Question 1

Which of the following statements is FALSE?

Accepted Answer

Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no simple formula to solve for the yield to maturity directly.

Question 2

A ten-year, zero-coupon bond with a yield to maturity of 6% has a face value of $1000. An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change?

Accepted Answer

The rate of return for a zero-coupon bond held to maturity is equal to the yield to maturity. Since the yield to maturity does not change, the rate of return remains 6.00%.

Question 3

A firm issues ten-year bonds with a coupon rate of 6.5%, paid semiannually. The credit spread for this firm's ten-year debt is 0.8%. New ten-year Treasury bonds are being issued at par with a coupon rate of 5%. What should the price of the firm's outstanding ten-year bonds be per $100 of face value?

Accepted Answer

The answer of A firm issues ten-year bonds with a...

Question 4

Which of the following statements is FALSE?

Accepted Answer

By convention, the coupon rate is expressed as a nominal rate, not an effective annual rate.

Question 5

How much will each coupon payment be of a 30-year $10,000 bond with a 4.5% coupon rate and semiannual payments?

Accepted Answer

The coupon rate is 4.5%, which means the bond will pay $4.5 in interest for every $100 of face value. Since the face value is $10,000, the annual coupon payment will be $450. Since the bond makes semiannual payments, the coupon payment will be half of that amount or $225.

Question 6

An investor holds a bond with a face value of $5000, a coupon rate of 4%, and semiannual payments that matures on 15/01/2012. How much will the investor receive on 15/01/2012?

Accepted Answer

The investor will receive the face value of the bond, which is $5000, plus the last coupon payment, which is $100 ($5000 x 4% x 6/12). So the total amount the investor will receive is $5100.

Question 7

What is the dirty price of a bond?

Accepted Answer

The dirty price of a bond is the actual cash price, which includes the bond's clean price plus any accrued interest since the last coupon payment.

Question 8

Use the table for the question(s) below.
The following table summarises prices of various default-free zero-coupon bonds (expressed as a percentage of face value):
$\begin{array} { l c c c c c } 
\hline \text { Maturity (years) } & \mathbf { 1 } & \mathbf { 2 } & \mathbf { 3 } & \mathbf { 4 } & \mathbf { 5 } \
\hline \text { Price (per } \$ 100 \text { face value) } & 94.52 & 89.68 & 85.40 & 81.65 & 78.35 \
\hline
\end{array}$
-Based upon the information provided in the table above, you can conclud?

Accepted Answer

The answer of Use the table for the question(s) below.
The...

Question 9

Which of the following statements is FALSE?

Accepted Answer

A zero-coupon bond is sold at a discount to its face value and does not pay interest before maturity, so its price is always less than its face value prior to maturity.

Question 10

Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten-year bonds
with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarises the YTM for similar
ten-year corporate bonds of various credit ratings:
$\begin{array} { l c c c c c } 
\hline \text { Rating } & \text { AAA } & \text { AA } & \text { A } & \text { BBB } & \text { BB } \
\hline \text { YTM } & 6.70 \% & 6.80 \% & 7.00 \% & 7.40 \% & 8.00 \% \
\hline
\end{array}$
-Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Luther's bonds received?

Accepted Answer

The bond price of $972.42 is less than the face value, indicating a yield higher than the coupon rate of 7%. The YTM closest to this scenario is 7.40%, which corresponds to a BBB rating.

Question 11

An investor purchases a 30-year, zero-coupon bond with a face value of $1000 and a yield to maturity of 6.5%. He sells this bond ten years later. What is the rate of return on his investment, assuming yield to maturity does not change?

Accepted Answer

The rate of return on a zero-coupon bond held to maturity is equal to the yield to maturity at the time of purchase, which is 6.5% in this case. Since the yield to maturity does not change, the rate of return remains 6.5%.

Question 12

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?

Accepted Answer

If the bond is trading at par, then the coupon rate should be equal to the yield to maturity (YTM) which is 6%. This will make the present value of the bond's future cash flows equal to its face value. Therefore, bond coupon rate should be 6%.

Question 13

A company issues a ten-year bond at par with a coupon rate of 6% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.8%. What was the percentage change in the price of the bond over the past two years?

Accepted Answer

The bond was issued at par, meaning its initial price was 100% of face value. With the YTM increasing to 7.8%, the bond's price would have decreased. Using the bond price formula, the price change is approximately -10.56%.

Question 14

A bond is currently trading below par. Which of the following must be true about that bond?

Accepted Answer

The answer of A bond is currently trading below par....

Question 15

Which of the following statements is FALSE?

Accepted Answer

Prices in the bond market are conventionally quoted in increments of $1 (not $1000).

Question 16

Which of the following bonds will be least sensitive to a change in interest rates?

Accepted Answer

The bond in option A has the same yield to maturity as its coupon rate, indicating that its market price is at par value. Bonds trading at par value are the least sensitive to changes in interest rates.

Question 17

Use the table for the question(s) below.
Consider the following yields to maturity on various one-year zero-coupon securities:
$\begin{array} { l c } 
\hline \text { Security } & \text { Yield (\%) } \
\hline \text { Treasury } & 4.6 \
\hline \text { AAA corporate } & 4.8 \
\hline \text { BBB corporate } & 5.6 \
\hline \text { B Corporate } & 6.2 \
\hline
\end{array}$
-The price (expressed as a percentage of the face value) of a one-year, zero-coupon, corporate bond with a BBB rating is closest to:

Accepted Answer

The price of a one-year, zero-coupon bond is equal to the present value of its face value, discounted at the yield to maturity. The yield to maturity for a BBB corporate bond is 5.6%, so the price of a one-year, zero-coupon, BBB corporate bond is equal to:$$100/(1+0.056) = 94.70$$

Question 18

Consider a zero-coupon bond with $1000 face value and 20 years to maturity. The price this bond will trade if the YTM is 6% is closest to:

Accepted Answer

The answer of Consider a zero-coupon bond with $1000 face...

Question 19

A bond has a $1000 face value, ten years to maturity, and 7% semiannual coupon payments. What would be the expected difference in this bond's price immediately before and immediately after the next coupon payment?

Accepted Answer

The bond pays a 7% annual coupon, which is $70 per year. Since the bond pays semiannual coupons, each payment is $35. The bond's price will drop by the amount of the coupon payment immediately after the coupon is paid, which is $35.

Question 20

Use the table for the question(s) below.
Consider the following yields to maturity on various one-year zero-coupon securities:

-The credit spread of the B corporate bond is closest to?

Accepted Answer

The credit spread is the difference between the yield of the corporate bond and the yield of a risk-free bond (such as a Treasury bond) with the same maturity. The correct choice is 1.6%, which is the closest to the calculated credit spread.

Quiz 6: Bond Valuation

Which of the following statements is FALSE?

A ten-year, zero-coupon bond with a yield to maturity of 6% has a face value of $1000. An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change?

Which of the following statements is FALSE?

How much will each coupon payment be of a 30-year $10,000 bond with a 4.5% coupon rate and semiannual payments?

An investor holds a bond with a face value of $5000, a coupon rate of 4%, and semiannual payments that matures on 15/01/2012. How much will the investor receive on 15/01/2012?

What is the dirty price of a bond?

Which of the following statements is FALSE?

An investor purchases a 30-year, zero-coupon bond with a face value of $1000 and a yield to maturity of 6.5%. He sells this bond ten years later. What is the rate of return on his investment, assuming yield to maturity does not change?

A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par?

A company issues a ten-year bond at par with a coupon rate of 6% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.8%. What was the percentage change in the price of the bond over the past two years?

A bond is currently trading below par. Which of the following must be true about that bond?

Which of the following statements is FALSE?

Which of the following bonds will be least sensitive to a change in interest rates?

Consider a zero-coupon bond with $1000 face value and 20 years to maturity. The price this bond will trade if the YTM is 6% is closest to:

A bond has a $1000 face value, ten years to maturity, and 7% semiannual coupon payments. What would be the expected difference in this bond's price immediately before and immediately after the next coupon payment?

Use the table for the question(s) below. Consider the following yields to maturity on various one-year zero-coupon securities: -The credit spread of the B corporate bond is closest to?