Deck 6: Valuing Bonds

Question 1

Bonds that have a Standard & Poor's rating of BBB or better are considered to be investment-grade bonds.

Answer 1

True

Question 2

Bonds rated BB or above by Standard & Poor's are called investment grade.

Answer 2

False

Question 3

Current yield overstates the return of premium bonds since investors who buy a bond at a premium face a capital loss over the life of the bond.

Answer 3

True

Question 4

Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity.

Question 5

Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds.

Question 6

When a financial calculator or spreadsheet program finds a bond's yield to maturity, it uses a trial-and-error process.

Question 7

TIPS are unlike most bonds in that their cash flows increase when the national rate of gross domestic product increases.

Question 8

It is impossible for an investor to insure against the risk of bond default.

Question 9

Indexed bonds were completely unknown in the United States until 1997 when the U.S. Treasury began to issue inflation-indexed bonds known as Treasury Inflation-Protected Securities, or TIPS.

Question 10

The current yield measures the bond's total rate of return.

Question 11

A bond's payment at maturity is referred to as its face value.

Question 12

A Treasury bond's bid price will be lower than the ask price.

Question 13

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

Question 14

Zero-coupon bonds are issued at prices below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.

Question 15

Bonds rated Ba by Moody's have the same safety rating as the bonds rated BB by Standard & Poor's.

Question 16

A long-term investor would more likely be interested in a bond's current yield rather than its yield to maturity.

Question 17

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

Question 18

Bonds with a rating of Ba or below by Moody's are referred to as speculative grade, high-yield, or junk bonds.

Question 19

When the market interest rate exceeds the coupon rate, bonds sell for less than face value to provide enough compensation to investors.

Question 20

Speculative-grade bonds have default risk; investment grade bonds do not.

Question 21

As the coupon rate of a bond increases, the bond's:

A) face value increases.
B) current price decreases.
C) interest payments increase.
D)maturity date is extended.

Question 22

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?

A) 6.00%
B) 7.14%
C) 5.04%
D)6.38%

Question 23

When an investor purchases a $1,000 par value bond that was quoted at 97.162, the investor:

A) receives 97.162% of the stated coupon payments.
B) receives $971.62 upon the maturity date of the bond.
C) pays 97.162% of face value for the bond.
D)pays $10,971.62 for a $10,000 face value bond.

Question 24

Periodic receipts of interest by the bondholder are known as:

A) the coupon rate.
B) a zero-coupon.
C) coupon payments.
D)the default premium.

Question 25

What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity and sells for $1,000?

A) 6.0%
B) 8.5%
C) 10.0%
D)12.5%

Question 26

A bond's yield to maturity takes into consideration:

A) current yield but not any price changes.
B) price changes but not the current yield.
C) both the current yield and any price changes.
D)neither the current yield nor any price changes.

Question 27

What happens to a discount bond as the time to maturity decreases?

A) The coupon rate increases.
B) The bond price increases.
C) The coupon rate decreases.
D)The bond price decreases.

Question 28

How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?

A) $696.74
B) $1,075.82
C) $1,082.00
D)$1,123.01

Question 29

How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?

A) $927.90
B) $981.40
C) $1,000.00
D)$1,075.82

Question 30

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

A) decline over time, reaching par value at maturity.
B) increase over time, reaching par value at maturity.
C) be less than the face value at maturity.
D)exceed the face value at maturity.

Question 31

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

A) dividend yield.
B) yield to maturity.
C) current yield.
D)coupon rate.

Question 32

Assume a bond is currently selling at par value. What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

A) The price of the bond will increase.
B) The coupon rate of the bond will increase.
C) The par value of the bond will decrease.
D)The coupon payments will be adjusted to the new discount rate.

Question 33

A bond's par value can also be called its:

A) coupon payment.
B) present value.
C) market value.
D)face value.

Question 34

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

A) The face value of the bond has decreased.
B) The bond's maturity value exceeds the bond's price.
C) The bond's internal rate of return is 7%.
D)The bond's maturity value is lower than the bond's price.

Question 35

Bond ratings measure a bond's credit risk.

Question 36

The coupon rate of a bond equals:

A) its yield to maturity.
B) a defined percentage of its face value.
C) the yield to maturity when the bond sells at a discount.
D)the annual interest divided by the current market price.

Question 37

Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.

Question 38

How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's price if the appropriate discount rate is 6%?

A) $209.91
B) $260.00
C) $760.00
D)$792.09

Question 39

What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a yield to maturity of 6%? Interest is paid annually.

A) 6%
B) 8%
C) 10%
D)11%

Question 40

The current yield of a bond can be calculated by:

A) multiplying the price by the coupon rate.
B) dividing the price by the annual coupon payments.
C) dividing the price by the par value.
D)dividing the annual coupon payments by the price.

Question 41

What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in interest if market interest rates change from 9% to 10%?

A) The coupon rate increases to 10%.
B) The coupon rate remains at 9%.
C) The coupon rate remains at 8%.
D)The coupon rate decreases to 8%.

Question 42

Which one of the following is fixed for the life of a given bond?

A) Current price
B) Current yield
C) Yield to maturity
D)Coupon rate

Question 43

If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then the yield to maturity will be:

A) lower than current interest rates.
B) equal to the coupon rate.
C) higher than the coupon rate.
D)lower than the coupon rate.

Question 44

How does a bond dealer generate profits when trading bonds?

A) By maintaining bid prices lower than ask prices
B) By maintaining bid prices higher than ask prices
C) By retaining the bond's next coupon payment
D)By lowering the bond's coupon rate upon resale

Question 45

What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face value is $100,000?

A) $100,135.41
B) $135,000.41
C) $136,269.38
D)$135,406.20

Question 46

Which one of the following bond values will change when interest rates change?

A) The expected cash flows
B) The present value
C) The coupon payment
D)The maturity value

Question 47

What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with coupon of 6.5% and sells the bond 1 year later for $1,037.19?

A) 4.53%
B) 5.33%
C) 5.16%
D)4.92%

Question 48

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

A) 4.48%
B) 6.15%
C) 7.52%
D)6.07%

Question 49

A bond is priced at $1,100, has 10 years remaining until maturity, and has a 10% coupon, paid semiannually. What is the amount of the next interest payment?

A) $50
B) $55
C) $100
D)$110

Question 50

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

A) The rate of return will be lower than the yield to maturity.
B) The rate of return will be higher than the yield to maturity.
C) The rate of return will equal the yield to maturity.
D)There is no predetermined relationship between the rate of return and the yield to maturity.

Question 51

If a bond investor's rate of return for a particular period equaled the bond's coupon rate, then during that period, the bond's price:

A) increased.
B) decreased.
C) remained constant.
D)changed, but the direction of the change is irrelevant.

Question 52

The yield curve depicts the current relationship between:

A) bond yields and default risk.
B) bond maturity and bond ratings.
C) bond yields and maturity.
D)promised yields and default premiums.

Question 53

Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:

A) increase by $51.54.
B) decrease by $51.54.
C) increase by $53.46.
D)decrease by $53.46.

Question 54

The purpose of a floating-rate bond is to:

A) save interest expense for corporate issuers.
B) avoid making interest payments until maturity.
C) shift the yield curve.
D)offer rates that adjust to current market conditions.

Question 55

Nominal U.S. Treasury bond yields:

A) are constant over time.
B) are equal to the real yields.
C) include a default premium.
D)include an inflation premium.

Question 56

Which one of the following bonds would be likely to exhibit a greater degree of interest rate risk?

A) A zero-coupon bond with 20 years until maturity
B) A coupon-paying bond with 20 years until maturity
C) A floating-rate bond with 20 years until maturity
D)A zero-coupon bond with 30 years until maturity

Question 57

Which one of these is included in the yield of a bond with a low credit rating but not included in a U.S. Treasury bond yield? Assume both bonds are selling at a premium.

A) Real rate of return
B) Inflation premium
C) Default premium
D)Loss of premium

Question 58

Which of the following would not be associated with a zero-coupon bond?

A) Yield to maturity
B) Discount bond
C) Current yield
D)Interest-rate risk

Question 59

When the yield curve is upward-sloping, then:

A) short-maturity bonds offer the highest coupon rates.
B) long-maturity bonds are priced above par value.
C) short-maturity bonds yield less than long-maturity bonds.
D)long-maturity bonds increase in price when interest rates increase.

Question 60

If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth 1 year from now if interest rates are constant?

A) $904.90
B) $925.39
C) $947.93
D)$1,000.00

Question 61

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:

A) bond is selling at a discount.
B) bond has a high default premium.
C) promised yield is not likely to materialize.
D)bond must be a Treasury Inflation-Protected Security.

Question 62

If an investor purchases a 3%, 5-year TIPS at its par value of $1,000 and the CPI increases 3% over each of the next 5 years, what will be the real value of the principal at maturity?

A) $1,000.00
B) $1,030.00
C) $1,060.90
D)$1,061.36

Question 63

How much would an investor lose the first year if she purchased a 30-year zero-coupon bond with a $1,000 par value and a 10% yield to maturity, only to see market interest rates increase to 12% one year later?

A) $19.93
B) $20.00
C) $23.93
D)$25.66

Question 64

Two years ago bonds were issued at par with 10 years until maturity and a 7% annual coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price of these bonds?

A) $917.06
B) $928.84
C) $987.50
D)$1,000.00

Question 65

Which one of the following is correct concerning real interest rates?

A) Real interest rates are constant.
B) Real interest rates must be positive.
C) Real interest rates must be less than nominal interest rates.
D)Real interest rates, if positive, increase purchasing power over time.

Question 66

If a bond is priced at par value, then:

A) it has a very low level of default risk.
B) its coupon rate equals its yield to maturity.
C) it must be a zero-coupon bond.
D)the bond is quite close to maturity.

Question 67

What is the amount of the annual coupon payment for a bond that has 6 years until maturity, sells for $1,050, and has a yield to maturity of 9.37%?

A) $98.64
B) $95.27
C) $101.38
D)$104.97

Question 68

A "convertible bond" provides the option to convert:

A) a bond into shares of common stock.
B) fixed-rate coupon payments into variable-rate payments.
C) a zero-coupon bond to a coupon-paying bond.
D)a junk bond to a zero-coupon investment-grade bond.

Question 69

Which one of the following must be correct for a bond currently selling at a premium?

A) Its coupon rate is variable.
B) Its current yield is lower than its coupon rate.
C) Its yield to maturity is higher than its coupon rate.
D)Its coupon rate is lower than the current market rate on similar bonds.

Question 70

Investors who buy which type of bond will be guaranteed a capital loss if they hold the bond to maturity?

A) Discount bond
B) Premium bond
C) Zero-coupon bond
D)Junk bond

Question 71

Many investors may be drawn to municipal bonds because of the bonds':

A) speculative grade ratings.
B) high coupon payments.
C) long periods until maturity.
D)income exemption from federal taxes.

Question 72

This morning, you purchased a TIPS. Which one of these should you expect to occur if you hold this bond during an inflationary period?

A) The coupon payment will increase in real terms.
B) The maturity value will increase in nominal terms.
C) The market price will remain constant at par.
D)The market price will decrease.

Question 73

A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years is called a:

A) TIPS.
B) Treasury bill.
C) Treasury bond.
D)Treasury note.

Question 74

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity, then sells the bond after 1 year for $1,085?

A) 6.82%
B) 6.91%
C) 7.64%
D)9.00%

Question 75

By how much will a bond increase in price over the next year if it currently sells for $925.16, has 5 years until maturity, and an annual coupon rate of 7%? (Do not round intermediate calculations.)

A) $8.26
B) $8.92
C) $12.53
D)$11.98

Question 76

Assume a bond has been owned by four different investors during its 20-year history. Which one of the following is most apt to have been different for each of these owners?

A) Coupon rate
B) Coupon frequency
C) Par value
D)Yield to maturity

Question 77

A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3 years. What is its yield to maturity?

A) 4.78%
B) 5.48%
C) 9.57%
D)12.17%

Question 78

Investors who purchase bonds having lower credit ratings should expect:

A) lower yields to maturity.
B) higher default possibilities.
C) lower coupon payments.
D)higher purchase prices.

Question 79

Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments. She sold the bond after 6 months and earned a total return of 4.8% on this investment. At what price, did she sell the bond?

A) $1,001.47
B) $974.28
C) $981.06
D)$1,003.18

Question 80

The existence of an upward-sloping yield curve suggests that:

A) bonds should be selling at a discount to par value.
B) bonds will not return as much as common stocks.
C) interest rates will be increasing in the future.
D)real interest rates will be increasing soon.