Question 1

Which one of the following bonds is most apt to have the smallest liquidity premium?

Accepted Answer

Treasury bills are short-term government securities with high liquidity and low risk, resulting in the smallest liquidity premium.

Question 2

The R in the Fisher effect formula represents the:

Accepted Answer

The Fisher effect formula states that the nominal return (R) is the sum of the real return and the expected inflation rate.

Question 3

A bond dealer sells at the _____ price and buys at the _____ price.

Accepted Answer

A bond dealer sells at the asked (or offer) price and buys at the bid price.

Question 4

A $1,000 face value bond currently has a yield to maturity of 6.03 percent.The bond matures in thirteen years and pays interest semiannually.The coupon rate is6.25percent.What is the current price of this bond?

Accepted Answer

The answer of A $1,000 face value bond currently has...

Question 5

A bond has a $1,000 face value, a market price of $989, and pays interest payments of $69.50 every year.What is the coupon rate?

Accepted Answer

The answer of A bond has a $1,000 face value,...

Question 6

The 7.2 percent bond of Blackford, Inc.has a yield to maturity of 7.3 percent.The bond matures in seven years, has a face value of $1,000, and pays semiannual interest payments.What is the amount of each coupon payment?

Accepted Answer

The bond has a 7.2% annual coupon rate, which means it pays 7.2% of its face value in interest each year. The face value is $1,000, so the annual interest is $1,000 * 7.2% = $72. Since the bond pays interest semiannually, each coupon payment is $72 / 2 = $36.00.

Question 7

A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments.The bond quote is 100.8.What is the amount of each coupon payment?

Accepted Answer

The answer of A bond has a par value of...

Question 8

The term structure of interest rates is primarily based on which three of the following?
I.Interest rate risk premium
II.Real rate of interest
III.Default risk premium
IV.Inflation premium
V.Liquidity premium

Accepted Answer

The term structure of interest rates is primarily based on the real rate of interest, the interest rate risk premium, and the inflation premium.

Question 9

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds.Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?

Accepted Answer

The liquidity premium is affected because the lack of an active secondary market makes it harder to sell the bonds, thus requiring a higher yield to compensate for this illiquidity.

Question 10

Which statement is correct?

Accepted Answer

Bond markets are primarily dealer-based, meaning that trades are conducted through a network of dealers rather than on a centralized exchange like the NYSE.

Question 11

An upward-sloping term structure of interest rates indicates:

Accepted Answer

An upward-sloping term structure, or yield curve, typically indicates that nominal interest rates are increasing with longer maturities, even if the real rate remains constant.

Question 12

A 15-year, annual coupon bond is priced at $984.56.The bond has a $1,000 face value and a yield to maturity of 6.5 percent.What is the coupon rate?

Accepted Answer

The coupon rate can be calculated using the bond pricing formula. Given the bond's price, face value, yield to maturity, and time to maturity, the coupon rate is approximately 6.34 percent.

Question 13

Lake Industries bonds have a face value of $1,000, a coupon rate of 7.2 percent, semiannual interest payments, and mature in 15 years.What is the current price of these bonds if the yield to maturity is 6.98 percent?

Accepted Answer

The bond price is calculated using the present value of future cash flows, which include semiannual coupon payments and the face value at maturity. Given the yield to maturity of 6.98% (or 3.49% per semiannual period), the bond price is closest to $1,020.26.

Question 14

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:

Accepted Answer

If inflation is expected to decrease, future interest rates are likely to be lower, leading to a downward sloping yield curve as long-term rates fall below short-term rates.

Question 15

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

Accepted Answer

A humped term structure occurs when intermediate-term bonds have higher yields than both short-term and long-term bonds, creating a peak or "hump" in the yield curve.

Question 16

Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses?

Accepted Answer

CAT bonds, or catastrophe bonds, allow issuers to skip or reduce interest payments if a specified natural disaster occurs, causing significant financial losses.

Question 17

What is the price of a $1,000 face value bond if the quoted price is 102.1?

Accepted Answer

The answer of What is the price of a $1,000...

Question 18

A fourteen-year, semiannual coupon bond is selling for $ 898.56.The bond has a face value of $1,000 and a yield to maturity of 6.03 percent.What is the coupon rate?

Accepted Answer

The coupon rate can be calculated using the bond price formula. Given the bond price, face value, yield to maturity, and time to maturity, the coupon rate is found to be approximately 4.95 percent.

Question 19

The 5.3 percent bond of Dominic Cyle Parts has a face value of $1,000, a maturity of 12 years, semiannual interest payments, and a yield to maturity of 6.12 percent.What is the current market price of the bond?

Accepted Answer

The answer of The 5.3 percent bond of Dominic Cyle...

Question 20

A $1,000 face value bond is currently quoted at 100.8.The bond pays semiannual payments of $22.50 each and matures in six years.What is the coupon rate?

Accepted Answer

The bond pays $22.50 every six months, which totals $45 annually. The coupon rate is calculated as the annual coupon payment divided by the face value of the bond: $45 / $1,000 = 4.50%.

Quiz 6: Interest Rates and Bond Valuation