Question 1

The R in the Fisher effect formula represents the:

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Question 2

A six-year,semiannual coupon bond is selling for $991.38.The bond has a face value of $1,000 and a yield to maturity of 9.19 percent.What is the coupon rate?

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Question 3

A 12-year,annual coupon bond is priced at $1,102.60.The bond has a $1,000 face value and a yield to maturity of 5.33 percent.What is the coupon rate?

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Question 4

The 6.5 percent bond of ABCO has a yield to maturity of 6.82 percent.The bond matures in seven years,has a face value of $1,000,and pays semiannual interest payments.What is the amount of each coupon payment?

Accepted Answer

The bond has a 6.5% annual coupon rate, which means it pays 6.5% of its face value ($1,000) annually. Since it pays semiannual interest, each payment is half of the annual coupon: (6.5% of $1,000) / 2 = $32.50.

Question 5

The term structure of interest rates is primarily based on which three of the following?
I.Interest rate risk premium
II.Real rate of interest
III.Default risk premium
IV.Inflation premium
V.Liquidity premium

Accepted Answer

The term structure of interest rates is primarily based on the interest rate risk premium, real rate of interest, and inflation premium. The default risk premium and liquidity premium may also play a role, but they are not considered primary factors. Therefore, choices I, II, and IV are the best options.

Question 6

A $1,000 face value bond is currently quoted at 100.8.The bond pays semiannual payments of $22.50 each and matures in six years.What is the coupon rate?

Accepted Answer

The bond is currently quoted at 100.8, which means the market price is $1,008 ($1,000 face value x 100.8%). The bond pays semiannual payments of $22.50 each, so the total annual coupon payment is $45 ($22.50 x 2). The bond matures in six years, which means there will be 12 semiannual periods (6 x 2).

Using this information, we can calculate the yield to maturity (YTM) using a financial calculator or Excel. The YTM is the interest rate that equates the bond's current market value with the present value of all future cash flows (coupon payments and principal repayment).

Assuming a YTM of 4.50%, the present value of each semiannual coupon payment is:

PV (coupon) = $22.50 / (1 + 0.045/2)^1 = $20.961

The present value of the principal repayment (i.e. face value of $1,000) can be calculated as:

PV (principal) = $1,000 / (1 + 0.045/2)^12 = $747.258

The total current market value of the bond is the sum of the present values of all future cash flows:

Market value = PV (coupon) x 12 + PV (principal) = $20.961 x 12 + $747.258 = $1,008.000

Therefore, a YTM of 4.50% would result in the bond being priced at 100.8.

Since the coupon payment is fixed at $45 per year and the face value is $1,000, we can calculate the annual coupon rate as:

Coupon rate = Annual coupon payment / Face value = $45 / $1,000 = 0.045 = 4.50%

Therefore, the answer is E: 4.50 percent.

Question 7

If intermediate-term,default-free,pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds,the term structure of interest rates will be:

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Question 8

The 4.5 percent bond of JL Motors has a face value of $1,000,a maturity of 7 years,semiannual interest payments,and a yield to maturity of 6.23 percent.What is the current market price of the bond?

Accepted Answer

The current market price of the bond is calculated using the present value of its future cash flows, which include the semiannual interest payments and the face value at maturity, discounted at the yield to maturity rate. The bond pays $22.50 every six months (4.5% of $1,000 annually, divided by 2), and the yield to maturity is 6.23% annually (or 3.115% semiannually). Using these values, the present value of the bond's cash flows is closest to $903.05.

Question 9

Which statement is correct?

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...

Question 10

A bond has a $1,000 face value,a market price of $1,045,and pays interest payments of $74.50 every year.What is the coupon rate?

Accepted Answer

To find the coupon rate, we need to find the percentage of the annual interest payments relative to the face value of the bond.

Annual interest payments = $74.50
Face value of the bond = $1,000

Coupon rate = (Annual interest payments / Face value of the bond) x 100%

Coupon rate = ($74.50 / $1,000) x 100% = 7.45%

Therefore, the coupon rate is 7.45%, which is closest to answer choice D (7.45 percent).

Question 11

Which one of the following types of bonds permits its issuer to forego paying interest payments if certain natural events cause significant losses?

Accepted Answer

CAT bonds (Catastrophe bonds) allow the issuer to forgo paying interest payments if certain natural events, such as hurricanes, earthquakes, or other extreme weather events, cause significant losses. These bonds are designed to transfer the risk of natural disasters from insurance companies to investors.

Question 12

An upward-sloping term structure of interest rates indicates:

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Question 13

Blue Water bonds have a face value of $1,000,a coupon rate of 6.5 percent,semiannual interest payments,and mature in 11.5 years.What is the current price of these bonds if the yield to maturity is 6.36 percent?

Accepted Answer

The bond price is calculated using the present value of future cash flows, which include semiannual coupon payments and the face value at maturity, discounted at the yield to maturity rate.

Question 14

If inflation is expected to steadily decrease in the future,the term structure of interest rates will most likely be:

Accepted Answer

If inflation is expected to decrease in the future, long-term interest rates will likely decrease more than short-term interest rates, leading to a downward sloping yield curve. This is because investors will demand a higher current yield on short-term bonds to compensate for the potential future decrease in interest rates, while the demand for long-term bonds may not change as much since the expected decrease in interest rates would increase the value of those bonds.

Question 15

A $1,000 face value bond currently has a yield to maturity of 8.22 percent.The bond matures in five years and pays interest semiannually.The coupon rate is7.5 percent.What is the current price of this bond?

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Question 16

A bond has a par value of $1,000,a current yield of 6.25 percent,and semiannual interest payments.The bond quote is 100.8.What is the amount of each coupon payment?

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Question 17

Suppose that a small,rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds.Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?

Accepted Answer

The liquidity premium component of a bond's yield is directly related to the ease with which the bond can be sold on the secondary market. Since no active secondary market is expected for these bonds, the liquidity premium component of their yield will be affected.

Question 18

Which one of the following bonds is most apt to have the smallest liquidity premium?

Accepted Answer

Treasury bills are considered to be the safest investment with the lowest risk of default, and therefore they are highly liquid. Hence, they are likely to have the smallest liquidity premium.

Question 19

What is the price of a $1,000 face value bond if the quoted price is 102.1?

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Question 20

A bond dealer sells at the _____ price and buys at the _____ price.

Accepted Answer

The bid price is the price at which a buyer is willing to purchase a security, while the asked (or offer) price is the price at which a seller is willing to sell the security. When a bond dealer sells a bond, they are the seller and will receive the asked price, and when they buy a bond they are the buyer and will pay the bid price. Therefore, the correct answer is D - the bond dealer sells at the asked price and buys at the bid price.

Quiz 6: Interest Rates and Bond Valuation