similar bonds in the market will yield 10 percent today.Should she buy the bonds at the offered price? (Round to the nearest dollar.)

A)Yes,the bond is worth more at $1,015.
B)No,the bond is only worth $921.
C)Yes,the bond is worth more at $950.
D)No,the bond is only worth $912.

Question 35

Bonds sell at a discount off the par value when market rates for similar bonds are:

A)less than the bond's coupon rate.
B)equal to the bond's coupon rate.
C)greater than the bond's coupon rate.
D)market rates are irrelevant in determining a bond's price.

Question 36

Which of the following statements is false?

A)When the prevailing market interest rate is higher than the coupon rate,the bond will be traded at a discount.
B)When the prevailing market interest rate is lower than the coupon rate,the bond will be traded at a premium.
C)The higher the coupon rate,the less sensitive the market price of the bond becomes to changes in prevailing market rates.
D)The longer the time to maturity,the less sensitive the market price of the bond becomes to changes in prevailing market rates.

Question 37

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments:

A)less than the price of the bond.
B)equal to zero.
C)equal to the price of the bond.
D)exceed the price of the bond.

Question 38

Stanley Richards is interested in buying a five-year bond that pays a coupon of 10 percent on a semiannual basis and has a face value of $1,000.The current market rate for similar bonds is 9.8 percent.At what price should the bond be trading? (Round to the nearest dollar.)

A)$1,048.
B)$965.
C)$1,099.
D)$982.

Question 39

In Australia,Treasury bonds pay coupons:

A)monthly.
B)semi-annually.
C)annually.
D)at maturity.

Question 40

The Australian Treasury has issued 10-year zero coupon bonds with a face value of $1,000.Assume that coupon payments are normally semi-annual.What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round to the nearest dollar.)

A)$515.
B)$604.
C)$684.
D)$860.

Question 41

A 5-year bond with 10% coupon rate and $1,000 face value is selling for $1,100.Calculate the yield to maturity on the bond assuming annual interest payments.

A)7.53%.
B)7.56%.
C)8.53%.
D)8.62%.

Question 42

Kevin Smart invested in a state government bond that promised an annual yield of 6.7 percent.The bond pays coupons twice a year and the face value is $1,000.What is the effective annual yield (EAY)on this investment?

A)13.6%.
B)6.8%.
C)6.7%.
D)None of the above.

Question 43

What is the YTM of a four-year bond with a par value of $1,000 and a 4 percent coupon rate when the bond pays coupons semi-annually and is priced at $932.35?

A)2.96%.
B)5.92%.
C)5.95%.
D)11.84%.

Question 44

If market interest rates fall after a bond is issued,the:

A)investor will sell the bond.
B)face value of the bond increases.
C)market value of the bond is decreasing.
D)market value of the bond is increasing.

Question 45

Suppose an investor earned a semi-annual yield of 6.4 percent on a bond paying coupons twice a year.What is the effective annual yield (EAY)on this investment?

A)12.8%.
B)6.4%.
C)13.2%.
D)13.0%.

Question 46

A change in interest rates for two 10-year bonds with coupon rates of 6% and 10% respectively will:

A)not impact on the prices of both bonds.
B)cause a similar level of changes for both bonds.
C)cause a bigger change in the price for the bond with a lower coupon rate than the bond with a bigger coupon rate.
D)cause a smaller change in the price of the bond with a lower coupon rate than the bond with a bigger coupon rate.

Question 47

What is the YTM of a four-year bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $932.35? Assume coupons are paid annually.

A)2.96%.
B)5.92%.
C)5.95%.
D)6.22%.

Question 48

Marketability is the ability of an investor to sell:

A)the security above its par value.
B)at a profit under all circumstances.
C)a security quickly,at a low transaction cost,and at a price close to its fair market value.
D)none of the above.

Question 49

Coupon payments are:

A)the regular interest payments received by the holder of a bond.
B)the regular interest payments received by the holder of an ordinary share.
C)the regular interest payments received by the holder of a bank deposit.
D)the regular interest payments received by the holder of a preference share.

Question 50

A five-year zero coupon bond with a face value of $1,000 is currently selling for $826.50.Assume that coupon payments are normally semi-annual.What is the bond's YTM?

A)3.84%
B)1.92%.
C)3.88%.
D)1.94%.

Question 51

Which one of the following increases the sensitivity of bond prices?

A)A decrease in maturity.
B)An increase in maturity.
C)An increase in the coupon payment.
D)A decrease in the yield to maturity.

Question 52

Which one of the following statements is true?

A)The interest risk premium always adds a downward bias to the slope of the yield curve.
B)The longer the maturity of a security,the greater its interest rate risk.
C)If investors believe inflation will be subsiding in the future,the prevailing yield will be upward sloping.
D)The real rate of interest varies with the business cycle,with the lowest rates seen at the end of a period of business expansion and the lowest at the bottom of a recession.

Question 53

Which one of the following statements is true?

A)Interest rate risk decreases as maturity increases.
B)Long-term bonds have lower price volatility than short-term bonds.
C)All other things being equal,short-term bonds are more risky than long-term bonds.
D)As interest rates decline,the prices of bonds rise; and as interest rates rise,the prices of bonds decline.

Question 54

Which one of the following statements is not true?

A)As interest rates increase,bond prices increase.
B)Interest rate changes and bond prices are inversely related.
C)Interest rate risk is the risk that bond prices will change as interest rates change.
D)Long-term bonds are more price volatile than short-term bonds of similar risk.

Question 55

Five years ago,Peter Pander bought a 10-year bond that pays 8 percent semi-annually for $981.10.It has a face value of $1,000.Today,he sold it for $1,067.22.What is the realised yield on his investment?

A)6.41%.
B)4.78%.
C)8.72%.
D)9.56%.

Question 56

Rick Wemmerslager bought a 10-year bond for $921.77 seven years ago.The bond pays a coupon of 15 percent semi-annually.Today,the bond is priced at $961.92.If he sold the bond today,what would be his realised yield? (Round to the nearest percent.)

A)16.62%.
B)16.86%.
C)7.6%.
D)16.95%.

Question 57

A twenty-year zero coupon bond with a face value of $1,000 is currently selling for $326.50.Assume that coupon payments are normally semi-annual.What is the bond's YTM?

A)5.68%.
B)5.65%.
C)5.76%.
D)5.72%.

Question 58

In a fixed-rate bond,the variable which changes to give investors the market rate of return is the

A)price.
B)face value.
C)coupon rate.
D)coupon amount.

Question 59

The yield to maturity (YTM)is:

A)the bond's internal rate of return.
B)the yield that an investor would expect to make if he or she bought the bond at the current price,held it to maturity,received all the promised payments on their scheduled dates,and reinvested all the cash flows received at the YTM.
C)the discount rate used to evaluate bonds.
D)all of the above.

Question 60

BJL Painting Ltd has bonds that trade with a yield to maturity of 7 percent and a face value of $1,000.The bonds have a six-year term to maturity,pay semi-annual coupons and are currently selling for $1,067.20.The coupon rate of the bond is closest to:

A)4.20%.
B)4.95%.
C)8.39%.
D)8.41%.

Question 61

A one-year bond offers a 12.5% yield to maturity and a two-year bond offers an 11% yield to maturity.Which of the following is true?

A)The term structure is flat.
B)The term structure is upward sloping.
C)The term structure cannot be determined.
D)The term structure is downward sloping.

Question 62

Historically,high default premiums have been associated with:

A)generally rising interest rates.
B)economic recessions.
C)the number of bonds rated by Moody's and Standard & Poor's.
D)economic boom periods.

Question 63

Credit-rating agency ratings are associated with which of the following investor risks?

A)Default risk.
B)Reinvestment risk.
C)Interest rate risk.
D)Exchange rate risk.

Question 64

Which of the following statements is true?

A)Interest rates always rise before recessions.
B)Treasury bond yields are always higher than Treasury bill yields.
C)Default risk premiums vary inversely with economic activity.
D)Municipal bond yields are usually higher than similar risk corporate yields.

Question 65

The refers to the relationship between interest rates and the term to maturity on underlying debt instruments.

A)liquidity preference theory.
B)market segmentation theory.
C)term structure of interest rates.
D)expectations theory.

Question 66

Interest rates should decrease if:

A)inflationary expectations have decreased.
B)business investment demand has decreased significantly.
C)Central Bank has decreased M1 and the supply of loanable funds.
D)the economy is in a boom.

Question 67

Inverted yield curves are observed when:

A)the economy is in recession.
B)the economy is stagnant.
C)the economy is growing.
D)none of the above.

Question 68

Which of the following is not considered when assigning a bond rating?

A)the amount of the fixed contractual cash payments.
B)the variability of earnings.
C)the issuer's expected cash flow.
D)the rating on the prior issue of securities sold.

Question 69

Which one of the following statements is not true?

A)The shape of the yield curve is not constant over time.
B)As the general level of interest rises and falls over time,the yield curve shifts up and down and has different slopes.
C)Yield curves show graphically how market yields vary as term to maturity changes.
D)The relationship between yield and marketability is known as the term structure of interest rates.

Question 70

The fundamental determinant of interest rates is the:

A)market price.
B)interaction between banks and borrowers.
C)interaction between lenders and borrowers.
D)interaction of the production opportunities facing society and the individual's time preference for consumption.

Question 71

Which one of the following statements is not true?

A)Australian government securities do not have any default risk and are the best proxy measure for the risk-free rate.
B)Investors must pay a premium to purchase a security that exposes them to default risk.
C)The risk that the lender may not receive payments as promised is called default risk.
D)All of the above are true statements.

Question 72

Which of the following risks may be included in the spread that compensates corporate bond investors for the assumption of additional risks over domestic government bond investors?

A)Interest rate risk.
B)Default risk.
C)Foreign exchange rate risk.
D)All of these.

Question 73

The three economic factors that determine the shape of the yield curve are:

A)the real rate of interest,the nominal rate of interest,and interest rate risk.
B)the real rate of interest,the expected rate of inflation,and marketability.
C)the real rate of interest,the expected rate of inflation,and interest rate risk.
D)the nominal rate of interest,the expected rate of inflation,and interest rate risk.

Question 74

Securities with lower marketability have:

A)lower borrowing costs than securities with high marketability.
B)higher borrowing costs than securities with high marketability.
C)the same borrowing costs as securities with high marketability.
D)none of the above.

Question 75

A ten-year bond with a 5% coupon rate is trading with a market yield of 7.75 percent.Coupons are paid annually and the face value is $1,000.What is the percentage change in price if the market yield decreases by 75 basis points?

A)5.388%.
B)5.018%.
C)5.675%.
D)5.774%.

Question 76

Which one of the following is not true?

A)Inflation does not affect the interest rates of bonds.
B)A bond issuer's rating is affected by its default risk.
C)An investor holding the bond until maturity expects to receive its par value.
D)Rating agencies use financial statements to assess the default probability of firms.

Question 77

Which of the following rated bonds has the least risk?

A)A.
B)AA.
C)AAA.
D)BB.

Question 78

The risk premium of a company would increase with:

A)An increase in earnings.
B)An increase in the current ratio.
C)A stable interest coverage ratio.
D)An increase in the debt to equity ratio.

Question 79

Debt ratings assigned by professional debt-rating services are a measure of the bond issuers'

A)default risk.
B)currency risk.
C)interest rate risk.
D)foreign exchange rate risk.

Question 80

Corporate bonds are less marketable than money market instruments and corporate equities because:

A)corporate bonds are not tax exempt and money market securities are.
B)the former are for smaller denominations.
C)corporate bonds are in fact not less marketable than money market instruments and corporate equities.
D)corporate bonds are long-term securities,which tend to be riskier and less marketable.