Question 1

The bond market

Accepted Answer

The bond market, unlike the stock market, can be a very thinly traded market. In addition, most bonds are traded by dealers.

Question 2

Callable bonds

Accepted Answer

Callable bonds often are refunded (called) when interest rates decline appreciably. The call price of the bond (approximately par and one year's coupon payment) declines to par as time passes and maturity is reached.

Question 3

Ceteris paribus, the price and yield on a bond are

Accepted Answer

Bond prices and yields are inversely related.

Question 4

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

Accepted Answer

The yield to maturity is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

Question 5

A coupon bond that pays interest annually is selling at a par value of $1,000, matures in five years, and has a coupon rate of 9%. The yield to maturity on this bond is

Accepted Answer

When a bond sells at par value, the coupon rate is equal to the yield to maturity.

Question 6

The _________ gives the number of shares for which each convertible bond can be exchanged.

Accepted Answer

The conversion premium is the amount for which the bond sells above conversion value; the price of bond as a straight bond provides the floor. The other terms are not specifically relevant to convertible bonds.

Question 7

A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.

Accepted Answer

FV = 1,000, PMT = 85, n = 7, i = 9.3, PV = 960.138.

Question 8

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

$1,080 + $7.5 (accrued interest) = $1,087.50.

Question 9

A coupon bond that pays interest semi-annually is selling at a par value of $1,000, matures in seven years, and has a coupon rate of 8.6%. The yield to maturity on this bond is

Accepted Answer

When a bond sells at par value, the coupon rate is equal to the yield to maturity.

Question 10

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

$1,130 + $20 (accrued interest) = $1,150.

Question 11

A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are

Accepted Answer

Boeing: 7.63% - 5.06% = 2.57%; Caterpillar: 7.16% - 4.30% = 2.86%.

Question 12

A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in five years has a yield of 5.6%. A bond issued by Lucent Technologies due in five years has a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%. The default risk premiums on the bonds issued by Exxon and Lucent Technologies, respectively, are

Accepted Answer

Exxon: 6.2% - 4.6% = 1.6%; Lucent Technologies: 8.9% - 5.6% = 3.3%.

Question 13

A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date.

Accepted Answer

Any bond may be redeemed prior to maturity, but all bonds other than put bonds are redeemed at a price determined by the prevailing interest rates.

Question 14

Floating-rate bonds are designed to ___________, while convertible bonds are designed to __________.

Accepted Answer

Floating-rate bonds allow the investor to earn a rate of interest income tied to current interest rates, thus negating one of the major disadvantages of fixed income investments. Convertible bonds allow the investor to benefit from the appreciation of the stock price, either by converting to stock or holding the bond, which will increase in price as the stock price increases.

Question 15

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be _________ if the coupon rate is 12%.

Accepted Answer

FV = 1000, PMT = 120, n = 5, i = 10, PV = 1075.82.

Question 16

A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in five years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of 7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are

Accepted Answer

Exxon: 7.2% - 6.2% = 1.0%; Xerox: 7. 9% - 6.7% = 1.2%.

Question 17

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%.

Accepted Answer

FV = 1,000, PMT = 70, n = 5, i = 10, PV = 886.28.

Question 18

A coupon bond is a bond that

Accepted Answer

A coupon bond will pay the coupon rate of interest on a regular basis unless the firm defaults on the bond. Convertible bonds are specific types of bonds.

Question 19

The bonds of Ford Motor Company have received a rating of "B" by Moody's. The "B" rating indicates

Accepted Answer

B ratings are risky bonds, often called junk bonds (or high-yield bonds by those marketing such bonds).

Question 20

A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years has a yield of 6.2%. A bond issued by Ford Motor Company due in 5 years has a yield of 7.5%; a bond issued by Shell Oil due in one year has a yield of 6.5%. The default risk premiums on the bonds issued by Shell and Ford, respectively, are

Accepted Answer

Shell: 6.5% - 5.7% = .8%; Ford: 7.5% - 6.2% = 1.3%.

Quiz 14: Bond Prices and Yields