Question 1

Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Accepted Answer

- Treasury Note: The quote is 87:25, which means the bond is trading at 87 and 25/32 of its par value. To calculate the price in dollars, we need to multiply the quote by the par value:

87 + 25/32 = 87.78125 (as a decimal)
87.78125 x $1000 = $877.81

- Corporate Bond: The quote is 102.42, which means the bond is trading at 102 and 42/100 of its par value. To calculate the price in dollars, we need to multiply the quote by the par value:

102.42% x $1000 = $1,024.20

- Municipal Bond: The quote is 101.45, which means the bond is trading at 101 and 45/100 of its par value. Since the par value for this bond is $5,000, we need to multiply the quote by $5,000 to get the price in dollars:

101.45% x $5,000 = $5,072.50

Therefore, the correct answer is C.

Question 2

Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

The call premium for one year of coupon payments is 4.5% * $1,000 = $45. Therefore, if the bond is called, the bondholder will receive the par value of $1,000 plus the call premium of $45, for a total price of $1,045.

Question 3

Interest Payments Determine the interest payment for the following three bonds: 2½ percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Accepted Answer

The 2½ percent coupon corporate bond pays $25 annually, or $12.50 semi-annually. The 3.15 percent coupon Treasury note pays $31.50 annually, or $15.75 semi-annually. The zero coupon bond pays no interest until maturity.

Question 4

Time to Maturity A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

The bond was issued in 1999 and matures in 2019, which is a 20-year time period. Since we are on May 2, 2009, we can calculate the time to maturity by counting the number of full years between the current date and the maturity date, which is 10 years. Therefore, the answer is B) 10 years.

Question 5

TIPS Interest and Par Value A 3 3/4 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

The answer of TIPS Interest and Par Value A 3...

Question 6

Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)

Accepted Answer

The formula to calculate the price of a zero coupon bond is:

Price = Face Value / (1 + r/n)^(n*t)

Where:
r = Rate of interest
n = Number of compounding periods per year
t = Time until maturity (in years)
Face Value = Par Value of the bond

Plugging in the given values, we get:

Price = 1000 / (1 + 0.06/2)^(2*10) = $553.68 (rounded to two decimal places)

Therefore, the best choice is A.

Question 7

TIPS Interest and Par Value A 2½ percent TIPS has an original reference CPI of 170.4. If the current CPI is 205.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

First, we need to calculate the current inflation rate:
Inflation rate = (Current CPI - Original CPI) / Original CPI
Inflation rate = (205.7 - 170.4) / 170.4
Inflation rate = 0.2075 or 20.75%

Next, we need to calculate the new par value:
New par value = Original par value x (1 + inflation rate)
New par value = $1,000 x (1 + 0.2075)
New par value = $1,207.16

Finally, we can calculate the current interest payment:
Current interest payment = (New par value x coupon rate) / 2
Current interest payment = ($1,207.16 x 0.025) / 2
Current interest payment = $15.09

Therefore, the answer is D) $1207.16, $15.09, respectively.

Question 8

Which of the following bonds carry significant risk that the issuer will not make current or future payments?

Accepted Answer

Junk bonds carry significant risk that the issuer will not make current or future payments. They are issued by companies with a high risk of default, so they offer high yields to compensate investors for the risk. However, this high yield comes with the increased risk of default, which means investors may not receive all payments or may not receive payments at all.

Question 9

Interest Payments Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semi-annually), 4.75 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)

Accepted Answer

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Question 10

Call Premium A 6 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

The call premium is one year of coupon payments, which is 6% of $1,000, or $60. Therefore, the price paid to the bondholder if the issuer calls the bond is the par value plus the call premium: $1,000 + $60 = $1,060.

Question 11

Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

To find the time to maturity, we need to calculate the number of full years and any partial year remaining until June 15, 2017.

Since the bond was issued on June 15, 2007, it has already been 1 year and 6 months (from June 15, 2007, to December 15, 2008).

To find the remaining time to maturity, we need to count the number of full years from December 15, 2008, to June 15, 2017. There are 8 full years in that time period.

However, we also need to consider the partial year remaining between December 15, 2008, and June 15, 2017. To do this, we can divide the number of days in that period (181) by the number of days in a year (365), which gives us approximately 0.49.

Therefore, the total time to maturity is 8 years and 0.49 years, which is equivalent to 8 years and 6 months (since 0.49 years is equivalent to approximately 6 months).

Question 12

Interest Payments Determine the interest payment for the following three bonds: 5½ percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Accepted Answer

The interest payment for the 5½ percent coupon corporate bond is $27.50 (5.5% of $1,000 divided by 2 for semi-annual payments). The 6.45 percent coupon Treasury note pays $32.25 annually (6.45% of $1,000). The zero coupon bond pays no interest until maturity.

Question 13

Call Premium A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)

Accepted Answer

The bondholder will receive the call premium of one year of coupon payments, which is 5.5% x $1,000 = $55. Therefore, the price paid to the bondholder if the issuer calls the bond is $1,000 + call premium of $55 = $1,055. Option D is the correct choice.

Question 14

Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Accepted Answer

The answer of Bond Quotes Consider the following three bond...

Question 15

Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 5 years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and $1,000 par value.)

Accepted Answer

The formula for calculating the price of a zero coupon bond is:

Price = Face Value / (1 + r)n

Where:

Face Value = $1,000 
r = the annual interest rate / 2 (since the bond compounds semi-annually) 
n = the number of periods (in this case, 5 years * 2 = 10 periods)

Plugging in the given values:

Price = $1,000 / (1 + 0.075/2)10

Price = $1,000 / 1.07510

Price = $692.02

Thus, the correct choice is A) $692.02 as it is the calculated price for the given bond.

Question 16

Which of the following is an important advantage to the issuer of a bond with a call provision?

Accepted Answer

A call provision allows the issuer to refinance the bond by calling it back early, which gives them an opportunity to issue new debt at a potentially lower interest rate. This can lower the cost of borrowing for the issuer.

Question 17

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

Accepted Answer

Municipal bonds are typically tax-exempt at the federal level, meaning investors do not have to pay federal income tax on the interest income earned from the bonds. Because of this tax benefit, the interest rates offered on municipal bonds are generally lower than other types of bonds that are subject to taxation.

Question 18

Time to Maturity A bond issued by a corporation on October 1, 2007, is scheduled to mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

Today is October 2, 2009, which means the bond has already been outstanding for 2 years. The bond is not set to mature until October 1, 3007, which is 998 years away from the current date. Therefore, the time to maturity of the bond is 998 years.

Question 19

Current Yield What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

Accepted Answer

The current yield represents the annual interest payment as a percentage of the current market price of the bond. To calculate the current yield of the bond, we divide the annual interest payment by the current market price and then multiply by 100.

Annual interest payment = 6% of the par value = 0.06 x 1000 = $60

Current market price = 101.70% of the par value = 1.017 x 1000 = $1,017

Current yield = ($60/$1,017) x 100 = 5.90%

Therefore, the answer is choice A, which is 5.9%.

Question 20

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

Accepted Answer

Credit quality risk refers to the probability of the bond issuer defaulting on their payments or facing financial distress, which could result in delayed or missed payments. Interest rate risk refers to the risk of fluctuations in interest rates, while liquidity risk refers to the risk of not being able to sell a security quickly enough without incurring significant losses. The term structure of interest rates refers to the relationship between different maturities of bonds and their corresponding interest rates.

Quiz 7: Valuing Bonds