Deck 12: Macroeconomic and Industry Analysis

Question 1

Of the following four investments,________ is considered to be the safest.

A) commercial paper
B) corporate bonds
C) Treasury bills
D) Treasury bonds
E) U.S.Agency issues

Answer 1

C

Question 2

Callable bonds

A) are called when interest rates decline appreciably.
B) have a call price that declines as time passes.
C) are called when interest rates increase appreciably.
D) a and b.
E) b and c.

Answer 2

D

Question 3

A coupon bond that pays interest annually has a par value of $1,000,matures in 5 years,and has a yield to maturity of 10%.The intrinsic value of the bond today will be ______ if the coupon rate is 7%.

A) $712.99
B) $620.92
C) $1,123.01
D) $886.28
E) $1,000.00

Answer 3

D

Question 4

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 ____________.

A) $1,087.50
B) $1,110.10
C) $1,150.00
D) $1,160.25
E) None of these is correct.

Question 5

A Treasury bond due in one year has a yield of 6.2%;a Treasury bond due in 5 years has a yield of 6.7%.A bond issued by General Motors due in 5 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 General Motors,respectively,are

A) 1.0% and 1.2%
B) 0.5% and .7%
C) 1.2% and 1.0%
D) 0.7% and 0.5%
E) none of these

Question 6

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.

A) current yield
B) dividend yield
C) P/E ratio
D) yield to maturity
E) discount yield

Question 7

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.

A) callable
B) coupon
C) retractable or put
D) Treasury
E) zero-coupon

Question 8

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

A) conversion ratio
B) current ratio
C) P/E ratio
D) conversion premium
E) convertible floor

Question 9

At issue,coupon bonds typically sell ________.

A) above par value
B) at or near par value
C) below par
D) at a value unrelated to par
E) none of these

Question 10

The current yield on a bond is equal to ________.

A) the internal rate of return
B) the yield to maturity
C) annual interest divided by the par value
D) annual interest divided by the current market price
E) none of these

Question 11

Ceteris paribus,the price and yield on a bond are

A) positively related.
B) negatively related.
C) sometimes positively and sometimes negatively related.
D) not related.
E) indefinitely related.

Question 12

Accrued interest

A) is quoted in the bond price in the financial press.
B) must be paid by the buyer of the bond and remitted to the seller of the bond.
C) must be paid to the broker for the inconvenience of selling bonds between maturity dates.
D) a and b.
E) a and c.

Question 13

A coupon bond is a bond that _________.

A) pays interest on a regular basis (typically every six months)
B) does not pay interest on a regular basis but pays a lump sum at maturity
C) can always be converted into a specific number of shares of common stock in the issuing company
D) always sells at par
E) none of these

Question 14

A coupon bond that pays interest semi-annually has a par value of $1,000,matures in 5 years,and has a yield to maturity of 10%.The intrinsic value of the bond today will be _________ if the coupon rate is 8%.

A) $922.78
B) $924.16
C) $1,075.80
D) $1,077.20
E) none of these

Question 15

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

A) minimize the holders' interest rate risk;give the investor the ability to share in the price appreciation of the company's stock
B) maximize the holders' interest rate risk;give the investor the ability to share in the price appreciation of the company's stock
C) minimize the holders' interest rate risk;give the investor the ability to benefit from interest rate changes
D) maximize the holders' interest rate risk;give investor the ability to share in the profits of the issuing company
E) none of these

Question 16

To earn a high rating from the bond rating agencies,a firm should have

A) a low times interest earned ratio
B) a low debt to equity ratio
C) a high quick ratio
D) a and c
E) b and c

Question 17

The bonds of Elbow Grease Dishwashing Company have received a rating of "D" by Moody's.The "D" rating indicates

A) the bonds are insured
B) the bonds are junk bonds
C) the bonds are referred to as "high yield" bonds
D) a and b
E) b and c

Question 18

A coupon bond that pays interest annually is selling at par value of $1,000,matures in 5 years,and has a coupon rate of 9%.The yield to maturity on this bond is:

A) 6.00%
B) 8.33%
C) 9.00%
D) 45.00%
E) none of these

Question 19

The bond market

A) can be quite "thin".
B) primarily consists of a network of bond dealers in the over the counter market.
C) consists of many investors on any given day.
D) a and b.
E) b and c.

Question 20

A coupon bond that pays interest annually,has a par value of $1,000,matures in 5 years,and has a yield to maturity of 10%.The intrinsic value of the bond today will be __________ if the coupon rate is 12%.

A) $922.77
B) $924.16
C) $1,075.82
D) $1,077.20
E) none of these

Question 21

A coupon bond pays interest semi-annually,matures in 5 years,has a par value of $1,000 and a coupon rate of 12%,and an effective annual yield to maturity of 10.25%.The price the bond should sell for today is ________.

A) $922.77
B) $924.16
C) $1,075.80
D) $1,077.20
E) none of these

Question 22

A coupon bond pays annual interest,has a par value of $1,000,matures in 4 years,has a coupon rate of 10%,and has a yield to maturity of 12%.The current yield on this bond is ___________.

A) 9.39%
B) 10.00%
C) 10.65%
D) 12.00%
E) none of these

Question 23

A Treasury bill with a par value of $100,000 due one month from now is selling today for $99,010.The effective annual yield is __________.

A) 12.40%
B) 12.55%
C) 12.62%
D) 12.68%
E) none of these

Question 24

Consider the following $1,000 par value zero-coupon bonds: $$\begin{array} { l c c } \text { Bond } &\text { Years to Maturity } & \text { Price } \\\hline \text { A } & 1 & \$ 909.09 \\\text { B } & 2 & \$ 811.62 \\\text { C } & 3 & \$ 711.78 \\\text { D } & 4 & \$ 635.52\end{array}$$
The yield to maturity on bond D is _______.

A) 10%
B) 11%
C) 12%
D) 14%
E) none of these

Question 25

A Treasury bill with a par value of $100,000 due three months from now is selling today for $97,087,with an effective annual yield of _________.

A) 12.40%
B) 12.55%
C) 12.62%
D) 12.68%
E) none of these

Question 26

A coupon bond that pays interest semi-annually has a par value of $1,000,matures in 7 years,and has a yield to maturity of 9.3%.The intrinsic value of the bond today will be ________ if the coupon rate is 9.5%.

A) $922.77
B) $1,010.12
C) $1,075.80
D) $1,077.22
E) None of these is correct.

Question 27

A coupon bond that pays interest of $100 annually has a par value of $1,000,matures in 5 years,and is selling today at a $72 discount from par value.The yield to maturity on this bond is __________.

A) 6.00%
B) 8.33%
C) 12.00%
D) 60.00%
E) none of these

Question 28

You purchased an annual interest coupon bond one year ago that now has 6 years remaining until maturity.The coupon rate of interest was 10% and par value was $1,000.At the time you purchased the bond,the yield to maturity was 8%.The amount you paid for this bond one year ago was

A) $1,057.50
B) $1,075.50
C) $1,088.50
D) $1.092.46
E) $1,104.13

Question 29

A convertible bond has a par value of $1,000 and a current market price of $850.The current price of the issuing firm's stock is $29 and the conversion ratio is 30 shares.The bond's market conversion value is ______.

A) $729
B) $810
C) $870
D) $1,000
E) none of these

Question 30

Consider the following $1,000 par value zero-coupon bonds: $$\begin{array} { l c c } \text { Bond } &\text { Years to Maturity } & \text { Price } \\\hline \text { A } & 1 & \$ 909.09 \\\text { B } & 2 & \$ 811.62 \\\text { C } & 3 & \$ 711.78 \\\text { D } & 4 & \$ 635.52\end{array}$$
The yield to maturity on bond B is _________.

A) 10%
B) 11%
C) 12%
D) 14%
E) none of these

Question 31

A coupon bond is reported as having an ask price of 113% of the $1,000 par value.If the last interest payment was made two months ago and the coupon rate is 12%,the invoice price of the bond will be ____________.

A) $1,100
B) $1,110
C) $1,150
D) $1,160
E) none of these

Question 32

Consider the following $1,000 par value zero-coupon bonds: $$\begin{array} { l c c } \text { Bond } &\text { Years to Maturity } & \text { Price } \\\hline \text { A } & 1 & \$ 909.09 \\\text { B } & 2 & \$ 811.62 \\\text { C } & 3 & \$ 711.78 \\\text { D } & 4 & \$ 635.52\end{array}$$
The yield to maturity on bond C is ____________.

A) 10%
B) 11%
C) 12%
D) 14%
E) none of these

Question 33

A Treasury bill with a par value of $100,000 due two months from now is selling today for $98,039,with an effective annual yield of _________.

A) 12.40%
B) 12.55%
C) 12.62%
D) 12.68%
E) none of these

Question 34

You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000.What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell.

A) 10.00%
B) 20.42%
C) 13.8%
D) 1.4%
E) none of these

Question 35

A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000.If the bond matures in 8 years,the bond should sell for a price of _______ today.

A) $422.41
B) $501.87
C) $513.16
D) $483.49
E) none of these

Question 36

A coupon bond that pays interest semi-annually has a par value of $1,000,matures in 5 years,and has a yield to maturity of 10%.The intrinsic value of the bond today will be __________ if the coupon rate is 12%.

A) $922.77
B) $924.16
C) $1,075.80
D) $1,077.22
E) none of these

Question 37

You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at that time.The coupon interest rate was 10% and the par value was $1,000.At the time you purchased the bond,the yield to maturity was 8%.If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%,your annual total rate of return on holding the bond for that year would have been _________.

A) 7.00%
B) 7.82%
C) 8.00%
D) 11.95%
E) none of these

Question 38

A convertible bond has a par value of $1,000 and a current market value of $850.The current price of the issuing firm's stock is $27 and the conversion ratio is 30 shares.The bond's conversion premium is _________.

A) $40
B) $150
C) $190
D) $200
E) none of these

Question 39

Consider the following $1,000 par value zero-coupon bonds: $$\begin{array} { l c c } \text { Bond } &\text { Years to Maturity } & \text { Price } \\\hline \text { A } & 1 & \$ 909.09 \\\text { B } & 2 & \$ 811.62 \\\text { C } & 3 & \$ 711.78 \\\text { D } & 4 & \$ 635.52\end{array}$$
The yield to maturity on bond A is ____________.

A) 10%
B) 11%
C) 12%
D) 14%
E) none of these

Question 40

A 10% coupon bond,annual payments,10 years to maturity is callable in 3 years at a call price of $1,100.If the bond is selling today for $975,the yield to call is _________.

A) 10.26%
B) 10.00%
C) 9.25%
D) 13.98%
E) none of these

Question 41

A bond will sell at a discount when __________.

A) the coupon rate is greater than the current yield and the current yield is greater than yield to maturity
B) the coupon rate is greater than yield to maturity
C) the coupon rate is less than the current yield and the current yield is greater than the yield to maturity
D) the coupon rate is less than the current yield and the current yield is less than yield to maturity
E) none of these are true.

Question 42

The yield to maturity on a bond is ________.

A) below the coupon rate when the bond sells at a discount,and equal to the coupon rate when the bond sells at a premium.
B) the discount rate that will set the present value of the payments equal to the bond price.
C) based on the assumption that any payments received are reinvested at the coupon rate.
D) none of these.
E) a,b,and c.

Question 43

You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase.The coupon interest rate is 10% and par value is $1,000.At the time you purchased the bond,the yield to maturity was 8%.If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%,your annual total rate of return on holding the bond for that year would have been _________.

A) 7.00%
B) 8.00%
C) 9.95%
D) 11.95%
E) none of these

Question 44

The yield to maturity of a 20-year zero coupon bond that is selling for $372.50 with a value at maturity of $1,000 is ________.

A) 5.1%
B) 8.8%
C) 10.8%
D) 13.4%
E) none of these

Question 45

A 1% decline in yield will have the greatest effect on the price of the bond with a

A) 10-year maturity,selling at 80
B) 10-year maturity,selling at 100
C) 20-year maturity,selling at 80
D) 20-year maturity,selling at 100
E) all bonds will be affected equally

Question 46

The invoice price of a bond that a buyer would pay is equal to

A) the asked price plus accrued interest.
B) the asked price less accrued interest.
C) the bid price plus accrued interest.
D) the bid price less accrued interest.
E) the bid price.

Question 47

The _________ is used to calculate the present value of a bond.

A) nominal yield
B) current yield
C) yield to maturity
D) yield to call
E) none of these

Question 48

Preferred stock

A) pays a fixed-income stream of dividends.
B) pays dividends but when they are passed it results in corporate bankruptcy.
C) has cash flows that constitute a perpetuity.
D) a and b.
E) a and c.

Question 49

An 8% coupon Canada bond pays interest on May 30 and November 30 and is traded for settlement on August 15.The accrued interest on the $100,000 face value of this bond is _________.

A) $491.80
B) $800.00
C) $983.61
D) $1,661.20
E) none of these

Question 50

Consider a $1,000 par value 20-year zero coupon bond issued at a yield to maturity of 10%.If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%,the imputed interest income for the first year of that bond is

A) zero.
B) $14.87.
C) $45.85.
D) $7.44.
E) none of these.

Question 51

Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%.If interest rates remain constant,one year from now the price of this bond will be _______.

A) higher
B) lower
C) the same
D) cannot be determined
E) $1,000

Question 52

Using semiannual compounding,a 15-year zero coupon bond that has a par value of $1,000 and a required return of 8% would be priced at approximately ______.

A) $308
B) $315
C) $464
D) $555
E) none of these

Question 53

A 12% coupon bond,semiannual payments,is callable in 5 years.The call price is $1,120;if the bond is selling today for $1,110,what is the yield to call?

A) 12.03%.
B) 10.86%.
C) 10.95%.
D) 9.14%.
E) none of these.

Question 54

A US Treasury bond quoted at 107:16 107:18 has a bid price of _______ and an asked price of _____.

A) $107.16,$107.18
B) $1,071.60,$1,071.80
C) $1,075.00,$1,075.63
D) $1,071.80,$1,071.60
E) $1,070.50,$1,070.56

Question 55

Which one of the following statements about convertibles is false?

A) The longer the call protection on a convertible,the less the security is worth.
B) The more volatile the underlying stock,the greater the value of the conversion feature.
C) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond,the more the convertible is worth.
D) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.
E) The longer the call protection on a convertible,the less the security is worth,the smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond,the more the convertible is worth and the collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

Question 56

Which one of the following statements about convertibles is true?

A) The longer the call protection on a convertible,the less the security is worth.
B) The more volatile the underlying stock,the greater the value of the conversion feature.
C) The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond,the more the convertible is worth.
D) The collateral that is used to secure a convertible bond is one reasons convertibles are more attractive than the underlying stock.
E) Convertibles are not callable.

Question 57

A bond with a 12% coupon,10 years to maturity and selling at 88 has a yield to maturity of _______.

A) over 14%
B) between 13% and 14%
C) between 12% and 13%
D) between 10% and 12%
E) less than 12%

Question 58

The bond indenture includes

A) the coupon rate of the bond.
B) the par value of the bond.
C) the maturity date of the bond.
D) all of these.
E) none of these.

Question 59

A bond has a par value of $1,000,a time to maturity of 20 years,a coupon rate of 10% with interest paid annually,a current price of $850 and a yield to maturity of 12%.Intuitively and without the use calculations,if interest payments are reinvested at 10%,the realized compound yield on this bond must be ________.

A) 10.00%
B) 10.9%
C) 12.0%
D) 12.4%
E) none of these

Question 60

A 10% coupon,annual payments,bond maturing in 10 years,is expected to make all coupon payments,but to pay only 50% of par value at maturity.What is the expected yield on this bond if the bond is purchased for $975?

A) 10.00%.
B) 6.68%.
C) 11.00%.
D) 8.68%.
E) none of these.

Question 61

RRB are

A) securities formed from the coupon payments only of government bonds.
B) securities formed from the principal payments only of government bonds.
C) government bonds with par value linked to the general level of prices.
D) government bonds with coupon rate linked to the general level of prices.
E) zero-coupon government bonds.

Question 62

A coupon bond that pays interest annually has a par value of $1,000,matures in 6 years,and has a yield to maturity of 11%.The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.

A) $712.99
B) $851.93
C) $1,123.01
D) $886.28
E) $1,000.00

Question 63

In the 2002-2004 time period the median return on capital ratio for bonds rated AAA by Standard and Poor's was

A) 27.6%
B) 13.4%
C) 39.4%
D) 17.5%
E) 41.1%

Question 64

Debt securities are often called fixed-income securities because

A) the government fixes the maximum rate that can be paid on bonds.
B) they are held predominantly by older people who are living on fixed incomes.
C) they pay a fixed amount at maturity.
D) they promise either a fixed stream of income or a stream of income determined by a specific formula.
E) they were the first type of investment offered to the public,which allowed them to "fix" their income at a higher level by investing in bonds.

Question 65

Most corporate bonds are traded

A) on a formal exchange operated by the New York Stock Exchange.
B) by the issuing corporation.
C) over the counter by bond dealers linked by a computer quotation system.
D) on a formal exchange operated by the Toronto Stock Exchange.
E) on a formal exchange operated by the Montreal Stock Exchange.

Question 66

Which of the following is not a type of international bond?

A) Samurai bonds
B) Yankee bonds
C) bulldog bonds
D) Elton bonds
E) All of these are international bonds.

Question 67

Collateralized bonds

A) rely on the general earning power of the firm for the bond's safety.
B) are backed by specific assets of the issuing firm.
C) are considered the safest assets of the firm.
D) all of these are true.
E) both b and c are true.

Question 68

A zero-coupon bond is one that

A) effectively has a zero percent coupon rate.
B) pays interest to the investor based on the general level of interest rates,rather than at a specified coupon rate.
C) pays interest to the investor without requiring the actual coupon to be mailed to the corporation.
D) is issued by state governments because they don't have to pay interest.
E) is analyzed primarily by focusing ("zeroing in")on the coupon rate.

Question 69

One year ago,you purchased a newly issued real return bond that has a 6% coupon rate,five years to maturity,and a par value of $1,000.The average inflation rate over the year was 4.2%.What is the amount of the coupon payment you will receive and what is the current face value of the bond?

A) $60.00,$1,000
B) $42.00,$1,042
C) $60.00,$1,042
D) $62.52,$1,042
E) $102.00,$1,000

Question 70

Subordination clauses in bond indentures

A) may restrict the amount of additional borrowing the firm can undertake.
B) are sometimes referred to as "me-first" rules.
C) provide higher priority to senior creditors in the event of bankruptcy.
D) all of these are true.
E) both b and c are true.

Question 71

Convertible bonds

A) give their holders the ability to share in price appreciation of the underlying stock.
B) offer lower coupon rates than similar nonconvertible bonds.
C) offer higher coupon rates than similar nonconvertible bonds.
D) both a and b are true.
E) both a and c are true.

Question 72

The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called

A) deferral.
B) reissue.
C) repurchase.
D) refunding.
E) none of these.

Question 73

Bearer bonds are

A) bonds traded without any record of ownership.
B) helpful to tax authorities in the enforcement of tax collection.
C) rare in the United States today.
D) all of these.
E) both a and c.

Question 74

Bond analysts might be more interested in a bond's yield to call if

A) the bond's yield to maturity is insufficient.
B) the firm has called some of its bonds in the past.
C) the investor only plans to hold the bond until its first call date.
D) interest rates are expected to rise.
E) interest rates are expected to fall.

Question 75

Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict

A) required coupon rates for new bond issues.
B) bankruptcy risk.
C) the likelihood of a firm becoming a takeover target.
D) the probability of a bond issue being called.
E) none of these.

Question 76

Most preferred stock
I)pays a fixed dividend.
II)pays a floating-rate dividend.
III)is held by corporations.
IV)is held by individuals.

A) I and III are true.
B) I and IV are true.
C) II and III are true.
D) II and IV are true.
E) only II is true.

Question 77

What is the relationship between the price of a straight bond and the price of a callable bond?

A) The straight bond's price will be higher than the callable bond's price for low interest rates.
B) The straight bond's price will be lower than the callable bond's price for low interest rates.
C) The straight bond's price will change as interest rates change,but the callable bond's price will stay the same.
D) The straight bond and the callable bond will have the same price.
E) There is no consistent relationship between the two types of bonds.

Question 78

When a bond indenture includes a sinking fund provision

A) firms must establish a cash fund for future bond redemption.
B) bondholders always benefit,because principal repayment on the scheduled maturity date is guaranteed.
C) bondholders may lose because their bonds can be repurchased by the corporation at below-market prices.
D) both a and b are true.
E) none of these are true.

Question 79

Swingin' Soiree,Inc.is a firm that has its main office on the Right Bank in Paris.The firm just issued bonds with a final payment amount that depends on whether the Seine River floods.This type of bond is known as

A) a contingency bond
B) a catastrophe bond
C) an emergency bond
D) an incident bond
E) an eventuality bond

Question 80

Three years ago you purchased a bond for $974.69.The bond had three years to maturity,a coupon rate of 8%,paid annually,and a face value of $1,000.Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below.Today is the bond's maturity date.What is your realized compound yield on the bond? $$\begin{array} { l c } \text { Time } & \text { Prevailing Reinvestment Rate } \\0 \text { (purchase date) } & 6.0 \% \\1 & 7.2 \% \\2 & 9.4 \% \\3 \text { (maturity date) } & 8.2 \%\end{array}$$

A) 6.43%
B) 7.96%
C) 8.23%
D) 8.97%
E) 9.13%