Deck 5: Interest Rates AMCQ Bomcq Valuation

Question 1

Long-term debt securities that are issued but not offered to the general public are referred to as

A)privately placed.
B)zero coupon bonds.
C)internal debt.
D)equity securities.
E)unfunded debt.

Answer 1

privately placed.

Question 2

Interest rate risk increases as

A)the time to maturity decreases.
B)the coupon rate increases.
C)a bond matures.
D)the coupon payment decreases.
E)either the time to maturity or the coupon rate increases.

Answer 2

the coupon payment decreases.

Question 3

The written,legally binding agreement between a corporate borrower and its lenders detailing all of the terms of a bond issue is called the

A)indenture.
B)covenant.
C)terms of trade.
D)put provision.
E)call provision.

Answer 3

indenture.

Question 4

ABC bonds have a coupon rate of 9 percent,pay interest semiannually,and sell at par.Each of these bonds has a market price of ________ and interest payments of ________.

A)$1,045;$90
B)$1,045;$45
C)$1,090;$90
D)$1,000;$90
E)$1,000;$45

Question 5

A discount bond has a coupon rate that

A)exceeds its current yield.
B)is less than the bond's yield to maturity.
C)exceeds both its current yield and its yield to maturity.
D)equals its current yield.
E)equals its current yield provided the bond pays interest annually.

Question 6

All else constant,as the market price of a bond increases the current yield ________ and the yield to maturity ________.

A)decreases;decreases
B)increases;decreases
C)increases;increases
D)decreases;increases
E)remains constant;increases

Question 7

A "make-whole" call provision on a bond provides for

A)call prices that vary with the funds available in a sinking fund.
B)a call price equal to the bond's approximate market value at the time of call.
C)decreasing call prices as interest rates decrease.
D)a call price equal to the face value plus all accrued interest to date.
E)a call price equal to the face value.

Question 8

Debt securities

A)increase a firm's cost of doing business.
B)pay tax-deductible dividends.
C)are treated the same as equity securities in a bankruptcy proceeding.
D)represent a minority ownership interest in the issuer.
E)are considered a liability only at the time payment is actually due.

Question 9

A deferred call provision is designed to

A)guarantee a bond will be repaid on a certain date prior to maturity.
B)prohibit the calling of a bond prior to a certain date.
C)ensure bond holders receive full value when a bond is called.
D)ensure any bankruptcy of the issuer is deferred until a bond is repaid in full.
E)ensure the owner of a bond agrees to the call before a bond is called.

Question 10

Which of the following are generally included in a bond indenture?

A)Market price and face value
B)Repayment arrangements and market price
C)Yield to maturity on any given date
D)Security description and basic terms
E)Protective covenants and lenders identities

Question 11

Protective covenants

A)are primarily designed to protect bondholders from future actions of the bond issuer.
B)only apply to bonds that have a deferred call provision.
C)are limited to stating actions that a firm must take.
D)are consistent for all bonds issued by a corporation within the United States.
E)are designed to protect the issuer should it default.

Question 12

All else constant,a bond will sell at ________ when the yield to maturity is ________ the coupon rate.

A)par;less than
B)a premium;equal to
C)par;higher than
D)a discount;higher than
E)a premium;higher than

Question 13

Which one of these definitions is correct?

A)Negative covenant: a "thou shalt" agreement
B)Premium bond: bond that sells for less than face value
C)Dirty price: market price,excluding accrued interest
D)Call provision: issuer's right to repurchase a bond prior to maturity
E)Unfunded debt: long-term corporate debt

Question 14

Last year,Theo purchased a fixed-rate,7-year bond at par that has a coupon rate of 6.5 percent.If the current market rate for this type and quality of bond is 6.8 percent,then he should expect

A)his interest payments to increase.
B)the bond's yield to maturity to remain constant.
C)the current yield today to be less than 6.5 percent.
D)the bond's current market price to exceed its face value.
E)to realize a capital loss if he sold the bond at today's market price.

Question 15

A bond with both a face value and a market value of $1,000 is called a ________ bond.

A)par value
B)premium
C)discount
D)zero coupon
E)floating rate

Question 16

The parts of an indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called

A)deferred call provisions.
B)sinking funds provisions.
C)protective covenants.
D)trustee relationships.
E)bond ratings.

Question 17

Assume a discount bond has a few years until maturity and a positive yield.All else constant,the bond's yield to maturity is

A)directly related to the time to maturity.
B)equal to the coupon rate.
C)inversely related to the bond's market price.
D)unrelated to the time to maturity.
E)less than its coupon rate.

Question 18

The yield to maturity on a bond is the rate

A)computed as the annual interest divided by the bond's market price.
B)an investor earns if the bond is sold prior to the maturity date.
C)of annual interest initially offered when the bond was issued.
D)of return currently required by the market.
E)of annual interest paid on the bond.

Question 19

All else constant,a coupon bond that is selling at a premium,must have

A)a yield to maturity that is less than the coupon rate.
B)a coupon rate that is equal to the yield to maturity.
C)a market price that is less than par value.
D)semiannual interest payments.
E)a coupon rate that is less than the yield to maturity.

Question 20

Interest rate risk ________ as the time to maturity increases.

A)increases at an increasing rate
B)increases at a decreasing rate
C)increases at a constant rate
D)decreases at an increasing rate
E)decreases at a decreasing rate

Question 21

Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to

A)interest rate risk and time value of money.
B)time value of money and inflation.
C)taxes and potential default.
D)taxes and inflation.
E)inflation and interest rate risk.

Question 22

The lowest Moody's bond rating that is considered to be an investment-grade rating is

A)A)
B)Baa.
C)BBB.
D)Ba.
E)BB.

Question 23

Floating-rate bonds generally have

A)an unlimited variable rate of interest.
B)a fixed coupon rate and a variable principal balance.
C)both a call and a put provision.
D)both a put provision and a collar.
E)a collar only on the bond's principal.

Question 24

Municipal bonds

A)primarily appeal to high tax-bracket investors.
B)generally pay a higher pretax rate of return than corporate bonds.
C)are issued only by local municipalities,such as a city or a borough.
D)are rarely callable.
E)pay interest that is exempt from all income tax.

Question 25

Bond ratings

A)are provided solely by Moody's.
B)only assess the possibility of default.
C)of B or higher are considered investment-grade ratings.
D)consider interest rate risk.
E)of C indicate an average level of risk.

Question 26

A convertible bond can be exchanged for

A)cash equal to par value at any time.
B)shares of company stock.
C)any other outstanding bond.
D)a newly issued bond if it carries a higher coupon rate.
E)a new bond if the current bond's rating falls to low-grade.

Question 27

Debentures

A)are a claim on assets not otherwise pledged as security.
B)represent a mortgage claim on real estate.
C)are a form of subordinated equity.
D)is another term for trust deeds.
E)are best defined as bearer bonds.

Question 28

For tax purposes,the implicit annual interest for any one year on a zero coupon bond is equal to

A)zero.
B)the annual change in the bond's value as determined by amortizing the loan.
C)the current yield.
D)the face value multiplied by the current market rate of interest.
E)the face value minus the current market value.

Question 29

Newspaper bond quotes are least apt to list a bond's

A)coupon rate.
B)maturity date.
C)bid price.
D)par value.
E)asked price.

Question 30

Assume you purchase a bond with a quoted price of 98.6208 on June 30.The bond pays interest on February 1 and August 1.The invoice price you pay for this purchase will equal the

A)clean price.
B)asked price.
C)dirty price.
D)par value.
E)bid price.

Question 31

Bonds that protect insurance companies from losses arising from natural disasters are called ________ bonds.

A)death
B)CAT
C)hurricane
D)flood insurance
E)DOG

Question 32

A crossover bond is a bond that

A)was previously in default but is now current with its debt obligations.
B)was issued by a non-U.S.entity but is held by a U.S.party.
C)has both an investment-grade and a low-grade rating.
D)was issued as investment-grade but is currently rated as low-grade.
E)is rated by both a U.S.and a non-U.S.rating agency.

Question 33

Bonds issued by the U.S.government

A)are considered to be default-free.
B)are exempt from interest-rate risk.
C)provide totally tax-free income.
D)pay interest that is exempt from federal income tax.
E)are taxed the same as municipal bonds.

Question 34

The U.S.corporate bond market

A)provides end-of-day values for all privately and publicly issued bonds.
B)is the largest securities market in the world based on trading volume.
C)is based on bond dealers who trade in a face-to-face market.
D)is more transparent than it was in the 1990s.
E)provides daily price quotes through BDEX,the bond dealers exchange.

Question 35

A sinking fund

A)is a claim on assets not otherwise pledged as security.
B)is used solely to retain funds until a bond issue matures.
C)is managed by a trustee.
D)is established during a bankruptcy proceeding to repay secured debts.
E)ensures all bonds are repaid prior to the original maturity date.

Question 36

What does the spread between the bid and asked bond prices represent?

A)Difference between the coupon rate and the current yield
B)Difference between the current yield and the yield to maturity
C)Accrued interest
D)Dealer's profit
E)Bondholder's profit

Question 37

If the bond holder has any rights that can force repayment of the bond prior to maturity,the bond

A)is an income bond.
B)has a call provision.
C)is convertible.
D)is a structured note.
E)has a put provision.

Question 38

______bonds pay interest that is taxed only at the federal level.

A)Municipal
B)Corporate
C)Treasury
D)Mortgage
E)Zero coupon

Question 39

The upper and lower limits on the coupon rate of a floating-rate bond are referred to as the bond's

A)put.
B)"make-whole" provision.
C)call.
D)income limit.
E)collar.

Question 40

Bonds backed by assets with long-term payments are referred to as

A)payment bonds.
B)time value bonds.
C)securitized bonds.
D)cash-flow bonds.
E)inflation bonds.

Question 41

Which formula computes the actual real rate of return on an investment?

A)r = (1 + R )- (1 + h)
B)r = (1 + R )/ (1 + h)
C)r = (1 + R )- (1 + h)- 1
D)r = (1 + R )/ (1 + h)- 1
E)R = (1 + r)× (1 + h)- 1

Question 42

A year ago,Jasper Inc.sold 20-year bonds at par with a coupon rate of 4.5 percent and semiannual payments.The face value of each bond is $1,000 and the yield to maturity is now 5.6 percent.What is the current value of each bond?

A)$923.09
B)$880.92
C)$872.35
D)$905.92
E)$868.66

Question 43

The overall level of interest rates is primarily affected by the

A)real rate.
B)inflation rate.
C)interest rate risk premium.
D)liquidity premium.
E)default risk premium.

Question 44

A General Co.bond has a coupon rate of 6 percent and pays interest annually.The face value is $1,000,and the current market price is $1,006.49.The bond matures in 16 years.What is the yield to maturity?

A)6)08%
B)5)94%
C)6)11%
D)6)03%
E)5)97%

Question 45

An upward sloping yield curve indicates

A)interest rates are declining.
B)lower quality bonds have higher yields.
C)short-term rates will rise sharply in the near future.
D)an inverse relationship between bond prices and yields.
E)long-term rates are higher than medium-term rates.

Question 46

Delta bonds are priced at $989.64,have a yield to maturity of 7.18 percent,pay semiannual payments,have a face value of $1,000,and have 6.5 years to maturity.What is the coupon rate?

A)6)98%
B)7)15%
C)7)23%
D)7)06%
E)7)20%

Question 47

Gugenheim offers 12-year coupon bonds with semiannual payments.The yield to maturity is 6.23 percent,and the bonds sell at 101 percent of par.What is the coupon rate?

A)3)09%
B)3)18%
C)3)31%
D)6)35%
E)6)61%

Question 48

Bond prices are quoted as a percentage of the

A)issue price.
B)total interest and principal payments.
C)face value.
D)dirty value.
E)clean value.

Question 49

A bond currently sells for $924.58,matures in 11 years,pays $27.50 every 6 months in interest,and has a face value of $1,000.What is the yield to maturity?

A)6)47%
B)5)98%
C)5)01%
D)3)23%
E)4)07%

Question 50

A bond has a coupon rate of 6 percent and matures in 10 years.The next semiannual interest payment will be paid 1 month from now.Which one of the following do you know with certainty concerning this bond?

A)The bond sells at a discount.
B)The bond sells at a premium.
C)The dirty price is higher than the clean price.
D)The clean price is higher than the dirty price.
E)The market price exceeds the par value.

Question 51

North & South RR bonds bear a coupon rate of 5.5 percent,payable annually.The bonds mature in 6.5 years,sell at par,and have a $1,000 face value.What is the yield to maturity?

A)5)59%
B)5)86%
C)5)50%
D)5)42%
E)5)71%

Question 52

The percentage change in the amount of money you have as the result of an investment is called the ________ rate of return.

A)real
B)nominal
C)effective
D)stripped
E)coupon

Question 53

An increase in which one of these is most apt to decrease the nominal interest rate?

A)Liquidity
B)Interest rate risk
C)Default risk
D)Expected future inflation
E)The relevant tax rate

Question 54

DT Company bonds are priced at $932.17,have a par value of $1,000,a yield to maturity of 6.18 percent,and a coupon rate of 6.35 percent.How many years is it until this bond matures if interest is paid semiannually?

A)18.04 years
B)20.42 years
C)28.00 years
D)40.84 years
E)36.08 years

Question 55

The Rose Shoppe offers 10-year,6 percent coupon bonds with semiannual payments and a yield to maturity of 5.72 percent.What is the current market price if the face value is $1,000?

A)$990.32
B)$1,021.10
C)$1,108.16
D)$987.64
E)$1,000.00

Question 56

The increase you realize in buying power as a result of owning a bond is referred to as the ________ rate of return.

A)inflated
B)market
C)nominal
D)real
E)risk-free

Question 57

According to the Fisher effect,a decrease in the rate of inflation will

A)increase the real rate but not affect the nominal rate.
B)decrease the nominal rate but not affect the real rate.
C)not affect either the real or the nominal rate.
D)decrease both the nominal and the real rate.
E)increase the nominal rate but not affect the real rate.

Question 58

The ________ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.

A)interest rate risk
B)taxability
C)liquidity
D)inflation
E)default risk

Question 59

The term structure of interest rates reflects the

A)pure time value of money for various lengths of time.
B)actual risk premium being paid for corporate bonds of varying maturities.
C)pure inflation adjustment applied to bonds of various maturities.
D)interest rate risk premium applicable to bonds of varying maturities.
E)nominal interest rates applicable to coupon bonds of varying maturities.

Question 60

Which one of these is included in the term structure of interest rates and remains constant over the term?

A)Default risk premium
B)Interest rate risk premium
C)Liquidity premium
D)Real rate of interest
E)Inflation premium

Question 61

What is the market price of a bond with a $5,000 face value if the price quote is 101.1629?

A)$4,942.52
B)$5,058.15
C)$5,581.45
D)$4,938.08
E)$5,116.29

Question 62

Delray bonds offer a coupon rate of 4.6 percent and currently sell at 99.2 percent of face value.What is the current yield on these bonds?

A)4)60%
B)4)57%
C)4)62%
D)4)55%
E)4)64%

Question 63

A zero coupon bond with a face value of $1,000 is issued at an initial price of $474.20 and a 25-year maturity.What is the implicit interest,in dollars,for the first year of the bond's life? Assume semiannual interest.

A)$14.44
B)$17.58
C)$14.37
D)$21.03
E)$20.25

Question 64

TJ Machine bonds have a coupon rate of 5.3 percent,a face value of $1,000,and pay interest semiannually.The bonds mature in 23 years and have a yield to maturity of 5.4 percent.What will be the percentage change in the bond's price if the market rate increases by 1 percent to 6.4 percent?

A)13.32%
B)12.02%
C)-11.96%
D)-12.00%
E)-13.13%

Question 65

Assume a taxable bond yields 6.38 percent and a comparable municipal bond yields 4.27 percent.At what tax rate would an investor be indifferent between the bonds?

A)66.93%
B)33.07%
C)51.49%
D)48.51%
E)57.03%

Question 66

River Tours has 5.8 percent coupon bonds that pay interest semiannually.The face value of each bond is $1,000,and the current market price is $1,003.54.If the yield to maturity is 5.68 percent,how many years is it until these bonds mature?

A)3)49 years
B)3)27 years
C)5)06 years
D)6)43 years
E)6)55 years

Question 67

The ABT Co.zero coupon bonds have a $1,000 face value,a required rate of return of 8 percent,and semiannual compounding.What is one of these bonds worth today if they mature in 12 years?

A)$390.12
B)$360.27
C)$397.11
D)$376.89
E)$356.30

Question 68

A $1,000 face value bond matures in 16 years,pays interest semiannually,and has a market quote of 102.0562.The coupon rate is 5.5 percent,the current yield is ________ percent,and the yield to maturity is ________ percent.

A)5)39;5.31
B)5)61;5.74
C)5)42;5.28
D)5)78;5.84
E)5)44;5.61

Question 69

A $1,000 face value bond is currently callable at a quoted price of 101.What is the amount of the call premium?

A)$1.00
B)$)0101
C)$10.00
D)$1.01
E)$10.10

Question 70

A U.S.Treasury bond has a face value of $5,000,a coupon rate of 3 percent compounded semiannually,a yield to maturity of 2.97 percent,and 7 years until maturity.What is the clean price quote of this bond?

A)$5,001.46
B)$5,013.33
C)$4,991.08
D)$4,996.72
E)$5,009.42

Question 71

Taylor Bros.bonds have a face value of $5,000,a current market price of $5,248.50,and a coupon rate of 5.3 percent,compounded semiannually.What is the current yield on these bonds?

A)5)38%
B)5)05%
C)5)17%
D)5)30%
E)5)41%

Question 72

Assume an investor has a tax rate of 33 percent.What municipal bond rate is equivalent to a corporate rate of 7.8 percent for this investor?

A)5)86%
B)4)37%
C)5)23%
D)6)08%
E)3)64%

Question 73

A zero coupon bond has a yield to maturity of 7.48 percent,semiannual compounding,a $1,000 face value,and a market quote of 41.0932.How many years is it until this bond matures?

A)24.22 years
B)23.18 years
C)12.11 years
D)24.66 years
E)12.33 years

Question 74

A $1,000 Treasury bond matures in 13.5 years,pays interest semiannually,and carries a coupon rate of 3.53 percent.What is the price of this bond if the discount rate is 4 percent?

A)$991.17
B)$951.34
C)$949.38
D)$976.96
E)$997.08

Question 75

Westover Company needs $1.8 million to expand its business.To accomplish this,the firm plans to sell 25-year,$1,000 face value zero-coupon bonds.The bonds will be priced to yield 7.15 percent with interest compounded semiannually.What is the minimum number of bonds the company must sell? Ignore all issue costs.

A)10,424 bonds
B)11,429 bonds
C)10,333 bonds
D)10,118 bonds
E)11,410 bonds

Question 76

A $1,000 face value bond has a bid quote of 100.6794 and a bid-ask spread of 0.0155.If you were to purchase this bond,what clean price would you pay?

A)$1,011.23
B)$1,004.33
C)$1,009.18
D)$1,006.95
E)$1,008.56

Question 77

A Treasury bond is quoted at a price of 99.4062 with a current yield of 3.17 percent.What is the coupon rate?

A)3)315%
B)3)068%
C)3)151%
D)3)077%
E)3)102%

Question 78

The 12-year bonds issued by Golf Companies have a quoted yield to maturity of 7.9 percent,a coupon rate of 8 percent,and semiannual payments.What is the effective annual yield on these bonds?

A)7)90%
B)7)97%
C)8)06%
D)8)00%
E)8)16%

Question 79

The Beta Co.bonds have a maturity of 13 years,a face value of $1,000,a coupon rate of 6.5 percent,and pay interest annually.What is the percentage change in the price of these bonds if the market yield rises to 6.9 percent from its current level of 6.5 percent?

A)-3.40%
B)-3.36%
C)3)40%
D)3)36%
E)-4.13%

Question 80

Autos and More offers a zero coupon bond with a yield to maturity of 9.3 percent.The bond matures in 11 years and has a face value of $1,000.What is this bond worth today? Assume semiannual compounding.

A)$367.91
B)$372.08
C)$375.99
D)$369.04
E)$374.17