Question 1

A Treasury bond is quoted as 99:18 asked and 99:09 bid.What is the bid-ask spread in dollars on a $5,000 face value bond?

Accepted Answer

Bid-ask spread = 99:18 - 99:09 = 9/32 of 1 percent of $5,000 = $14.06

Question 2

Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent.The bonds make semiannual payments.The yield-to-maturity on these bonds is 9.2 percent.What is the current bond price?

Accepted Answer

The answer of Dexter Mills issued 20-year bonds a year...

Question 3

The outstanding bonds of Winter Time Products provide a real rate of return of 5.6 percent.The current rate of inflation is 4.68 percent.What is the actual nominal rate of return on these bonds?

Accepted Answer

(1 + 0.056) × (1 + 0.0468) - 1 = 10.54 percent

Question 4

Bryceton, Inc.has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a current price of $802.30.The bonds make semiannual payments.What is the coupon rate?

Accepted Answer

Coupon rate = ($32.81 × 2)/$1,000 = 6.56 percent

Question 5

Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5.28 percent yield to maturity, and a face value of $1,000.The current rate of inflation is 4.1 percent.What is the real rate of return on these bonds?

Accepted Answer

The real rate of return can be calculated using the formula:

Real rate of return = [(1 + nominal rate) / (1 + inflation rate)] - 1

Plugging in the given values, we get:

Real rate of return = [(1 + 0.05) / (1 + 0.041)] - 1 = 0.0113 or 1.13%

Therefore, the best choice is D.

Question 6

Technical Sales, Inc.has 6.6 percent coupon bonds on the market with 9 years left to maturity.The bonds make semiannual payments and currently sell for 92.5 percent of par.What is the effective annual yield?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct. Effective annual rate = [1 + (0.07774/2)]² - 1 = 7.93 percent

Question 7

The yield to maturity on a bond is currently 8.46 percent.The real rate of return is 3.22 percent.What is the rate of inflation?

Accepted Answer

The rate of inflation can be approximated using the Fisher equation, which is (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Plugging in the given numbers: (1 + 0.0846) = (1 + 0.0322) * (1 + inflation rate). Solving for the inflation rate gives approximately 0.0508 or 5.08 percent.

Question 8

Northern Warehouses wants to raise $11.4 million to expand its business.To accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds.The bonds will be priced to yield 8.75 percent.What is the minimum number of bonds it must sell to raise the $11.4 million it needs?

Accepted Answer

The answer of Northern Warehouses wants to raise $11.4 million...

Question 9

A Treasury bond is quoted at a price of 106:23 with a 3.50 percent coupon.The bond pays interest semiannually.What is the current yield on one of these bonds?

Accepted Answer

To calculate the current yield, we need to first calculate the annual coupon payment. The coupon payment can be found by taking the coupon rate (3.50%) and multiplying it by the face value of the bond ($1,000). This gives us an annual coupon payment of $35.

Next, we need to calculate the current price of the bond as a percentage of its face value. In the bond market, bond prices are quoted in points and 32nds. In this case, the bond is quoted at 106:23, which means the bond is priced at 106 and 23/32 of its face value. To convert this to a decimal, we add 106 to 23/32 and then divide by 100. This gives us a price of 1.06796875.

Finally, we can calculate the current yield by dividing the annual coupon payment ($35) by the current price of the bond (1.06796875) and multiplying by 100 to convert to a percentage. This gives us a current yield of 3.28 percent, which is closest to choice letter C.

Question 10

Suppose the real rate is 9.5 percent and the inflation rate is 1.8 percent.What rate would you expect to see on a Treasury bill?

Accepted Answer

The real rate is 9.5% and inflation is 1.8%. To calculate the nominal rate, we add the real rate and the inflation rate, using the formula:

Nominal rate = Real rate + Inflation rate

Nominal rate = 9.5% + 1.8%
Nominal rate = 11.3%

So we would expect to see a rate of 11.3% on a Treasury bill. However, we need to take into account that Treasury bills are typically issued at a discount to their face value, so the actual discount rate would be slightly higher than 11.3%.

Among the given options, the closest rate to 11.3% is 11.47%, so the correct choice is C.

Question 11

An investment offers a 10.5 percent total return over the coming year.Sam Bernanke thinks the total real return on this investment will be only 6.2 percent.What does Sam believe the inflation rate will be for the next year?

Accepted Answer

The difference between the total return and real return is the inflation rate. 
10.5% - 6.2% = 4.3% 
Therefore, Sam believes the inflation rate will be 4.3%.

Question 12

You have won a contest and will receive $2,500 a year in real terms for the next 3 years.Each payment will be received at the end of the period with the first payment occurring one year from today.The relevant nominal discount rate is 6.3 percent and the inflation rate is 3.1 percent.What are your winnings worth today?

Accepted Answer

The answer of You have won a contest and will...

Question 13

A bond that pays interest annually yielded 7.47 percent last year.The inflation rate for the same period was 4 percent.What was the actual real rate of return on this bond for last year?

Accepted Answer

The actual real rate of return is calculated by subtracting the inflation rate from the yield. 
Actual real rate of return = 7.47% - 4% = 3.47% 
Rounded to the nearest hundredth, the answer is 3.34%. Therefore, the correct answer is C.

Question 14

A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56.The bond matures in 22 years.What is the implicit interest, in dollars, for the first year of the bond's life?

Accepted Answer

Implicit interest = $228.06 - $212.56 = $15.50

Question 15

Bond S is a 4 percent coupon bond.Bond T is a 10 percent coupon bond.Both bonds have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7 percent.If interest rates suddenly rise by 2 percent, what will the percentage change in the price of Bond T be?

Accepted Answer

Percentage change in price = ($1,068.92 - $1,227.51)/$1,227.51 = -12.92 percent

Question 16

You purchased an investment which will pay you $8,000, in real dollars, a year for the next three years.Each payment will be received at the end of the period with the first payment occurring one year from today.The nominal discount rate is 7.5 percent and the inflation rate is 2.9 percent.What is the present value of these payments?

Accepted Answer

To calculate the present value of the payments, we need to discount each payment back to the present using the nominal discount rate adjusted for inflation. The formula for the real discount rate is: (1 + nominal discount rate) / (1 + inflation rate) - 1
Using the numbers given in the problem, the real discount rate is (1 + 0.075) / (1 + 0.029) - 1 = 0.0452 or 4.52%
We can now use this real discount rate to calculate the present value of the payments:
PV = 8000 / (1 + 0.0452)^1 + 8000 / (1 + 0.0452)^2 + 8000 / (1 + 0.0452)^3
PV = 22004.20, which rounds to $22,004. 
Therefore, the best choice is B.

Question 17

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent.The bonds make semiannual payments.These bonds currently sell for 102 percent of par value.What is the yield-to-maturity?

Accepted Answer

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

Question 18

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent.What is the amount of each interest payment if the face value of the bonds is $1,000?

Accepted Answer

First, we need to find the semiannual coupon rate that will give the effective annual yield of 8.6285%. Using the formula for effective annual yield:

(1 + semiannual coupon rate)^2 - 1 = 0.086285

Solving for the semiannual coupon rate, we get:

semiannual coupon rate = (1 + 0.086285)^(1/2) - 1 = 0.041125 or 4.1125%

Each interest payment is based on the face value of $1,000 and the semiannual coupon rate of 4.1125%. Therefore, each interest payment is:

$1,000 x 4.1125% = $41.125 or $42.25 rounded to the nearest cent.

Therefore, the correct answer is B.

Question 19

Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity.The bond makes annual payments and currently sells for $842.10.What is the yield-to-maturity?

Accepted Answer