Deck 6: Bond Valuation and Interest Rates

Question 1

Use the following three statements to answer this question:
I)The prices of bonds with higher durations are more sensitive to interest rate changes than are those with lower durations.
II)All else being equal,durations will be higher when (1)market yields are lower,(2)bonds have longer maturities,and (3)bonds have lower coupons.
III)Duration is a measure of risk of the bond

A) I is correct, II, III are incorrect.
B) I is incorrect, II, III are correct.
C) I, II and III are correct.
D) I, II and III are incorrect.

Answer 1

C

Question 2

A five-year annual pay bond is quoted at 93.011 with a market yield of 8 percent.The coupon rate is closest to
a) 4.12%
b) 6.25%
c) 6.28%
d) 9.19%

Answer 2

b,N=5,I/Y = 8,FV=$1,000,PV=$-930.11,solve for PMT

Question 3

Bonds that are classified as unsecured obligations are called:

A) callable bond.
B) treasury bond.
C) debenture.
D) all of the above.

Answer 3

C

Question 4

Which of the following is generally not stated in a bond indenture?

A) The interest payment dates.
B) The principal repayment date.
C) The call date.
D) The maturity date.

Question 5

Which of the following statements is TRUE?

A) The quoted price of a bond is the actual price an investor pays for the bond whenever the bond is sold at a date other than the date of a coupon payment.
B) The quoted price of a bond is the actual price an investor pays for the bond when the bond is sold on the date of a coupon payment.
C) A bond purchaser must pay the bond seller the cash price plus the accrued interest on the bond.
D) The cash price plus the accrued interest on the bond is the quoted price of the bond.

Question 6

Which of the following is (are)needed to price a bond?

A) The coupon rate.
B) The face value amount.
C) The yield to maturity.
D) All of the above.

Question 7

The price of a ten-year semi-annual pay bond with a par value of $1,000 and a 7.5 percent annual coupon and yield to maturity of 8.25 percent is closest to:
a) $949.60
b) $950.24
c) $1,051.48
d) $1,052.11

Question 8

Which of the following statements is false?

A) The bullet (balloon) payment refers to the principal payment made in one lump sum at maturity.
B) Collateral trust bonds are debt instruments that are secured by real assets.
C) Protective covenants can be positive or negative.
D) Debentures are debt instruments that are generally unsecured.

Question 9

An investor bought a bond at par and held it for one year.If the coupon rate is 5 percent,residual maturity of the bond is 8 years,and the yield to maturity of the bond when it was sold was 6 percent,what is the holding period return of the bond?
a) 5%
b) 6%
c) -1.21%
d) -1.23%

Question 10

Which of the following statements is TRUE?

A) Protective covenants are clauses that restrict the actions of the issuer.
B) Convertible bonds are debt instruments that can be converted into preferred shares at predetermined conversion prices.
C) Sinking fund provisions require the trustee to set money aside each year so that funds are available at maturity to pay off the debt.
D) Purchase fund provisions require the repurchase of a certain amount of debt only if it can be repurchased at or above a given price.

Question 11

Which one of the following increases the sensitivity of the bond prices?

A) Increase in maturity
B) Decrease in maturity
C) Decrease in yield to maturity
D) Increase in coupon payment

Question 12

Which of the following statements is true?

A) The price of bonds with lower coupon rates will be less sensitive to interest rates than the price of higher-coupon-paying bonds will be.
B) The price of bonds with lower coupon rates will be more sensitive to interest rates than the price of higher-coupon-paying bonds will be.
C) None of the above.

Question 13

Which of the following bonds is secured by real assets?

A) A collateral trust bond.
B) A bullet bond.
C) A debenture.
D) None of the above.

Question 14

Which of the following is not a true statement?

A) Mortgage bonds are debt instruments that are secured by real assets.
B) Callable bonds give the issuer the option to "call" or repurchase outstanding bonds at predetermined call prices at specified times.
C) Retractable bonds allow the bondholder to sell the bonds back to the issuer at predetermined prices at specified times earlier than the maturity date.
D) Extendible bonds allow the issuer to extend the maturity date of the bond.

Question 15

Two years ago,St.Laurent Shippers Co.issued seven year semi-annual pay bonds with a coupon rate of 8 percent.At issue,the yield to maturity was 7.5%.Today the market rate on the bonds is 9 percent.The current price of the bond is closest to:
a) $1,026.85
b) $1,020.53
c) $960.44
d) $948.89

Question 16

An investor bought a bond at par (=$1,000)and held it for one month.If the coupon rate is 5 percent,residual maturity of the bond is 8 years,and the selling price was $937.90,what is the holding period return?
a) 5%
b) 5.79%
c) -5.79%
d) -1.79%

Question 17

Which one of the following is not a bond provision?

A) Pledging financial assets as collateral to the bond issue.
B) Limiting dividend payments to equity holders.
C) Limiting payments to other existing bondholders.
D) Pledging equipment as collateral for the issue.

Question 18

Which of the following statements is false?

A) When the prevailing market interest rate is lower than the coupon rate, the bond will be traded at a premium.
B) When the prevailing market interest rate is higher than the coupon rate, the bond will be traded at a discount.
C) The longer the time to maturity, the less sensitive the market price of the bond becomes to changes in prevailing market rates.
D) The higher the coupon rate, the less sensitive the market price of the bond becomes to changes in prevailing market rates.

Question 19

The convex shape of the bond price-yield curve shows:
I)For a given change in interest rates,bond prices will increase more when rates decrease than they will decrease when rates increase.
II)The curve is steeper for higher interest rates.
III)The curve is always downward sloping.

A) I, III are correct, II is incorrect.
B) I is incorrect, II, III are correct.
C) I, II and III are correct.
D) I and II are correct, III is incorrect.

Question 20

Toronto Skates Corp.has 6 percent annual-pay coupon bonds that trade with a yield to maturity of 5.5 percent.The bonds have eight years to maturity.What is the current bond price closest to?
a) $1,032.01
b) $1,031.67
c) $968.95
d) $968.60

Question 21

The market yield of a 12-year 8 percent semi-annual-pay bond is 6.6 percent.The bond is callable in four years and its yield to call is 6.48 percent.What is the call price of the bond?
a) $1,125.46
b) $1,114.81
c) $1,085.94
d) $1,080.01

Question 22

A fifteen-year 7 percent semi-annual-pay coupon bond that is callable in five years at a call price of $1,070 is selling for $1,036.53.What is the YTC of this bond?
a) 7.30%
b) 6.61%
c) 6.14%
d) 6.00%

Question 23

The market yield of a twelve-year 7 percent annual-pay bond is 6 percent.The bond is callable in three years and its yield to call is 5.7 percent.What is the call price of the bond?
a) 1057.74
b) 1083.84
c) 1089.59
d) 1026.73

Question 24

Which of the following is not a correct statement of the interest rate parity (IRP)theory?

A) It states the relationship between inflation and interest rates.
B) It states that forward currency contracts can be used to eliminate foreign exchange risk.
C) It demonstrates how differences in interest rates across countries are offset by expected changes in exchange rates.
D) It describes the relationship between interest rates and currency levels by using forward currency exchange rates.

Question 25

The current yield (CY)is:

A) The ratio of the semi-annual coupon interest divided by the bond's maturity value.
B) The ratio of the semi-annual coupon interest divided by the bond's current market price.
C) The ratio of the annual coupon interest divided by the bond's current market price.
D) The ratio of the annual coupon interest divided by the bond's maturity value.

Question 26

The yield to maturity (YTM)is:

A) the discount rate used to evaluate bonds.
B) the bond's internal rate of return.
C) the yield that an investor would expect to make if he or she bought the bond at the current price, held it to maturity, received all the promised payments on their scheduled dates, and reinvested all the cash flows received at YTM.
D) All of the above.

Question 27

A four-year 6 percent semi-annual-pay bond with a maturity value of $1,000 is trading at the YTM of 7 percent.What is this bond's current yield?
a) 5.80%
b) 6.21%
c) 6.76%
d) 7.25%

Question 28

LaMaudite Lager Inc.has semi-annual pay bonds that trade with a yield to maturity of 7 percent.The bonds have a six-year term to maturity and are currently selling for $1,067.20.The coupon rate of the bond is closest to:
a) 4.95%
b) 8.39%
c) 8.41%
d) 15.69%

Question 29

refers to the relationship between interest rates and the term to maturity on underlying debt instruments.

A) The Expectations theory
B) The Liquidity preference theory
C) The Market segmentation theory
D) The Term structure of interest rates

Question 30

A one-year bond offers a 12.5% yield to maturity and a two-year bond offers an 11% yield to maturity.Which of the following is true?

A) The term structure is upward sloping.
B) The term structure is flat.
C) The term structure is downward sloping.
D) The term structure cannot be determined.

Question 31

What is the YTM of a four-year semi-annual pay bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $932.35?
a) 2.96%
b) 5.92%
c) 5.95%
d) 11.90%

Question 32

What is the YTM of a four-year annual pay bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $932.35?
a) 2.96%
b) 5.92%
c) 5.95%
d) 11.90%

Question 33

A 5-year bond with 10% coupon rate and $1000 face value is selling for $1100.Calculate the yield to maturity on the bond assuming annual interest payments.
a) 8.53%
b) 8.62%
c) 10%
d) None of the above

Question 34

A five-year bond paying 8 percent semi-annual-pay coupons is trading on the market at a yield of 6.75 percent.What is the percentage change in price if the market yield increases by 75 basis points?
a) -2.98%
b) -3.02%
c) -3.05%
d) -3.11%

Question 35

A ten-year annual pay bond with a 5% coupon rate is trading with a market yield of 7.75 percent.What is the percentage change in price if the market yield decreases by 75 basis points?
a) 5.37%
b) 5.61%
c) 5.67%
d) 5.77%

Question 36

What is the current yield of a four-year semi-annual pay bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $932.35?

A) 4.29%
B) 4.00%
C) 5.95%
D) 2.14%

Question 37

The nominal interest rate is:

A) the difference between the real rate and expected inflation.
B) low when expected inflation is low and high when expected inflation is high.
C) high when expected inflation is low and low when expected inflation is high.
D) None of the above

Question 38

What is the YTM of a four-year annual pay bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $1,000?
a) 2.96%
b) 4.00%
c) 5.95%
d) 11.90%

Question 39

It is now October 25.Jenny has just purchased a ten-year 4.5 percent Canadian government bond quoted at 96.894.The last semi-annual coupon payment was made on June 30 in the same year.How much will Jenny actually pay for this bond?
a) $954.52
b) $968.94
c) $976.15
d) $983.36

Question 40

Which one of the following will occur during an increase in the supply of loanable funds?

A) A decrease in interest rates.
B) A decrease of the money supply in the economy.
C) A decrease in insured deposit amounts.
D) A decrease in the saving rate in the economy.

Question 41

Which one of the following statements is not correct?

A) AAA bonds are the safest bond investment.
B) Speculative grade bonds require high yields.
C) Large, well-established companies always have speculative grade ratings.
D) Speculative bonds are also called junk bonds.

Question 42

The risk premium of a company would increase with:

A) An increase in the debt to equity ratio
B) An increase in the current ratio
C) A stable interest coverage ratio
D) An increase in earnings

Question 43

Which of the following rated bonds has the least risk?

A) AA
B) AAA
C) BB
D) A

Question 44

Debt ratings assigned by professional debt-rating services are a measure of the bond issuers'

A) currency risk.
B) interest rate risk.
C) foreign exchange rate risk.
D) default risk.

Question 45

Which one of the following ratios is the most correlated to default risk?

A) Account receivables collection period
B) Inventory collection period
C) Debt to equity ratio
D) Profit margin

Question 46

Which of the following risks may be included in the spread that compensates corporate bond investors for the assumption of additional risks over domestic government bond investors?

A) Default risk
B) Foreign exchange rate risk
C) Interest rate risk
D) All of these

Question 47

Which one of the following is not true?

A) A bond issuer's rating is affected by its default risk.
B) An investor holding the bond until maturity expects to receive its par value.
C) Inflation does not affect the interest rates of bonds.
D) Rating agencies use financial statements to assess the default probability of firms.

Question 48

Suppose you observed that five-year government bonds are trading at a YTM of 5.75 percent.The yield spread between AAA- and BBB-rated corporate bonds is 130 basis points.The maturity yield differential between the three-year and five-year government bonds is 45 basis points.What yield would you expect to observe on BBB-rated corporate bonds with three years to mature?
a) 5.30%
b) 6.60%
c) 7.05%
d) 7.50%

Question 49

Which of the following is not a theory of the term structure of interest rates?

A) Expectations theory
B) Interest rate parity theory
C) Liquidity preference theory
D) Market segmentations theory

Question 50

Suppose U.S.interest rates are presently 4.54 percent on one-year U.S.T-bills.Suppose that the one-year forward exchange rate is quoted at US$1 = C$1.0698 and that the interest rate on one-year T-bills in Canada is 4.325 percent.What should the spot exchange rate be?
a) 1.0622
b) 1.0676
c) 1.0720
d) 1.0764

Question 51

A ten-year zero coupon bond with a face value of $1,000 is currently quoted at 48.72.Assume the bond's YTM remains unchanged throughout the bond's term to maturity.What should the bond be sold for three years from now?
a) $542.69
b) $594.19
c) $604.50
d) $641.04

Question 52

A twenty-year zero coupon bond with a face value of $1,000 is currently selling for $326.50.What is the bond's YTM?
a) 5.65%
b) 5.68%
c) 5.72%
d) 5.76%

Question 53

A 182-day Canadian T-bill has a bond equivalent yield of 3.925 percent.What is the bank discount yield on a 182-day U.S.T-bill with the same quoted price?
a) 3.90%
b) 3.87%
c) 3.83%
d) 3.80%

Question 54

Suppose you observed that one-year T-bills are trading at a YTM of 4.35 percent.The yield spread between AAA- and BBB-rated corporate bonds is 150 basis points.The maturity yield differential between the one-year T-bills and the five-year government bonds is 65 basis points.What yield would you expect to observe on BBB-rated corporate bonds with a five-year maturity?
a) 5.00%
b) 5.20%
c) 5.85%
d) 6.50%

Question 55

Suppose Canadian interest rates are presently 4.5 percent on one-year Canadian T-bills.Suppose that the U.S.dollar is quoted at US$1 = C$1.0695 and that the interest rate on one-year T-bills in the U.S.is 4.9 percent.What should the one-year forward exchange rate (C$/US$)be?
a) 1.0783
b) 1.0736
c) 1.0692
d) 1.0654

Question 56

A 180-day U.S.T-bill has a bond discount yield of 4.135 percent.What is the bank equivalent yield on a 180-day Canadian T-bill with the same quoted price?
a) 4.28%
b) 4.24%
c) 4.19%
d) 4.16%

Question 57

What is the yield of a 91-day Canadian T-bill with a par value of $1,000 that is quoted at 98.735?
a) 5.07%
b) 5.14%
c) 5.22%
d) 5.24%

Question 58

A zero coupon bond with a face value of $1,000 is currently selling for $687.38.The bond has a market yield of 5.48 percent.What is the bond's term to maturity?
a) 6.62 years
b) 6.93 years
c) 7.03 years
d) 7.42 years

Question 59

Marie bought a five-year 4.25 percent annual coupon bond for $974 a year ago.Today,she sold the bond at the market yield of 4 percent.What is Marie's approximate real rate of return if the inflation rate over the past year was 2.2 percent?
a) 1.80%
b) 2.05%
c) 5.76%
d) 5.98%

Question 60

Suppose you buy 91-day Treasury bill with a par value of $1,000 for 98.125 at the time of the issue.After owning the Treasury bill for 23 days,you sell it.The bond equivalent yield you earned is 6.57%.What price did you receive for the T-bill?
a) $986.31
b) $985.31
c) $856.31
d) $1,000
e) None of the above

Question 61

Explain the term "yield to maturity."

Question 62

The market yield on a fifteen-year 7.5 percent bond is 6.5%.The bond makes semi-annual coupon payments and is callable in five years at a call price of $1,075.
a) What is the bond price based on the market yield?
b) What is the bond's yield to call?
c) Is this bond likely to be called? Explain.

Question 63

Discuss the reasoning behind interest rate parity.Why don't firms always issue bonds in the country where interest rates are the lowest?

Question 64

Supreme Investment Co.has observed that the market prices for the one-year and two-year zero coupon bonds that have no default risk are $965.90 and $901.54,respectively.
a) How much would Supreme pay for a two-year 5.8 percent annual coupon bond that has the same default risk as the zeros?
b) What is the yield to maturity of this two-year coupon bond?

Question 65

Genie would like to receive an exact real rate of return of 5 percent per year on a bond investment at a time when the expected inflation rate is 4.5 percent.
a) What nominal rate of return would Genie expect to receive on a bond investment?
b) How much would Genie be willing to pay for a bond maturing in five years if it pays a semi-annual coupon of 8 percent?

Question 66

Explain the implication of an increase in expected inflation.

Question 67

Suppose you observed that one-year T-bills are trading with a YTM of 4.75 percent.The yield spread between AAA- and BB-rated corporate bonds is 130 basis points.The maturity yield differential between the one-year T-bills and three-year government bonds is 45 basis points.
a) What is the market yield you would expect on a three-year BB-rated corporate bond that pays a 7.25 annual coupon?
b) How much would you pay for this three-year BB-rated corporate bond if its coupon rate was 7.25%?

Question 68

Briefly describe three theories of the term structure of interest rates.

Question 69

Sam has put aside C$5,000 for his travel to Japan in a year from now.He could invest the money in Canada and earn 4.5 percent,and then convert it to Japanese yen when he leaves.Alternatively,Sam could convert the funds to Japanese yen (JY)and earn a 4.85 percent return on a Japanese investment today.Which approach should he take if the currency spot rate is C$/JY=0.008872 and the one-year forward rate is 0.008738?

Question 70

Suppose a one-year zero-coupon bond is sold at $980,a two-year zero-coupon bond is sold at $950,and a three-year zero-coupon bond is sold at $920.What is the price of a 3-year 5% annual coupon bond? What is its YTM?

Question 71

Which of the following is true?

A) The YTC is greater than the coupon rate, because the call price is greater than the bond's current price.
B) The YTC is greater than the coupon rate, because the call price is smaller than the bond's current price.
C) The YTC is greater than the coupon rate, because the call price is equal to the bond's current price.

Question 72

The yield to call (YTC)is:

A) the opportunity cost of forgone coupon payments.
B) the yield that an investor would expect to make if he or she bought the bond at the current price, held it to call date.
C) the yield that an investor would expect to make if he or she bought the bond at the current price, held it to maturity, received all the promised payments on their scheduled dates.
D) All of the above.

Question 73

Explain the difference between the coupon rate and the current yield.

Question 74

The liquidity preference theory suggests that investors prefer short-term debt instruments because they exhibit less interest rate risk,while debt issuers prefer to lock in borrowing rates for longer periods to avoid the risk of having to refinance at higher rates.Therefore issuers must provide investors with higher yields to induce them to invest in longer-term bonds.As a result,yield curves will generally be upward sloping because long-term rates will be higher than short-term rates.

Question 75

The spot ¥/C$ exchange rate is 107.9 and the one year forward exchange rate ¥/C$ $ is 103.6.If the annual interest rate on Canadian T-bill is 5.5%,what would you expect the annual interest rate to be on Japanese T-bill?
a) 1.4%
b) 3.3%
c) 1.4%
d) 1.29%

Question 76

The expectations theory argues that the yield curve reflects investor expectations about future interest rates.Therefore,an upward-sloping yield curve reflects expectations of interest rate increases in the future,and a downward sloping curve reflects expectations of interest rate decreases in the future.

Question 77

What is the term structure of interest rates and the yield curve?

Question 78

The market segmentations theory suggests that distinct markets exist for interest rate securities of various maturities and those interest rates are determined within these independent market segments by the forces of supply and demand within that market.The resulting term structure merely depicts the consequences of the forces of supply and demand within these markets.
Type: Concept

Question 79

If everything else held constant,a decrease in relative expected inflation in Canada compared with the U.S.would imply:

A) An increase in the Canadian dollar versus the U.S. dollar
B) A decrease in the Canadian dollar versus the U.S. dollar
C) No change in the Canadian dollar versus the U.S. dollar
D) A decrease in the Canadian dollar versus the euro

Question 80

What is the major concern about the liquidity preference theory of the yield curve?