Deck 12: Bond Pricing and Selection

Question 1

Bonds are identified by all of the following except

A) issuer
B) maturity
C) coupon
D) rating

Answer 1

rating

Question 2

How much interest does an XYZ 7s09 bond pay each year?

A) 9% of par
B) 7% of par
C) 7.09% of par
D) Cannot be determined

Answer 2

7% of par

Question 3

The details of a bond issue are contained in the

A) debenture
B) indenture
C) confirmation statement
D) call agreement

Answer 3

indenture

Question 4

U. S. treasury bonds are ______ issues.

A) full faith and credit
B) secured
C) subordinated
D) corporate

Question 5

Which of the following is the correct order of increasing maturity?

A) Bills, bonds, notes
B) Bills, notes, bonds
C) Notes, bills, bonds
D) Notes, bonds, bills

Question 6

Which of the following are most similar?

A) Bills and notes
B) Bills and bonds
C) Notes and bonds
D) They are all equally similar

Question 7

A debenture is like a _____ loan.

A) secured
B) signature
C) automobile
D) mortgage

Question 8

Which of the following is most likely to be financed by a revenue bond?

A) Bridge
B) Low-income housing complex
C) Fleet of corporate automobiles
D) Airplane

Question 9

Treasury bonds have an initial life of more than ___ years.

A) five
B) ten
C) fifteen
D) twenty

Question 10

Debt that uses land and buildings as collateral is a _____ loan.

A) collateral trust
B) equipment trust
C) mortgage
D) senior

Question 11

A cash reserve for the ultimate repayment of bond principal is a

A) reserve fund
B) depreciation fund
C) sinking fund
D) interest-only fund

Question 12

A fleet of trucks might logically be financed with

A) collateral trust bonds
B) equipment trust certificates
C) mortgages
D) treasury bonds

Question 13

A loan with a large final payment is a _____ loan.

A) balloon
B) escrow
C) inflated
D) descending

Question 14

A bond on which the interest is payable only if it is earned is a(n) ____ bond.

A) sinking fund
B) income
C) subordinated
D) full faith and credit

Question 15

An income bond is most likely to be associated with financing which of the following?

A) An apartment complex
B) A public highway
C) A toll bridge
D) Capital improvements to a park

Question 16

Typical bond cash flows include all of the following except

A) annuity plus lump sum
B) growing annuity plus lump sum
C) perpetuity
D) lump sum only

Question 17

An example of a variable rate security is a

A) fixed rate mortgage
B) consol
C) U. S. savings bond
D) zero coupon bond

Question 18

A ____ company issued a famous commodity-backed convertible bond.

A) soybean processing
B) silver mining
C) sugar refining
D) savings and loan

Question 19

New debt may no longer be issued in _____ form.

A) book entry
B) registered
C) bearer
D) convertible

Question 20

If you hold a bond certificate with your name on it, it is a _____ bond.

A) book entry
B) registered
C) bearer
D) convertible

Question 21

Newly issued bonds issued by the U. S. Treasury are in _____ form only.

A) book entry
B) registered
C) bearer
D) convertible

Question 22

An individual who wishes to buy a U. S. Treasury bond must open an account through the

A) Federal Reserve System
B) Security Investor Protection Corporation
C) Treasury Direct System
D) Federal Deposit Insurance Corporation

Question 23

The clipping of coupons is associated with _____ bonds.

A) book entry
B) registered
C) bearer
D) convertible

Question 24

To solve for a bond's yield to maturity with semi-annual interest payments

A) divide the discount rate by two and double the number of periods
B) divide the discount rate by two and halve the number of periods
C) multiply the discount rate by two and double the number of periods
D) multiply the discount rate by two and halve the number of periods

Question 25

You own $5,000 par of the XYZ 8s of 09. The bond paid interest six months ago, and pays again tomorrow. How much is the next interest check?

A) $40
B) $80
C) $200
D) $400

Question 26

You own $5,000 par of the XYZ 8s of 09; they sell for 94% of par. The bond paid interest six months ago, and pays again tomorrow. How much is the next interest check?

A) $376
B) $188
C) $200
D) $400

Question 27

A consol is valued as a

A) level annuity
B) annuity due
C) perpetuity
D) growing perpetuity

Question 28

The quantity equals

A) C x R
B) C ÷ R
C) C^R
D) R^C

Question 29

What is the value of a consol that pays $100 per year if the required rate of return is 8%?

A) $800
B) $1000
C) $1250
D) $1500

Question 30

The yield to maturity calculation assumes that _____ are reinvested at the yield to maturity.

A) coupon proceeds
B) sinking fund payments
C) the principal payments
D) dollars equal to the purchase price

Question 31

A specific yield to maturity can only be locked in with which of the following bonds?

A) consol
B) variable rate
C) convertible
D) zero coupon

Question 32

The effective annual rate is also called the

A) arithmetic mean return
B) geometric mean return
C) realized compound yield
D) internal rate of return

Question 33

If a bond sells for par

A) current yield exceeds the yield to maturity
B) current yield is less than the yield to maturity
C) current yield equals yield to maturity
D) none of the above

Question 34

If a bond sells at a premium

A) current yield exceeds the yield to maturity
B) current yield is less than the yield to maturity
C) current yield equals yield to maturity
D) none of the above

Question 35

If a bond sells at a discount

A) current yield exceeds the yield to maturity
B) current yield is less than the yield to maturity
C) current yield equals yield to maturity
D) none of the above

Question 36

If a bond sells at a premium, its price

A) must decline over time
B) must rise over time
C) will remain relatively constant over time
D) will be very volatile over time

Question 37

Someone who relies on investment income for living expenses is most concerned with

A) internal rate of return
B) yield to maturity
C) realized compound yield
D) current yield

Question 38

The yield curve is normally

A) flat
B) descending
C) upward sloping
D) none of the above

Question 39

The yield curve normally has a ____ first derivative and a _____ second derivative.

A) positive, positive
B) positive, negative
C) negative, positive
D) negative, negative

Question 40

If all interest rates rise by a similar amount, this is a _____ in the yield curve.

A) parallel shift
B) stochastic aberration
C) non-parallel shift
D) non-stochastic aberration

Question 41

Corporate bonds rated BBB will show a _____ of yield curve than U. S. Treasury bonds.

A) lower level
B) higher level
C) flatter plot
D) steeper plot

Question 42

Forward interest rates are mostly associated with the _____ theory of interest rate structure.

A) liquidity premium
B) expectations
C) inflation premium
D) normal backwardation

Question 43

Two-year certificates of deposit yield 5.00%; a one-year CD has a 4.66% rate. What is the one-year forward rate?

A) 4.66%
B) 5.34%
C) 5.66%
D) 5.77%

Question 44

If the expectations theory of interest rates is accurate, the only explanation for an upward sloping yield curve is

A) fear of inflation
B) an expectation that interest rates will continually increase
C) demand for liquidity
D) risk aversion

Question 45

According to the liquidity premium theory of interest rates

A) forward rates are actually higher than the expected interest rate
B) forward rates are actually lower than the expected interest rate
C) forward rates are equal to the expected interest rate
D) none of the above

Question 46

A $1000 par bond has a conversion price of $33.50. Its conversion ratio is

A) $29.85
B) 29.85 shares
C) $33,500
D) 33,500 shares

Question 47

A $1000 par bond sells for $900 and has a conversion ratio of 25 shares. If the underlying stock price is $35, the conversion value is

A) $25
B) $100
C) $875
D) $935

Question 48

A convertible bond's ____ should never be _____ than its _____.

A) conversion value, less, market value
B) conversion value, more, market value
C) conversion ratio, less, conversion price
D) conversion price, less, conversion ratio

Question 49

For a convertible bond, an arbitrage profit would be available if the conversion value is

A) positive
B) negative
C) greater than the market value
D) less than the market value

Question 50

For a convertible bond, the difference between the bond price and the conversion value is know as the

A) intrinsic value
B) residual value
C) discount under conversion value
D) premium over conversion value

Question 51

The maximum level of accrued interest with most bonds occurs _____ times a year.

A) two
B) four
C) six
D) twelve

Question 52

The amount a bond buyer pays is

A) bond price + accrued interest + brokerage fees
B) bond price - accrued interest + brokerage fees
C) accrued interest - bond price + brokerage fees
D) accrued interest - bond price - brokerage fees

Question 53

How much interest has accrued on an 8%, $1000 par bond seven days after the last interest payment date?

A) None
B) $1.00
C) $1.53
D) $40.00

Question 54

Credit risk is also called

A) interest rate risk
B) purchasing power risk
C) default risk
D) reinvestment rate risk

Question 55

Standard & Poor's bond ratings measure

A) interest rate risk
B) purchasing power risk
C) default risk
D) reinvestment rate risk

Question 56

The demarcation between investment grade bonds and junk bonds is the S&P _____ rating.

A) AAA
B) AA
C) BBB
D) B

Question 57

_____ is a leading bond rating service.

A) Moody's Investors Service
B) Weissenberger's Investment Service
C) Value Line Investment Survey
D) Morningstar

Question 58

The fact that bond prices change as market interest rates change is a result of

A) interest rate risk
B) purchasing power risk
C) default risk
D) reinvestment rate risk

Question 59

Which of the following has no interest rate risk?

A) Non-negotiable certificate of deposit
B) U. S. Treasury bond
C) Corporate bond
D) Mortgage

Question 60

Call risk is a type of _____ risk.

A) convenience
B) market
C) interest rate
D) default

Question 61

If a bond is called, the bondholder often receives

A) less than the par value
B) the par value minus the last coupon payment
C) the par value minus the last year's coupon payment
D) the par value plus a call premium

Question 62

The _____ the _____ on a bond, the higher its reinvestment rate risk.

A) higher, yield to maturity
B) lower, yield to maturity
C) higher, coupon
D) lower, coupon

Question 63

Marketability risk refers to

A) the possibility of selling a bond for less than the price paid
B) the possibility of having the bond called
C) the difficulty in selling a bond
D) the magnitude of the total bond risk

Question 64

Bond prices move _____ with market yields.

A) directly
B) inversely
C) exponentially
D) logarithmically

Question 65

A famous set of bond pricing relationships is

A) Kondradiev's theorems
B) the Dow theory
C) Fibbonacci theorems
D) Malkiel's theorems

Question 66

_____ term bonds have more _____ risk.

A) Longer, reinvestment rate
B) Longer, interest rate
C) Shorter, reinvestment rate
D) Shorter, interest rate

Question 67

_____ coupon bonds have more _____ risk.

A) Higher, reinvestment rate
B) Higher, interest rate
C) Lower, reinvestment rate
D) Lower, interest rate

Question 68

If interest rates fall, is the price change in a bond with "t" years until maturity. Suppose there are four bonds: , , , . If the bonds are identical in every respect except for their maturity, which of the following statements is true?

A) $(\Delta_2 - \Delta_4) > 0$
B) $(\Delta_2 - \Delta_4) = 0$
C) $(\Delta_2 - \Delta_4) - (\Delta_{22} - \Delta_{24}) > 0$
D) $(\Delta_2 - \Delta_4) - (\Delta_{22} - \Delta_{24}) < 0$

Question 69

Malkiel's theorem five deals with

A) bond capital gains and losses
B) changing default risk levels
C) declining interest rates
D) call risk

Question 70

The principal value of duration is the fact that

A) it makes knowledge of default risk unnecessary
B) it incorporates Malkiel's theorems in a single expression
C) it incorporates default risk into interest rate risk
D) it eliminates the reinvestment rate risk problem

Question 71

A definition of duration is

A) the weighted average life of a bond
B) the weighted average value of a bond's cash flows
C) the weighted average of the bond's marketability
D) the weighted average time until cash flows occur

Question 72

In calculating duration via the traditional method, the "weights" reflect the

A) time value of money
B) level of default risk
C) level of interest rate risk
D) cost of capital

Question 73

If a $1,000 par value bond has a coupon rate of 6% with interest paid semi-annually, a maturity of 12 years, and a yield-to-maturity of 7%, what is the current price of this bond?

A) $919.71
B) $989.71
C) $1014.71
D) $1062.71

Question 74

If a $1,000 face value bond has a coupon rate of 5.5% with interest paid semi-annually, a maturity of 15 years, and a yield to maturity of 4.5%, what is the current price of this bond?

A) $854.66
B) $1108.23
C) $1162.89
D) $1242.72

Question 75

If a $1,000 face value bond has a coupon rate of 6.5% with interest paid semi-annually, a maturity of 11 years, and a current price of 1090.34, what is the annual yield-to-maturity of this bond?

A) 2.7%
B) 5.4%
C) 5.8%
D) 6.8%

Question 76

If a $1,000 par value bond has a coupon rate of 7% with interest paid semi-annually, a maturity of 18 years, and a current price of $1,235, what is the annual yield-to-maturity of this bond?

A) 2.5%
B) 4.3%
C) 5.0%
D) 6.4%

Question 77

If a $1,000 face value zero coupon bond has a maturity of 15 years and a yield-to-maturity of 6%, what is the current price of this bond?

A) $417.27
B) $518.27
C) $635.51
D) $782.48

Question 78

If a $1,000 face value zero coupon bond has a maturity of 22 years and is currently priced at $521.89, what is the annual yield-to-maturity?

A) 2%
B) 3%
C) 4%
D) 5%

Question 79

What is the duration of a $1,000 par value bond with a coupon rate of 8%, a yield-to-maturity of 6%, and 4 years left to maturity? (Assume annual coupon payments)

A) 3.25 years
B) 3.59 years
C) 3.72 years
D) 3.86 years

Question 80

What is the duration of a $1,000 par value bond with a coupon rate of 6%, a yield-to-maturity of 5%, and 2 years left to maturity? (Interest payments are made semi-annually.)

A) 1.7 years
B) 1.9 years
C) 2.0 years
D) 3.8 years