Question 1

In which way do income bonds pay interest?

Accepted Answer

Income bonds pay interest only when the issuing company's earnings are sufficient to cover the interest payments, making them different from traditional bonds that pay interest at regular intervals regardless of the issuer's earnings.

Question 2

Company A has a bond outstanding that pays a 6% coupon.The interest is paid annually,and the bond matures in 10 years.The market rate of interest on bonds of similar risk is 5% and the bond is selling for $1,077.32.One year from today,the bond is expected to be selling for $1,071.08.What is the current yield on the bond?

Accepted Answer

To calculate the current yield, we need to divide the annual coupon payment by the current market price of the bond:

Annual Coupon Payment = Face Value × Coupon Rate
                     = $1,000 × 0.06
                     = $60

Current Market Price = $1,077.32

Current Yield = Annual Coupon Payment / Current Market Price
             = $60 / $1,077.32
             ≈ 0.055694
             = 5.5694%

Therefore, the best choice is B.

Question 3

Which of the following best describes a normal yield curve?

Accepted Answer

A normal yield curve is upward sloping to the right, indicating that longer term bonds have higher yields compared to shorter term bonds. This is because investors are compensated with higher yields for taking on the risk of holding a bond for a longer period of time.

Question 4

Company A has a bond outstanding that pays a 7% coupon.The interest is paid semiannually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately,one year from today?

Accepted Answer

The answer of Company A has a bond outstanding that...

Question 5

Current yield is calculated by dividing a bond's coupon payment by which of the following?

Accepted Answer

Current yield is calculated by dividing the annual interest payment (coupon payment) by the bond's current market price, not by its yield to maturity, discounted price, or coupon rate. This provides an investor with an estimate of the income they can expect relative to the price they pay for the bond.

Question 6

Which statements regarding bond ratings are true?
I.They include quantitative analysis of financial ratios.
II.They include the effects of special covenants and the collateral provisions of the agreement.
III.They include qualitative analysis of the sensitivity of earnings to changes in the economy and inflation.
IV.They instantaneously change as the factors in the market or in the company change.

Accepted Answer

Statement I is true because bond ratings include quantitative analysis of financial ratios such as debt-to-equity, interest coverage, and cash flow ratios. Statement II is also true because bond ratings consider the effects of special covenants and the collateral provisions of the agreement. Statement III is true because bond ratings include qualitative analysis of the sensitivity of earnings to changes in the economy and inflation. Statement IV is false because bond ratings do not instantaneously change as the factors in the market or in the company change; they are revised periodically based on the issuer's performance and the market conditions.

Question 7

Company A has a bond outstanding that pays a 7% coupon.The interest is paid annually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately?

Accepted Answer

To find the approximate price of the bond, we can use the formula:
Bond Price = (Coupon Payment / Interest Rate) x [1 - 1/(1 + Interest Rate)^Number of Years] + Face Value / (1 + Interest Rate)^Number of Years

Plugging in the values, we get:
Bond Price = (70 / 0.08) x [1 - 1/(1 + 0.08)^10] + 1000 / (1 + 0.08)^10
Bond Price = 875 x 0.469 + 1000 / 2.1589
Bond Price = 410.875 + 463.106
Bond Price = $873.98

Therefore, the bond should be selling for approximately $932.90, which is closest to option B.

Question 8

Which of the following is a correct statement regarding maple bonds?

Accepted Answer

Maple bonds are foreign bonds issued in Canadian dollars, so they have no currency risk.

Question 9

Company A has a bond outstanding that pays a 7% coupon.The interest is paid annually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately,one year from today?

Accepted Answer

To calculate the approximate price of the bond one year from today, we need to calculate the present value of the future cash flows (the annual coupon payment and the principal payment at maturity). Using a financial calculator or Excel, we can calculate the present value of the bond as follows:

PV = (Coupon payment / (1 + market rate)) + (Principal payment / (1 + market rate)^number of years)
PV = (70 / 1.08) + (1000 / 1.08^10)
PV = 35.19 + 466.77
PV = 501.96

Therefore, the bond should be selling for approximately $937.53 ($501.96 + the annual interest payment of $70). The closest answer choice is C.

Question 10

In which country did indexed bonds first become popular?

Accepted Answer

Indexed bonds first became popular in Brazil as a response to the country's high inflation rates.

Question 11

Which of the following is considered the dominate law when a firm with liabilities exceeding $5 million is declaring bankruptcy?

Accepted Answer

The Companies' Creditors Arrangement Act (CCAA) is the dominant law for firms with liabilities exceeding $5 million declaring bankruptcy in Canada, as it allows for the reorganization of the company to attempt to avoid outright bankruptcy and liquidation, providing a framework for restructuring under court supervision.

Question 12

Where are bonds mainly sold?

Accepted Answer

Bonds are mainly sold in the over-the-counter market, where large financial institutions act as intermediaries between buyers and sellers. This market allows for more flexibility in pricing and terms than the auction market or stock exchanges. While bonds can also be sold in banks or stock markets, the primary market for bonds is the over-the-counter market.

Question 13

A bond pays a 3% coupon (stated annually,paid semiannually).Its priced is currently $900 and its term to maturity in 12 years.If an investor buys the bond and holds it to maturity,what is his/her expected yield?

Accepted Answer

The answer of A bond pays a 3% coupon (stated...

Question 14

Company A has two 7% coupon bonds outstanding.Each of the bonds pays interest annually.Bond A has 5 years to maturity and bond B has 10 years to maturity.The current market rate of return is 6%.What will happen if the market rate of return decreases to 5%?

Accepted Answer

When the market rate of return decreases to 5%, the price of both bonds will increase as their coupon rate is higher than the market rate. However, bond A, with a shorter time to maturity, will experience a greater percentage change in price than bond B, which has a longer time to maturity. This is because bond A's cash flows will be paid back sooner, and its price will be more sensitive to changes in interest rates. Therefore, the percentage change in the price of bond A will be less than that of bond B.

Question 15

Company A has a bond outstanding that pays a 6% coupon.The interest is paid annually and the bond matures in 10 years.The market rate of interest on bonds of similar risk is 5% and the bond is selling for $1,077.32.One year from today,the bond is expected to be selling for $1,071.08.What is the rate of return for the bondholder?

Accepted Answer

The answer of Company A has a bond outstanding that...

Question 16

Company A has a bond outstanding that pays a 7% coupon.The interest is paid semiannually,and the bond matures in 10 years.If the market rate of interest on bonds of similar risk is 8%,what should company A's bond be selling for,approximately?

Accepted Answer

The bond's price can be calculated using the present value of its future cash flows, which include semiannual coupon payments and the face value at maturity. Given a 7% annual coupon rate, the semiannual coupon is 3.5%. With a market rate of 8% annually (4% semiannually), the bond's price is the present value of these cash flows, which is approximately $932.05.

Question 17

The trust deed of bond indenture contains the features of the conditional agreement between the issuing firm and the bond investors.Which of the following will NOT be contained in the bond indenture or agreement for a floating-rate bond?I.coupon interest rateII.coupon interest payment dateIII.convertible feature with a conversion ratioIV.reference to a benchmark interest rate

Accepted Answer

The answer of The trust deed of bond indenture contains...

Question 18

A zero coupon bond with a nominal $1,000 face value has 20 years to maturity and is issued with a price of $311.80.What is the implicit interest you earn on the bond in year 2 of the bond's life,keeping all other factors constant?

Accepted Answer

The implicit interest in year 2 is calculated by finding the difference between the bond's value at the end of year 2 and the end of year 1. The bond's value grows at a constant rate, which can be found using the formula for compound interest. The interest rate is approximately 5.5%, and the bond's value at the end of year 2 minus the value at the end of year 1 gives the implicit interest of $18.71.

Question 19

What is the interest received on a zero coupon bond?

Accepted Answer

Since zero coupon bonds do not pay any periodic interest, the interest received is the difference between the face value and the market value, which is paid on the maturity date. Therefore, option A is the correct answer.

Question 20

WAn upward sloping yield curve is often referred to as a:

Accepted Answer

An upward sloping yield curve is often referred to as a normal curve, because it reflects the typical relationship between short-term and long-term interest rates. In a normal curve, long-term interest rates are higher than short-term interest rates, reflecting the expectation that inflation and economic growth will increase in the future.

Quiz 6: Bonds, Bond Valuation, and Interest Rates