Question 1

An 8% coupon U.S.Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15.The accrued interest on the $100,000 face value of this note is

Accepted Answer

D

Question 2

At issue, coupon bonds typically sell

Accepted Answer

Coupon bonds typically sell at or near par value, especially when they are first issued. The par value is the face value of the bond, and the coupon rate (interest rate) is typically set in a way that makes the bond attractive to buyers, hence selling at or near par value.

Question 3

If a 7.5% coupon bond is trading for $1,050.00, it has a current yield of

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the bond's current price. The annual coupon payment is 7.5% of $1,000 (assuming $1,000 face value), which is $75. The current yield is $75 / $1,050 = 0.0714 or 7.1%.

Question 4

If a 6% coupon bond is trading for $950.00, it has a current yield of

Accepted Answer

The formula for current yield is (annual coupon payment / market price) x 100%. 
In this case, the annual coupon payment is 6% of the face value (par value) of the bond, which is not given in the question. 
However, we can still calculate the current yield using the information provided. 
If the bond is trading for $950.00, that means the market price is less than the face value (par value) of the bond. 
Therefore, we know the bond is trading at a discount. 
Using this information, we can assume that the face value of the bond is greater than $1000.00 (since a 6% coupon bond selling for $1000.00 would have a current yield of 6%). 
Let's assume the face value is $1000.00, for simplicity. 
The annual coupon payment would be 6% x $1000.00 = $60.00 
Plugging this into the current yield formula: 
($60.00 / $950.00) x 100% = 6.32% 
Therefore, the answer is B, 6.3%.

Question 5

A coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 10%, and has a yield to maturity of 12%.The current yield on this bond is

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the current market price of the bond. The annual coupon payment is $100 (10% of $1,000). The bond's price is less than $1,000 because the yield to maturity (12%) is higher than the coupon rate (10%). The current yield is approximately 10.65%.

Question 6

If a 7.75% coupon bond is trading for $1,019.00, it has a current yield of

Accepted Answer

The current yield is calculated by dividing the annual coupon payment by the bond's current price. The annual coupon payment is 7.75% of $1,000 (the face value), which is $77.50. The current yield is $77.50 / $1,019.00 = 0.0761 or 7.61%.

Question 7

Ceteris paribus, the price and yield on a bond are

Accepted Answer

The price and yield on a bond have an inverse relationship, meaning that as one increases, the other decreases. As the price of a bond goes up, its yield (i.e., the rate of return) goes down, and vice versa. This relationship is known as the bond's price-yield curve.

Question 8

The current yield on a bond is equal to

Accepted Answer

The current yield is the annual interest payment divided by the current market price of the bond. It is a measure of the bond's return that investors can expect to receive in the upcoming year.

Question 9

The invoice price of a bond that a buyer would pay is equal to

Accepted Answer

The invoice price of a bond that a buyer would pay is equal to the asked price plus accrued interest. This reflects the total cost to the buyer, including the price of the bond itself and the interest that has accrued since the last payment date.

Question 10

If a 7.25% coupon bond is trading for $982.00, it has a current yield of

Accepted Answer

The current yield of a bond is calculated by dividing the annual coupon payment by the market price of the bond. For a 7.25% coupon bond, the annual coupon payment is 7.25% of the face value, which is typically $1,000, so the annual coupon payment is $72.50. The current yield is then $72.50 / $982.00 = 0.0738 or 7.38%.

Question 11

Mortgage bonds are:

Accepted Answer

Mortgage bonds are bonds that are issued with a property as collateral behind them. This means that in the event of default, the lender can foreclose on the property and use the proceeds to pay back the bondholders. This makes mortgage bonds a relatively safe investment, as there is collateral behind the bond.

Question 12

A coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 8.25%, and has a yield to maturity of 8.64%.The current yield on this bond is

Accepted Answer

The answer of A coupon bond pays annual interest, has...

Question 13

Accrued interest

Accepted Answer

Accrued interest is the interest that has accumulated on a bond since the last interest payment up to the purchase date. The buyer of the bond must pay this accrued interest to the seller, as the seller is entitled to the interest earned up to the sale date.

Question 14

A coupon bond is reported as having an ask price of 108% of the $1,000 par value in the Wall Street Journal.If the last interest payment was made one month ago and the coupon rate is 9%, the invoice price of the bond will be

Accepted Answer

The current ask price of the bond is 108% of the $1,000 par value which translates to $1,080 ($1,000 x 1.08). Since the last interest payment was made one month ago, the next interest payment will not be received by the buyer. Therefore, the invoice price of the bond will be the ask price ($1,080) plus the accrued interest from the last interest payment. 
Accrued interest = (coupon rate / 12 months) x $1,000 = (0.09 / 12) x $1,000 = $7.50
Invoice price = Ask price + Accrued interest = $1,080 + $7.50 = $1,087.50.
So, the best choice is A.

Question 15

A coupon bond is reported as having an ask price of 113% of the $1,000 par value in the Wall Street Journal.If the last interest payment was made two months ago and the coupon rate is 12%, the invoice price of the bond will be

Accepted Answer

The answer of A coupon bond is reported as having...

Question 16

A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of 11%, and has a yield to maturity of 12%.The current yield on this bond is

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the current market price of the bond. The annual coupon payment is $1,000 * 11% = $110. Since the yield to maturity is higher than the coupon rate, the bond is selling at a discount, but the current yield is still based on the coupon rate, which is 11%. Therefore, the closest option is 11.73%.

Question 17

If an 8% coupon bond is trading for $1,025.00, it has a current yield of

Accepted Answer

The current yield of a bond is calculated by dividing the annual coupon payment by the market price of the bond. For an 8% coupon bond with a face value of $1,000 (as is standard unless otherwise specified), the annual coupon payment is $80 (8% of $1,000). If the bond is trading for $1,025.00, the current yield is $80 / $1,025.00 = 0.078 or 7.8%.

Question 18

If a 6.75% coupon bond is trading for $1,016.00, it has a current yield of

Accepted Answer

The current yield of a bond is calculated by dividing the annual coupon payment by the market price of the bond. For a 6.75% coupon bond, the annual coupon payment is 6.75% of the face value, which is typically $1,000, so the annual coupon payment is $67.50. The bond is trading for $1,016.00, so the current yield is $67.50 / $1,016.00 = 0.0664, or 6.64%.

Question 19

To earn a high rating from the bond-rating agencies, a firm should have

Accepted Answer

Bond-rating agencies look for a low debt-to-equity ratio as it shows that the firm has a lower level of debt relative to equity, indicating a lower risk of default. A high quick ratio is also desirable as it shows that the firm has enough liquid assets to cover its short-term liabilities. Therefore, a firm with a low debt-to-equity ratio and a high quick ratio is likely to earn a high rating from bond-rating agencies.

Question 20

Of the following five investments, ________ is (are) considered the least risky.

Accepted Answer

Treasury bills are considered the least risky investment because they are backed by the U.S. government and have a short-term maturity of less than one year. This means there is a lower risk of default and the investment can be easily liquidated if needed. Corporate bonds and U.S. agency issues have a slightly higher risk because they are not backed by the government, while Treasury bonds have a longer maturity and are therefore more susceptible to interest rate fluctuations.

Quiz 14: Bond Prices and Yields