Deck 8: Interest Rates and Bond Valuation

Question 1

If a bond's yield to maturity is less than its coupon rate,the bond will sell at a ________,and increases in market interest rates will:

A)discount; decrease this discount.
B)discount; increase this discount.
C)premium; decrease this premium.
D)premium; increase this premium.
E)premium; not affect this premium.

Answer 1

premium; decrease this premium.

Question 2

Rosina purchased one 15-year bond at par value when it was initially issued.This bond has a coupon rate of 7 percent and matures 13 years from now.If the current market rate for this type and quality of bond is 7.5 percent,then Rosina should expect:

A)the bond issuer to increase the amount of all future interest payments.
B)the yield to maturity to remain constant due to the fixed coupon rate.
C)to realize a capital loss if she sold the bond at today's market price.
D)today's market price to exceed the face value of the bond.
E)the current yield today to be less than 7 percent.

Answer 2

to realize a capital loss if she sold the bond at today's market price.

Question 3

All else constant,a bond will sell at ________ when the yield to maturity is ________ the coupon rate.

A)a premium; greater than
B)a premium; equal to
C)at par; greater than
D)at par; less than
E)a discount; greater than

Answer 3

a discount; greater than

Question 4

The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 5

Which one of these bonds is the most interest-rate sensitive?

A)5-year zero coupon bond
B)10-year zero coupon bond
C)5-year,6 percent,annual coupon bond
D)10-year,6 percent,semiannual coupon bond
E)10-year,6 percent,annual coupon bond

Question 6

Aspens is preparing a bond offering with a coupon rate of 5.5 percent.The bonds will be repaid in 10 years.The company plans to issue the bonds at par value and pay interest annually.Which one of the following statements is correct? Assume a face value of $1,000.

A)The bonds will pay 19 interest payments and one principal payment.
B)The bonds will initially sell at a discount.
C)At maturity,the bonds will pay a final payment of $1,027.50.
D)The bonds will pay twenty equal coupon payments.
E)At issuance,the bond's yield to maturity is 5.5 percent.

Question 7

The specified date on which the principal amount of a bond is repaid is called the bond's:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 8

The market price of a bond increases when the:

A)face value decreases.
B)coupon rate decreases.
C)discount rate decreases.
D)par value decreases.
E)coupon is paid annually rather than semiannually.

Question 9

The yield to maturity:

A)that is expected will be realized any time a bond is sold.
B)will exceed the coupon rate when the bond is selling at a premium.
C)equals the current yield for all annual coupon bonds.
D)can only be realized if a bond is purchased on the issue date at par value.
E)equals both the current yield and the coupon rate for par value bonds.

Question 10

A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a ________ bond.

A)par
B)discount
C)premium
D)zero coupon
E)floating rate

Question 11

A bond that makes no coupon payments and is initially priced at a deep discount is called a ________ bond.

A)Treasury
B)municipal
C)floating-rate
D)junk
E)zero coupon

Question 12

A zero coupon bond:

A)is sold at a large premium.
B)has a price equal to the future value of the face amount given a positive rate of return.
C)can only be issued by the U.S.Treasury.
D)has less interest rate risk than a comparable coupon bond.
E)has a market price that is computed using semiannual compounding of interest.

Question 13

Interest rate risk ________ as the time to maturity decreases and ________ as the coupon rate decreases.

A)decreases; increases
B)decreases; decreases
C)increases; increases
D)increases; decreases
E)increases; is unaffected

Question 14

A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of ________ and interest payments in the amount of ________ each.

A)$1,006; $60
B)$1,060; $30
C)$1,060; $60
D)$1,000; $30
E)$1,000; $60

Question 15

The stated interest payment,in dollars,made on a bond each period is called the bond's:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 16

All else constant,a coupon bond that is selling at a premium,must have:

A)a coupon rate that is equal to the yield to maturity.
B)a market price that is less than par value.
C)semiannual interest payments.
D)a yield to maturity that is less than the coupon rate.
E)a coupon rate that is less than the yield to maturity.

Question 17

The annual interest paid by a bond divided by the bond's face value is called the:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 18

A par value bond offers a coupon rate of 7 percent with semiannual interest payments.The effective annual rate provided by these bonds must be:

A)equal to 3.5 percent.
B)greater than 3.5 percent but less than 4 percent.
C)equal to 7 percent.
D)greater than 7 percent but less than 8 percent.
E)equal to 14 percent.

Question 19

The rate of return required by investors in the market for owning a bond is called the:

A)coupon.
B)face value.
C)maturity.
D)yield to maturity.
E)coupon rate.

Question 20

A bond with a face value of $1,000 that sells for $1,000 in the market is called a ________ bond.

A)par value
B)discount
C)premium
D)zero coupon
E)floating rate

Question 21

Which entity provides a daily snapshot of bond prices for the most active issues?

A)Federal Reserve Bank
B)US Treasury Department
C)SEC
D)FINRA
E)NYSE

Question 22

The relationship between nominal interest rates on default-free,pure discount securities and the time to maturity is called the:

A)liquidity effect.
B)Fisher effect.
C)term structure of interest rates.
D)inflation premium.
E)interest rate risk premium.

Question 23

The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is computed as:

A)Taxable rate/(1 − T^*).
B)Tax-exempt rate × (1 − T^*).
C)Taxable rate − (1 + T^*).
D)Taxable rate × (1 − T^*).
E)Tax-exempt rate/(1 + T^*).

Question 24

An increase in the rate of inflation will:

A)increase both the real and the nominal rate of interest.
B)decrease both the real and the nominal rate of interest.
C)increase the nominal interest rate while lowering the real interest rate.
D)increase the real interest rate but not affect the nominal interest rate.
E)increase the nominal interest rate but will not affect the real interest rate.

Question 25

All else held constant,interest rate risk will increase when the time to maturity:

A)decreases or the coupon rate increases.
B)decreases or the coupon rate decreases.
C)increases or the coupon rate increases.
D)increases or the coupon rate decreases.
E)decreases and the coupon rate equals zero.

Question 26

The relationship between nominal rates,real rates,and inflation is known as the:

A)Miller and Modigliani theorem.
B)Fisher effect.
C)Gordon growth model.
D)term structure of interest rates.
E)interest rate risk premium.

Question 27

The profit that is earned on a bond trade by a bond dealer is called the:

A)asked price.
B)spread.
C)bid price.
D)accrued interest.
E)quote value.

Question 28

A newspaper listing of bond prices has an "Asked yield" column.This yield is based on the asked price and represents the:

A)yield to maturity.
B)difference between the current yield and the yield to maturity.
C)difference between the bond's yield and the yield of a comparable Treasury issue.
D)coupon rate.
E)current yield.

Question 29

If you want to increase your purchasing power by investing in a bond,then:

A)you must purchase that bond at a discount.
B)the nominal rate of return on that bond must be less than the inflation rate.
C)you should purchase a premium bond.
D)the nominal rate of return must equal or exceed the rate of inflation.
E)you must earn a positive real rate of return on that bond.

Question 30

Most of the trading in bonds is conducted:

A)in person on the floor of the NYSE.
B)by dealers located in Chicago.
C)by brokers on various trading floors.
D)electronically.
E)on the trade floor in Washington,DC.

Question 31

The Fisher formula is expressed as ________ where R is the nominal rate,r is the real rate,and h is the inflation rate.

A)r = Rh
B)R = rh
C)1 + h = (1 + r)/(1 + R)
D)1 + R = (1 + r)/(1 + h)
E)1 + R = (1 + r)(1 + h)

Question 32

The longest term bonds ever issued had an initial maturity date of:

A)25 years.
B)50 years.
C)100 years.
D)1,000 years.
E)never as the bonds are perpetual.

Question 33

The dirty price of a bond is defined as the:

A)market price minus any taxes due on the accrued interest.
B)market price minus the accrued interest.
C)clean price minus the accrued interest.
D)quoted price plus the accrued interest.
E)clean price minus any taxes due on the accrued interest.

Question 34

The total price you pay to purchase a premium bond is referred to as the:

A)dirty price or the full price.
B)clean price or the invoice price.
C)invoice price or the par value.
D)dirty price or the par value.
E)clean price or the par value.

Question 35

The interest paid on any municipal bond is:

A)free of default risk.
B)subject to default risk and is exempt from state income taxation.
C)free of both default risk and federal income taxation.
D)exempt from federal income taxation and may or may not be exempt from state taxation.
E)taxable at the federal level and tax exempt at the state and local level.

Question 36

The promised coupon payments on a US TIPS bond are specified in:

A)euros.
B)Canadian dollars.
C)nominal terms.
D)inflated terms.
E)real terms.

Question 37

Bond dealers report all of their trading information using the system known as:

A)SEC-Bond.
B)NASDAQ.
C)FED trades.
D)FINRA.
E)TRACE.

Question 38

Which one of these combinations of bond ratings represents a crossover situation?

A)BBB; Baa
B)BB; Ba
C)Ba; B
D)Baa; BB
E)B; CCC

Question 39

A bond is listed in a newspaper at a bid of 105.4844.This quote should be interpreted to mean:

A)the bond will pay semiannual interest payments of $105.4844 per $1,000 of face value.
B)you can sell that bond at a price equal to 105.4844 percent of face value.
C)the bond will pay annual interest payments of $105.4844 per $1,000 of face value.
D)you can buy that bond at a price equal to 105.4844 percent of face value.
E)the bond dealer is willing to sell that bond for a price equal to 105.4844 percent of par.

Question 40

The monthly returns on US Treasury bills over the past 50 years have:

A)exceeded inflation for all periods.
B)provided consistently positive monthly rates of return for investors.
C)ranged between zero and five percent on an annualized basis.
D)always been positive on a real basis.
E)sometimes been less than the monthly rate of inflation.

Question 41

The bonds issued by Manson and Son bear a coupon of 6 percent,payable semiannually.The bond matures in 15 years and has a $1,000 face value.Currently,the bond sells at par.What is the yield to maturity?

A)5.87 percent
B)5.97 percent
C)6.00 percent
D)6.09 percent
E)6.17 percent

Question 42

The term structure of interest rates:

A)plots interest rates against bond ratings.
B)is just another name for the yield curve.
C)ignores interest rate risk premiums while the Treasury yield curve includes those premiums.
D)ignores both inflation and interest rate risk premiums.
E)is based on pure discount bonds while the Treasury yield curve is based on coupon bond yields.

Question 43

What is the value of a 20-year,zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent,compounded semiannually?

A)$153.30
B)$192.40
C)$195.26
D)$168.31
E)$172.19

Question 44

Westover's has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years.The bond pays interest semiannually.What is the market price of one $1,000 face value bond if the yield to maturity is 7.13 percent?

A)$934.59
B)$880.86
C)$870.01
D)$905.92
E)$947.87

Question 45

Moon Lite Cafe has a semiannual,5 percent coupon bond with a current market price of $988.52.The bond has a par value of $1,000 and a yield to maturity of 5.68 percent.How many years is it until this bond matures?

A)1.5 years
B)1.8 years
C)2.1 years
D)2.2 years
E)1.6 years

Question 46

TJ's offers a $1,000 face value,zero coupon bond with a yield to maturity of 11.3 percent,given annual compounding.The bond matures in 16 years.What is the current price?

A)$178.78
B)$180.33
C)$188.36
D)$190.09
E)$192.18

Question 47

The ________ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.

A)default risk
B)taxability
C)inflation
D)liquidity
E)interest rate risk

Question 48

A firm offers a zero coupon bond with a face value of $1,000 that matures in 10 years.What is the current market price if the yield to maturity is 7.6 percent,given semiannual compounding?

A)$474.30
B)$473.26
C)$835.56
D)$919.12
E)$1,088.00

Question 49

The ________ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.

A)default risk
B)taxability
C)liquidity
D)inflation
E)interest rate risk

Question 50

The term structure of interest rates reflects the:

A)real rate of interest.
B)real rate of interest plus the inflation premium.
C)nominal interest rate plus the interest rate risk premium.
D)pure time value of money.
E)real rate,inflation premium,interest rate risk premium,and the liquidity premium.

Question 51

Guggenheim offers a bond with annual payments and a coupon rate of 5 percent.The yield to maturity is 5.62 percent and the maturity date is 9 years away.What is the market price of one $1,000 face value bond?

A)$942.66
B)$868.67
C)$869.67
D)$957.12
E)$1,009.59

Question 52

The zero coupon bonds of Mark Enterprises have a market price of $394.47,a face value of $1,000,and a yield to maturity of 6.87 percent based on semiannual compounding.How many years is it until this bond matures?

A)11.08 years
B)10.49 years
C)13.77 years
D)12.64 years
E)15.42 years

Question 53

Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years.The market rate of return on bonds of this risk is currently 11 percent.What is the current value of a $1,000 face value bond?

A)$830.58
B)$843.07
C)$893.30
D)$929.17
E)$854.08

Question 54

An upward-sloping term structure of interest rates indicates that:

A)longer-term rates are higher than shorter-term rates.
B)investors should expect interest rates to decline in the future.
C)short and intermediate term rates are real rates while long term rates are nominal rates.
D)the Fed is expected to decrease rates in the near term.
E)the larger the investment in dollars,the higher the interest rate paid.

Question 55

A corporate bond has a coupon of 7.5 percent and pays interest annually.The face value is $1,000 and the current market price is $1,108.15.The bond matures in 14 years.What is the yield to maturity?

A)6.31 percent
B)7.82 percent
C)8.00 percent
D)8.04 percent
E)8.12 percent

Question 56

The Lo Sun Corporation offers a bond with a current market price of $1,029.75,a coupon rate of 8 percent,and a yield to maturity of 7.52 percent.The face value is $1,000.Interest is paid semiannually.How many years is it until this bond matures?

A)8.5 years
B)8.0 years
C)9.0 years
D)17 years
E)16 years

Question 57

Which of these is included in the return on a municipal bond but excluded from the return on a US Treasury bond?

A)Inflation premium and liquidity premium
B)Taxability premium and interest rate risk premium
C)Default risk premium and interest rate risk premium
D)Inflation premium and default risk premium
E)Liquidity premium and taxability premium

Question 58

The term structure of interest rates:

A)must be upward-sloping.
B)can be humped in the middle.
C)is downward-sloping when inflation is expected to rise.
D)obtains its slope from the real rate of return.
E)generally has the same degree of steepness each year.

Question 59

Chocolate and More offers a bond with a coupon rate of 6 percent,semiannual payments,and a yield to maturity of 7.73 percent.The bonds mature in 9 years.What is the market price of a $1,000 face value bond?

A)$889.29
B)$963.88
C)$1,008.16
D)$924.26
E)$901.86

Question 60

Otto Enterprises has a bond issue outstanding with a coupon of 8 percent that matures in 15 years.The bond is currently priced at $923.60 and has a par value of $1,000.Interest is paid semiannually.What is the yield to maturity?

A)8.67 percent
B)9.93 percent
C)9.16 percent
D)8.93 percent
E)8.45 percent

Question 61

Last year,a bond yielded a nominal return of 7.37 percent while inflation averaged 3.26 percent.What was the real rate of return?

A)3.42 percent
B)3.27 percent
C)3.98 percent
D)3.71 percent
E)3.86 percent

Question 62

A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years.What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent?

A)−5.28 percent
B)−4.26 percent
C)−2.38 percent
D)1.13 percent
E)4.13 percent

Question 63

Aivree is buying a $1,000 face value bond at a quoted price of 99.486.The bond carries a coupon rate of 5.6 percent,with interest paid semiannually.The next interest payment is four months from today.What is the clean price of this bond?

A)$994.86
B)$1,004.19
C)$1,013.53
D)$987.21
E)$1,005.73

Question 64

Nathan is buying a $1,000 face value bond at a quoted price of 101.364.The bond carries a coupon rate of 7.75 percent,with interest paid semiannually.The next interest payment is two months from today.What is the dirty price of this bond?

A)$1,039.47
B)$1,042.15
C)$1,056.02
D)$1,028.18
E)$1,026.56

Question 65

Suzette owns a corporate bond with a yield to maturity of 7.45 percent.She is in the 12 percent tax bracket.What is her equivalent rate of return on a municipal bond? Ignore state taxes.

A)6.17 percent
B)5.89 percent
C)6.56 percent
D)8.26 percent
E)8.47 percent

Question 66

The 5-year bond of XYZ Corp.has a bid quote of 131.2891 and an asked quote of 131.3047.Assume you purchase one of these bonds with a face value of $5,000 and a coupon rate of 7.4 percent,paid semiannually.The next interest payment will be paid two months from today.What will be your invoice price for this purchase?

A)$7,220.01
B)$6,690.68
C)$6,809.47
D)$7,001.32
E)$6,549.30

Question 67

Currently,you own a municipal bond with a yield to maturity of 4.86 percent.If you are in the 24 percent tax bracket,what is your equivalent corporate tax rate? Ignore state taxes.

A)7.17 percent
B)6.61 percent
C)6.39 percent
D)6.59 percent
E)6.82 percent

Question 68

Allison's wants to raise $12.4 million to expand its business.To accomplish this,it plans to sell 25-year,$1,000 face value,zero-coupon bonds.The bonds will be priced to yield 6.5 percent,with semiannual compounding.What is the minimum number of bonds the firm must sell to raise the $12.4 million it needs?

A)59,864
B)52,667
C)61,366
D)60,107
E)60,435

Question 69

Jackson's has $1,000 face value,zero-coupon bonds outstanding that mature in 13.5 years.What is the current value of one of these bonds if the market rate of interest is 7.6 percent? Assume semiannual compounding.

A)$365.32
B)$401.12
C)$360.49
D)$378.17
E)$384.07

Question 70

A corporate bond is currently quoted at 101.633.What is the market price of a bond with a $1,000 face value?

A)$1,000.28
B)$1,002.77
C)$1,016.33
D)$1,102.77
E)$1,276.70

Question 71

Mason's has 5-year,8 percent annual coupon bonds outstanding with a par value of $1,000.Dixon's has 10-year,8 percent annual coupon bonds outstanding with a par value of $1,000.Both bonds currently have a yield to maturity of 8 percent.Which one of the following statements is correct if the market rate decreases to 7 percent?

A)Both bonds will decrease in value by 4.10 percent.
B)Mason's bond will increase in value by $52.10.
C)Dixon's bond will increase in value by 4.61 percent.
D)Mason's bond will increase in value by $41.
E)Dixon's bond will increase in value by 6.87 percent.

Question 72

A bond has a coupon rate of 8.2 percent,a $1,000 par value,matures in 11.5 years,has a yield to maturity of 7.67 percent,and pays interest annually.What is the current yield?

A)7.89 percent
B)8.21 percent
C)8.43 percent
D)7.67 percent
E)8.52 percent

Question 73

A corporate bond has a coupon rate of 5.5 percent,a $1,000 face value,and matures three years from today.The corporation is in a serious financial situation and has announced that no future annual interest payments will be paid and that the probability the entire face value will be repaid is only 75 percent.If the entire face value cannot be paid,then 60 percent of the face value will be repaid.All payments will be made three years from now.What is the current value of this bond at a discount rate of 15 percent?

A)$591.76
B)$603.10
C)$611.90
D)$617.48
E)$622.04

Question 74

A corporate bond has a coupon rate of 6 percent,a $1,000 face value,and matures two years from today.The corporation is in a serious financial situation and has announced that no future annual interest payments will be paid and that only 50 percent of the face value will be repaid but that payment will be delayed by one year.What is the current value of this bond to a bondholder with a required rate of return of 14 percent?

A)$374.31
B)$358.40
C)$299.02
D)$337.49
E)$325.08

Question 75

A $1,000 par value bond carries a coupon rate of 6.5 percent and has a yield to maturity of 7.29 percent.The inflation rate is 3.13 percent.What is the bond's real rate of return?

A)3.27 percent
B)4.03 percent
C)3.37 percent
D)4.42 percent
E)3.86 percent

Question 76

The nominal rate of return on a bond is 7.28 percent while the real rate is 3.09 percent.What is the rate of inflation?

A)4.06 percent
B)4.28 percent
C)4.09 percent
D)4.13 percent
E)4.17 percent

Question 77

A zero coupon bond with a face value of $1,000 is issued with an initial price of $430.84 based on semiannual compounding.The bond matures in 20 years.What is the implicit interest,in dollars,for the first year of the bond's life?

A)$19.08
B)$22.56
C)$18.53
D)$21.47
E)$25.25

Question 78

A corporate bond with a face value of $1,000 matures in 4 years and has a coupon rate of 6.25 percent.The current price of the bond is $932 and interest is paid semiannually.What is the yield to maturity?

A)9.05 percent
B)6.67 percent
C)8.58 percent
D)8.28 percent
E)7.92 percent

Question 79

If a bond provides a real rate of return of 2.89 percent at a time when inflation is 3.21 percent,what is the nominal rate of return on the bond?

A)6.10 percent
B)6.13 percent
C)6.16 percent
D)6.19 percent
E)6.22 percent

Question 80

Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16.The bond has a coupon rate of 6.2 percent,semiannual interest payments,and the next interest payment occurs one month from today.Of the amount paid for the bond,what was the dollar amount of the accrued interest?

A)$25.83
B)$5.17
C)$31.00
D)$27.39
E)$6.20