Deck 10: Bond Prices and Yields

Question 1

__________ are examples of synthetically created zero coupon bonds.

A) COLTS
B) OPOSSMS
C) STRIPS
D) ARMs

Answer 1

C

Question 2

TIPS offer investors inflation protection by ______________ by the inflation rate each year.

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

Answer 2

C

Question 3

TIPS are an example of _______________.

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

Answer 3

C

Question 4

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.

A) Eurobonds
B) Yankee bonds
C) Samurai bonds
D) foreign bonds

Question 5

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 6

A Japanese firm issued and sold a pound denominated bond in the United Kingdom.A U.S.firm issued bonds denominated in dollars but sold the bonds in Japan.Which one of the following statements is correct?

A) Both bonds are examples of Eurobonds.
B) The Japanese bond is a Eurobond and the U.S. bond is termed a foreign bond.
C) The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond.
D) Neither bond is a Eurobond.

Question 7

Bonds issued in the U.S.are __________ and most bonds issued overseas are ___________.

A) bearer bonds; registered bonds
B) registered bonds; bearer bonds
C) straight bonds; convertible bonds
D) puttable bonds; callable

Question 8

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 9

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 10

Sinking funds are commonly viewed as protecting the _______ of the bond.

A) issuer
B) underwriter
C) holder
D) dealer

Question 11

Inflation-indexed Treasury securities are commonly called ____.

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

Question 12

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 13

A mortgage bond is _______.

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured

Question 14

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 15

A debenture is _________.

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured

Question 16

The primary difference between Treasury notes and bonds is ________.

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

Question 17

A collateral trust bond is _______.

A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured

Question 18

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 19

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 20

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 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

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 stock 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 23

The issuer of a/an ________ bond may choose to pay interest either in cash or in additional bonds.

A) asset backed bonds
B) TIPS
C) catastrophe
D) pay in kind

Question 24

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.

Question 25

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 26

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 27

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 stock 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 28

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

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

Question 29

_______ 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 30

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 31

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 32

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 33

Serial bonds are associated with _________.

A) staggered maturity dates
B) collateral
C) coupon payment dates
D) conversion features

Question 34

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 $84.52 discount from par value.The approximate yield to maturity on this bond is _________.

A) 6%
B) 7%
C) 8%
D) 9%

Question 35

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 36

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%

Question 37

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

A) Callable feature
B) Convertible feature
C) Subordination clause
D) Sinking fund

Question 38

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 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

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 41

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 42

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

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

Question 43

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%

Question 44

$1,000 par value zero coupon bonds, ignore liquidity premiums
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 45

Yields on municipal 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 46

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 47

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 48

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

Question 49

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 $1055.84.The yield to call on this bond is _________.

A) 6.00%
B) 6.58%
C) 7.20%
D) 8.00%

Question 50

A coupon bond which pays interest semi-annually has a par value of $1,000,matures in 8 years,and has a yield to maturity of 6%.If the coupon rate is 7%,the intrinsic value of the bond today will be __________ (to the nearest dollar).

A) $1,000
B) $1,063
C) $1,081
D) $1,100

Question 51

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

Question 52

$1,000 par value zero coupon bonds, ignore liquidity premiums
The expected one-year interest rate one year from now should be about _________.

A) 6.00%
B) 7.50 %
C) 9.00%
D) 10.00%

Question 53

$1,000 par value zero coupon bonds, ignore liquidity premiums
One year from now Bond C should sell for ________ (to the nearest dollar).

A) $857
B) $842
C) $835
D) $821

Question 54

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 55

You can be sure that a bond will sell at a premium to par when _________.

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

Question 56

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

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

Question 57

$1,000 par value zero coupon bonds, ignore liquidity premiums
The expected two year interest rate three years from now should be _________.

A) 9.55%
B) 11.74%
C) 14.89%
D) 13.73%

Question 58

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 59

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 60

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 61

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.

A) marketability
B) risk
C) taxation
D) call protection

Question 62

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 63

If the quote for a Treasury bond is listed in the newspaper as 99:08 bid,99:11 ask,the actual price you can sell this bond given a $10,000 par value is _____________.

A) $9,828.12
B) $9,925.00
C) $9,934.37
D) $9,955.43

Question 64

A bond pays a semi-annual coupon and the last coupon was paid 61 days ago.If the annual coupon payment is $75,what is the accrued interest?

A) $13.21
B) $12.57
C) $15.44
D) $16.32

Question 65

Under the pure expectations hypothesis and constant real interest rates for different maturities,an upward sloping yield curve would indicate __________________.

A) expected increases in inflation over time
B) expected decreases in inflation over time
C) the presence of a liquidity premium
D) that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long-term part of the market

Question 66

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 67

The yield to maturity of an 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 68

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid,98:13 ask,the actual price for you to purchase this bond given a $10,000 par value is _____________.

A) $9,828.12
B) $9,809.38
C) $9,840.62
D) $9,813.42

Question 69

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 70

On May 1, 2007, Joe Hill is considering one of the following newly-issued 10 year AAA corporate bonds.
Suppose market interest rates decline by 100 basis points (i.e.,1%).The effect of this decline would be:

A) The price of Wildwood bond would decline by more than the Asbury bond.
B) The price of Wildwood bond would decline by less than the Asbury bond.
C) The price of Wildwood bond would increase by more than the Asbury bond.
D) The price of Wildwood bond would increase by less than the Asbury bond.

Question 71

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 72

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 real rate of return on the TIPS bond in the first year?

A) 5.00%
B) 8.15%
C) 7.15%
D) 4.00%

Question 73

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 74

On May 1, 2007, Joe Hill is considering one of the following newly-issued 10 year AAA corporate bonds.
If interest rates are expected to rise,then Joe Hill should ____.

A) prefer the Wildwood bond to the Asbury bond
B) prefer the Asbury bond to the Wildwood bond
C) be indifferent between the Wildwood bond and the Asbury bond
D) there is not enough information given to tell

Question 75

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 76

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 77

A 6% coupon U.S.treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10.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 78

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 79

On May 1, 2007, Joe Hill is considering one of the following newly-issued 10 year AAA corporate bonds.
If the volatility of interest rates is expected to increase,the Joe Hill should __.

A) prefer the Wildwood bond to the Asbury bond
B) prefer the Asbury bond to the Wildwood bond
C) be indifferent between the Wildwood bond and the Asbury bond
D) there is not enough information given to tell

Question 80

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%