Deck 13: Bond Pricing and Yields

Question 1

If interest rates fall after a bond is issued, the yield to maturity rises.​

Answer 1

False

Question 2

If a bond is selling for a discount, that implies
​1) interest rates have fallen
2) interest rates have risen
3) the yield to maturity exceeds the current yield
4) the yield to maturity is less than the current yield

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Answer 2

​2 and 3

Question 3

The current yield on a bond is the interest (coupon) paid by the bond divided by the market price of the bond.​

Answer 3

True

Question 4

Since bonds pay a fixed amount of interest, their prices do not fluctuate.​

Question 5

The current yield and yield to maturity are equal when the bond is initially sold for its face value.​

Question 6

The price of a bond depends on
1) the bond's coupon
2) the maturity date
3) current interest rates

A)​1 and 2
B)​1 and 3
C)​2 and 3
D)​1, 2, and 3

Question 7

If interest rates in general fall,​

A) ​the prices of existing bonds rise
B) ​the prices of existing bonds fall
C) ​the prices of existing bonds are unaffected
D) ​the coupon rate adjusts for the change in interest rates

Question 8

Bonds only sell for a discount when the firm is having financial difficulty.​

Question 9

​If interest rates rise, a firm may retire a bond issue by
1) calling it
2) repurchasing it
3) issuing new bonds and redeeming the old bonds

A)​1 and 2
B)1 and 3
C)​2 and 3
D)​only 2

Question 10

The yield to maturity may differ from the realized yield since coupon payments may be reinvested at a different rate.​

Question 11

Bonds never sell for a premium over their principal value.​

Question 12

The yield to maturity on a bond is​

A) ​the interest paid divided by the price of the bond
B) ​the bond's coupon divided by the principal amount
C) ​the price appreciation earned by the bond
D) interest plus price appreciation (or loss) achieved by holding the bond to maturity

Question 13

​Which of the following is not true if interest rates rise?

A) ​Existing bonds may be called.
B) ​Prices of existing bonds fall.
C) ​The yield to maturity rises more than the current yield.
D) ​The market price of a zero coupon bond falls.

Question 14

The current yield considers not only the interest paid but also any price change during the current year.​

Question 15

The yield to maturity assumes that​

A) ​the bond will be called
B) ​the coupon will increase with higher interest rates
C) the coupon will decrease with lower interest rates
D) ​the bond will not be called

Question 16

​If a bond sells for a discount, its price approaches the face value as the bond approaches maturity.

Question 17

An investor may anticipate that a bond will be called if interest rates have risen.​

Question 18

If interest rates fall, the prices of existing bonds also fall.​

Question 19

If interest rates rise, the prices of existing bonds increase.​

Question 20

If interest rates rise after a bond is issued, the yield to maturity will exceed the current yield.​

Question 21

If interest rates in general rise,

A) ​the prices of existing bonds rise
B) ​the prices of existing bonds fall
C) ​the prices of matured bonds rise
D) ​the prices of matured bonds fall

Question 22

The current yield on a bond is​

A) ​interest paid divided by the bond's price
B) ​the bond's coupon
C) ​the interest rate stated on the bond
D) ​the yield over the lifetime of the bond

Question 23

An investor buys a $1,000, 20 year 7 percent (interest paid semiannually) bond at par. After five years have passed, interest rates are 10 percent. How much did the investor lose on the purchase of the bond?​

Question 24

Determine the current market prices of the following $1,000 bonds if the comparable rate is 10 percent and answer the following questions.​
XY 5 1/4 percent (interest paid annually) for 20 years
AB 14 percent (interest paid annually) for 20 years
​
a. Which bond has a current yield that exceeds the
yield to maturity?
b. Which bond may you expect to be called? Why?
c. If CD, Inc. has a bond with a 5 1/4 percent coupon
and a maturity of 20 years but which was lower
rated, what would be its price relative to the XY,
Inc bond? Explain.

Question 25

If a bond is selling for a premium, that implies​
1) interest rates have risen
2) interest rates have fallen
3) the yield to maturity exceeds the current yield
4) the yield to maturity is less than the current yield

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 26

You purchase a high-yield, junk bond for $1,000 that pays $140 annually. After buying the bond, yields decline and you are able to reinvest the interest at only 9 percent. You reinvest all the interest payments. How much will you have when the bond is retired after twelve years? What was the annual return you earned on this investment?
​

Question 27

​If investors anticipate that interest rates will fall, they

A) should buy bonds​
B) ​should sell bonds
C) ​should buy shares in money market mutual funds
D) ​should take no action

Question 28

The current price of a bond is not affected by​

A) ​current interest rates
B) ​the risk classification of the bond
C) ​the maturity date
D) ​last year's interest rates

Question 29

If interest rates rise after a bond is issued,
​1) the bond may be called
2) the firm may repurchase the bond
3) the current yield exceeds the yield to maturity
4) the current yield is less than the yield to maturity

A)​1 and 3
B)​1 and 4
C)​2 and 3
D)​2 and 4

Question 30

​You purchase a bond for $875. It pays $80 a year (i.e., the semiannual coupon is 4 percent), and the bond matures after ten years. What is the yield to maturity?

Question 31

If interest rates decline after a bond is issued,​

A) ​the bond's coupon is decreased
B) ​the bond's price falls
C) ​the yield to maturity will exceed the current yield
D) ​the current yield will exceed the yield to maturity