Deck 9: Bond Prices and Yields

Question 1

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require ________.

A)a higher yield on short-term bonds than long-term bonds
B)a higher yield on long-term bonds than short-term bonds
C)the same yield on both short-term bonds and long-term bonds
D)the liquidity preference theory cannot be used to make any of the other statements.

Answer 1

B

Question 2

Bonds rated ________ or better by Standard and Poor's are considered investment grade.

A)AA
B)BBB
C)BB
D)CCC

Answer 2

B

Question 3

Inflation-indexed Treasury securities are commonly called ________.

A)PIKs
B)CARs
C)TIPS
D)STRIPS

Answer 3

C

Question 4

Bonds with coupon rates that fall when the general level of interest rates rise are called ________.

A)asset-backed bonds
B)convertible bonds
C)inverse floaters
D)index bonds

Question 5

The bonds of Elbow Grease Dishwashing Company have received a rating of 'C' by Moody's. The 'C' rating indicates the bonds are ________.

A)high grade
B)intermediate grade
C)investment grade
D)junk bonds

Question 6

You would typically find all but which one of the following in a bond contract?

A)A dividend restriction clause
B)A sinking fund clause
C)A requirement to subordinate any new debt issued
D)A price earnings ratio

Question 7

TIPS are an example of ________.

A)Eurobonds
B)convertible bonds
C)indexed bonds
D)catastrophe bonds

Question 8

The invoice price of a bond is the ________.

A)stated or flat price in a quote sheet plus accrued interest
B)stated or flat price in a quote sheet minus accrued interest
C)bid price
D)average of the bid and ask price

Question 9

A ________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specific price after a specific date.

A)callable
B)coupon
C)puttable
D)Treasury

Question 10

You buy a TIPS at issue at par for $1 000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is ________.

A)$30.00
B)$33.00
C)$32.78
D)$30.90

Question 11

The primary difference between Treasury notes and bonds is ________.

A)maturity at issue
B)default risk
C)coupon rate
D)tax status

Question 12

Everything else equal, the ________ the maturity of a bond and the ________ the coupon the greater the sensitivity of the bond's price to interest rate changes.

A)longer; higher
B)longer; lower
C)shorter; higher
D)shorter; lower

Question 13

Floating rate bonds have a ________ that is adjusted with current market interest rates.

A)maturity date
B)coupon payment date
C)coupon rate
D)dividend yield

Question 14

When discussing bonds, convexity relates to the ________.

A)shape of the bond price curve with respect to interest rates
B)shape of the yield curve with respect to maturity
C)slope of the yield curve with respect to liquidity premiums
D)size of the bid-ask spread

Question 15

________ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

A)Asset-backed bonds
B)TIPS
C)Catastrophe
D)Pay-in-kind

Question 16

To earn a high rating from the bond rating agencies, a company would want to have ________.
I) a low times-interest-earned ratio
II) a low debt-to-equity ratio
III) a high quick ratio

A)I only
B)II and III only
C)I and III only
D)I, II and III

Question 17

TIPS offer investors inflation protection by increasing ________ by the inflation rate each year.

A)only the coupon rate
B)only the par value
C)both the par value and the coupon payment
D)the promised yield to maturity

Question 18

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1 000. Each pay interest of $120 annually. Bond A will mature in 5 years while Bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, ________.

A)both bonds will increase in value but Bond A will increase more than Bond B
B)both bonds will increase in value but Bond B will increase more than Bond A
C)both bonds will decrease in value but Bond A will decrease more than Bond B
D)both bonds will decrease in value but Bond B will decrease more than Bond A

Question 19

Everything else equal, ________ bonds will require a higher promised YTM than ________ bonds.

A)catastrophe; standard
B)non-callable; callable
C)mortgage; debenture
D)AAA rated; BAA rated

Question 20

According to the liquidity preference theory of the term structure of interest rates an increase in the yield on long-term corporate bonds versus short-term bonds could be due to ________.

A)declining liquidity premiums
B)expectation of an upcoming recession
C)a decline in future inflation expectations
D)increase in expected interest rate volatility

Question 21

A ________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date.

A)callable
B)coupon
C)puttable
D)Treasury

Question 22

Consider the following $1 000 par value zero-coupon bonds: The expected one-year interest rate two years from now should be ________.

A)7.00%
B)8.00%
C)9.00%
D)10.00%

Question 23

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short-term interest rates to ________ in the future.

A)increase
B)decrease
C)not change
D)change in an unpredictable manner

Question 24

A Treasury bond due in one year has a yield of 6.3% while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corporation has a yield of 9.6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6.8%. The default risk premiums on the one-year and 5-year bonds issued by High Country Marketing Corp. are respectively ________ and ________.

A)0.4%, 0.3%
B)0.4%, 0.5%
C)0.5%, 0.5%
D)0.5%, 0.8%

Question 25

A coupon bond which pays interest annually, has a par value of $1 000, matures in 5 years and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be approximately ________.

A)$856
B)$892
C)$926
D)$1 000 PV₀ = $90

Question 26

A convertible bond has a par value of $1 000 but its current market price is $975. The current price of the issuing company's shares is $26 and the conversion ratio is 34 shares. The bond's market conversion value is ________.

A)$1 000
B)$884
C)$933
D)$980

Question 27

A zero-coupon bond has a yield to maturity of 5% and a par value of $1 000. If the bond matures in 16 years, it should sell for a price of ________ today.

A)$458.00
B)$641.00
C)$789.00
D)$1 100.00

Question 28

Which one of the following statements is correct?

A)Invoice price = Flat price - Accrued interest
B)Invoice price = Flat price + Accrued interest
C)Flat price = Invoice price + Accrued interest
D)Invoice price = Settlement price - Accrued interest

Question 29

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

A)Zero coupon bonds
B)Coupon bonds selling at a discount
C)Coupon bonds selling at a premium
D)Floating rate bonds

Question 30

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ________.

A)multiyear analysis
B)horizon analysis
C)maturity analysis
D)reinvestment analysis

Question 31

A coupon bond which pays interest of 4% annually, has a par value of $1 000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is ________.

A)7.2%
B)8.8%
C)9.1%
D)9.6% $785 = $40

Question 32

The ________ of a bond is computed as the ratio of coupon payments to market price.

A)nominal yield
B)current yield
C)yield to maturity
D)yield to call

Question 33

Yields on tax-exempt bonds are typically ________ yields on corporate bonds of similar risk and time to maturity.

A)lower than
B)slightly higher than
C)identical to
D)twice as high as

Question 34

You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1 000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately ________.

A)5.0%
B)5.5%
C)7.6%
D)8.9% PV₀ = 60

Question 35

Which of the following bonds would most likely sell at the lowest yield?

A)A callable debenture
B)A puttable mortgage bond
C)A callable mortgage bond
D)A puttable debenture

Question 36

A coupon bond pays semi-annual interest is reported as having an ask price of 117% of its $1 000 par value in the Wall Street Journal. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be ________.

A)$1 140
B)$1 170
C)$1 180
D)$1 200 Invoice price =

Question 37

A callable bond pays annual interest of $60, has a par value of $1 000, matures in 20 years but is callable in 10 years at a price of $1 100, and has a value today of $1 055.84. The yield to call on this bond is ________.

A)6.00%
B)6.58%
C)7.20%
D)8.00% 1055.84 = 60

Question 38

A bond has a par value of $1 000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the approximate capital gain yield of this bond over the next year?

A)0.7%
B)1.8%
C)2.5%
D)3.4%

Question 39

A coupon bond which pays interest of $60 annually, has a par value of $1 000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is ________.

A)6.00%
B)6.49%
C)6.73%
D)7.00%

Question 40

A convertible bond has a par value of $1 000 but its current market price is $950. The current price of the issuing company's shares is $19 and the conversion ratio is 40 shares. The bond's conversion premium is ________.

A)$50.00
B)$190.00
C)$200.00
D)$240.00

Question 41

A bond has a flat price of $985 and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

A)$999.55
B)$1 002.01
C)$1 007.45
D)$1 012.13

Question 42

The yield to maturity of a 10-year zero coupon bond, with a par value of $1 000 and a market price of $625, is ________.

A)4.8%
B)6.1%
C)7.7%
D)10.4%

Question 43

One-, two- and three-year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate, one year from today?

A)2.0%
B)8.0%
C)9.0%
D)11.1%

Question 44

You buy an 8-year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon. In one year promised yields have risen to 7%. Your one year holding period return was ________.

A)0.61%
B)-5.39%
C)1.28%
D)-3.25%

Question 45

A 1% decline in yield will have the least effect on the price of the bond with a ________.

A)10-year maturity, selling at 80
B)10-year maturity, selling at 100
C)20-year maturity, selling at 80
D)20-year maturity, selling at 100

Question 46

A bond has a 5% coupon rate. The coupon is paid semi-annually and the last coupon was paid 35 days ago. If the bond has a par value of $1 000, what is the accrued interest?

A)$4.81
B)$14.24
C)$25.00
D)$50.00

Question 47

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1 000 and a required return of 12% would be priced at ________.

A)$97
B)$104
C)$364
D)$732

Question 48

The yield to maturity on a bond is ________.
I) above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium
II) the discount rate that will set the present value of the payments equal to the bond price
III) equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

A)I only
B)II only
C)I and II only
D)I, II and III

Question 49

If the price of a $10 000 par Treasury bond is $10 237.50 the quote would be listed in the newspaper as ________.

A)102:10
B)102:11
C)102:12
D)102:13

Question 50

A discount bond that pays interest semiannually will ________.
I) have a lower price than an equivalent annual payment bond
II) have a higher EAR than an equivalent annual payment bond
III) sell for less than its conversion value

A)I and II only
B)I and III only
C)II and III only
D)I, II and III

Question 51

Consider the following $1 000 par value zero-coupon bonds: The expected one-year interest rate four years from now should be ________.

A)16.00%
B)18.00%
C)20.00%
D)22.00%

Question 52

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6% and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?

A)6.72%
B)9.17%
C)4.49%
D)8.98%

Question 53

You can be sure that a bond will sell at a premium to par when its coupon rate is ________.

A)greater than its yield to maturity
B)less than its yield to maturity
C)equal to its yield to maturity
D)less than its conversion value

Question 54

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

A)4.80%
B)4.85%
C)9.60%
D)9.70%

Question 55

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding period return in an investor decides to sell now?

A)Increased
B)Decreased
C)Stayed the same
D)Cannot be determined

Question 56

A 6% coupon US Treasury note pays interest on 31 May and 30 November and is traded for settlement on 10 August. The accrued interest on $100 000 face amount of this note is ________.

A)$581.97
B)$1 163.93
C)$2 327.87
D)$3 000.00

Question 57

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be ________.

A)higher
B)lower
C)the same
D)indeterminate

Question 58

Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and a coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

A)5.00%
B)5.15%
C)8.15%
D)9.00%