Chapter 4—Valuing Bonds
MULTIPLE CHOICE
1.
A 15-year, 8%, $1000 face value bond is currently trading at $958. The yield
to maturity of this bond must be
a.
less than 8%.
b.
equal to 8%.
c.
greater than 8%.
d.
unknown.
ANS: C
PTS: 1
DIF: E
REF: 4.2 Bond Prices and Interest Rates NAT: Analytic skills
LOC: understand stocks and bonds
2.
A bond that grants the investor the right to exchange their bonds for common
stock, is called a
a.
zero-coupon bond.
b.
Treasury bond.
c.
convertible bond.
d.
mortgage bond.
ANS: C
PTS: 1
NAT: Reflective thinking
risk?
a.
b.
c.
d.
3.
DIF: E
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
Of the following bonds, which one has the highest degree of interest rate
20 year 8% bond
5 year 8% bond
10 year 8% bond
Not enough information.
ANS: A
PTS: 1
DIF: E
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
4.
a.
b.
c.
d.
Which of the following information cannot be found in a bond’s indenture?
The coupon rate.
The maturity of the bond.
The price of the bond.
None of the above.
ANS: C
PTS: 1
NAT: Reflective thinking
5.
a.
b.
c.
d.
DIF: E
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
Bonds issued by US states or local governments are called:
Treasury bonds.
Municipal bonds.
Corporate bonds.
Yankee bonds.
ANS: B
PTS: 1
NAT: Reflective thinking
DIF: E
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
6.
Bavarian Sausage just issued a 10 year 7% coupon bond. The face value of
the bond is $1,000 and the bond makes ANNUAL coupon payments. If the required return
on the bond is 10%, what is the bond’s price?
a.
$815.66
b.
$923.67
c.
$1,000.00
d.
$1,256.35
ANS: A
FV:1000
PMT: 70
I/Y: 10
N: 10
PV: 815.66
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
7.
Bavarian Sausage just issued a 10-year 7% coupon bond. The face value of
the bond is $1,000 and the bond makes SEMIANNUAL coupon payments. If the required
return on the bond is 10%, what is the bond’s price?
a.
b.
c.
d.
$815.66
$1,000
$813.07
$1,035.27
ANS: C
FV: 1000
PMT: 70/2
I/Y: 10/2
N: 10*2
PV: 813.07
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
8.
Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of
the bond is $1,000 and the bond makes ANNUAL coupon payments. If the required return
on the bond is 10%, what is the bond’s price?
a.
$815.16
b.
$1,000
c.
$1,122.89
d.
$1067.24
ANS: C
FV: 1000
PMT: 120
I/Y: 10
N: 10
PV: 1122.89
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
9.
Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of
the bond is $1,000 and the bond makes SEMIANNUAL coupon payments. If the required
return on the bond is 10%, what is the bond’s price?
a.
$1,122.89
b.
$815.26
c.
$1,000.00
d.
$1,124.62
ANS: D
FV: 1000
PMT: 120/2
I/Y: 10/2
N: 10*2
PV: 1124.62
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
10.
Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of
the bond is $1,000 and the bond makes ANNUAL coupon payments. If the bond is trading
at $967.25, what is the bond’s yield to maturity?
a.
12.00%
b.
12.59%
c.
11.26%
d.
13.27%
ANS: B
FV: 1000
PV: 967.25
PMT: 120
N: 10
I/Y: 12.59
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
11.
Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of
the bond is $1,000 and the bond makes SEMIANNUAL coupon payments. If the bond is
trading at $867.25, what is the bond’s yield to maturity?
a.
12.00%
b.
12.37%
c.
14.56%
d.
10.86%
ANS: C
FV: 1000
PV: 867.25
PMT: 120/2
N: 10*2
I/Y : 7.28
yield to maturity: 2*7.28 = 14.56
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
12.
Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of
the bond is $1,000 and the bond makes SEMIANNUAL coupon payments. If the bond is
trading at $1,267.25, what is the bond’s yield to maturity?
a.
12.00%
b.
8.06%
c.
14.38%
d.
10.97%
ANS: B
FV: 1000
PV: 1267.25
PMT: 120
N: 10
I/Y: 8.06
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
13.
Bavarian Sausage wants to issue a 10-year coupon bond. The face value of
the bond is $1,000 and the bond makes SEMIANNUAL coupon payments. Outstanding
Bavarian Sausage 8% bonds with a remaining maturity of 10 years are currently trading at
$1,145. These bonds also have a face value of $1,000 and make SEMIANNUAL payments.
If Bavarian Sausage wants the new bonds to sell at par, what should be the coupon rate on
these bonds?
a.
8.00%
b.
6.05%
c.
7.25%
d.
9.35%
ANS: B
FV: 1000
PV: 1145
PMT: 80/2
N: 10/2
I/Y: 3.025
coupon rate = 3.025*2 = 6.05
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
14.
You just bought a bond with a yield to maturity of 9.5%. If the rate of
inflation is expected to be 4%, what is the real return on your investment?
a.
9.50%
b.
5.29%
c.
4.00%
d.
Not enough information.
ANS: B
r = 1.095/1.04 - 1 = .0529
PTS: 1
DIF: E
REF: 4.2 Bond Prices and Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
15.
What is the value of a 15-year 10% coupon bond with a face value of
$1,000. The required return on the bond is 12% and the bond makes SEMIANNUAL
payments.
a.
$862.35
b.
$1,167.39
c.
$925.76
d.
$1,000
ANS: A
FV: 1000
PMT: 100/2
I/Y: 12/2
N: 15*2
PV: 862.35
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
16.
You are offered a zero-coupon bond with a $1,000 face value and 5 years
left to maturity. If the required return on the bond is 8%, what is the most you should pay for
this bond?
a.
$752.69
b.
$680.58
c.
$1,000
d.
$1,126.94
ANS: B
FV: 1000
PMT: 0
I/Y: 8
N: 5
PV: 680.58
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
17.
You just bought a 5-year zero coupon bond with a $1,000 face value for
$735.67. What is the yield to maturity of this bond?
a.
10.36%
b.
6.33%
c.
4.69%
d.
8.18%
ANS: B
FV: 1000
PV: 735.67
PMT: 0
N: 5
I/Y: 6.33
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
18.
You just bought a 5-year zero coupon bond with a $1,000 face value for
$735.67. What is the taxable capital gain on this bond next year?
a.
$274.33
b.
$68.51
c.
$169.47
d.
$46.64
ANS: D
FV: 1000
PV: 735.67
PMT: 0
N: 5
I/Y: 6.33
FV: 1000
PMT: 0
N: 4
I/Y: 6.33
PV: 782.31
capital gain: 782.31-735.67 = 46.64
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
19.
The real return is 10% and the expected rate of inflation is 4.5%. What is the
nominal rate?
a.
4.50%
b.
14.95%
c.
10.00%
d.
8.69%
ANS: B
R = (1.1)(1.045) - 1 = .1495
PTS: 1
DIF: E
REF: 4.2 Bond Prices and Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
20.
A one-year bond offers a yield of 6% and a two year bond offers a yield of
7.5%. Under the expectations theory what should be the yield on a one year bond next year?
a.
13.50%
b.
4.52%
c.
7.38%
d.
9.02%
ANS: D
(1.075)^2 = (1.06)(1+r)
r = .0902
PTS: 1
DIF: M
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
21.
A two-year bond offers a yield of 6% and a three year bond offers a yield of
7.5%. Under the expectations theory what should be the yield on a one year bond in two
years?
a.
5.95%
b.
10.56%
c.
3.06%
d.
12.49%
ANS: B
(1.075)^3 = (1.06)^2(1+r)
r = .1056
PTS: 1
DIF: H
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
22.
The yield on a one-year bond is 6% today and is expected to be 8.5% next
year. Based on the expectations theory, what is the yield of a two year bond today?
a.
15.01%
b.
12.68%
c.
5.67%
d.
7.24%
ANS: D
(1+r)^2 = (1.06)(1.085)
r = .0724
PTS: 1
DIF: H
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
23.
You are looking up bond prices in the newspaper and you find the following
quote for a $1,000 face value treasury bond: 103:26. What is the price of this bond?
a.
$103.26
b.
$1,038.13
c.
$1,032.60
d.
$1,000
ANS: B
103:26 = 103.8125
1000(1.038125) = 1038.13
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
24.
You have the choice between investing in a corporate bond with a yield of
8% or a municipal bond. If your marginal tax rate is 28%, what should be the yield on the
municipal bond in order to be competitive?
a.
8.00%
b.
5.76%
c.
11.11%
d.
13.69%
ANS: B
.08(1-.28) = .0576
PTS: 1
DIF: E
REF: 4.3 Types of Bonds
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
25.
You have the choice between investing in a corporate bond or a municipal
bond with a yield of 8%. If your marginal tax rate is 28%, what should be the yield on the
corporate bond in order to be competitive?
a.
8.00%
b.
5.76%
c.
13.64%
d.
11.11%
ANS: D
.08 = r(1-.28)
r = .1111
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
26.
McLaughlin Enterprises has an outstanding $1,000 par value bond with a
11% coupon that pays at the end of each year. The bond matures in nine years. Bonds of
similar risk have a required return of 10%. What is the market value of the McLaughlin
bond?
a.
$890.00
b.
$1,053.35
c.
$1,000.00
d.
$1,057.59
ANS: D
FV = 1,000
N=9
I/YR = 10
PMT = 110
PV = ? = 1,057.59
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
27.
Winburn Sports & Entertainment has an outstanding $1,000 par value bond
with a 11% coupon that pays SEMIANNUALLY at the end of each period. The bond
matures in nine years. Bonds of similar risk have a required return of 10%. What is the
market value of the Winburn bond?
a.
$1,035.54
b.
$1,057.59
c.
$1,058.45
d.
$1,073.05
ANS: C
P/YR = 2
FV = 1,000
N = 18
I/YR = 10
PMT = 55
PV = ? = 1,057.59
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
28.
A 10-year Treasury bond with par value of $1,000 has a 6% coupon rate and
pays interest every six months. The bond is three years old and has just made its sixth
payment. The market now only requires a 5% return on the bond. What is the expected price
of the bond?
a.
$802.03
b.
$1,058.45
c.
$1,077.95
d.
$1,350.73
ANS: B
P/YR = 2
FV = 1,000
N = 14
I/YR = 5
PMT = 30
PV = ? = 1,058.45
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates
NAT: Analytic skills
LOC: understand stocks and bonds
29.
A $1,000 par value bond that makes ANNUAL interest payments of $50 and
matures in four years sells for $980. What is the yield to maturity of the bond?
a.
5.57%
b.
2.47%
c.
4.54%
d.
2.04%
ANS: A
FV = 1,000
N=4
PMT = 50
PV = ? = 980
I/YR = 5.57
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
30.
Alexis Media issued five-year bonds one year ago with a 7.5% coupon that
pays SEMIANNUALLY (the bonds just paid the second coupon payment). Alexis
announced a revised advertising revenue forecast that is quite bleak compared with the
prevailing forecast at the time of the bond issuance. Investors now require a 9% return on
Alexis bonds. What is the percent change in price of the bonds associated with the change in
business conditions?
a.
4.95% decrease
b.
8.30% decrease
c.
29.06% decrease
d.
19.79% increase
e.
Can’t determine with the information given
ANS: A
P/YR = 2
FV = 1,000
N=8
I/YR = 9
PMT = 37.50
PV = ? = 950.53
(950.53 - 1,000)/1000 = -4.95%
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
31.
A new one-year bond pays interest of 1.04%. A new two-year bond pays
interest of 1.46%. Using expectations theory of term structure and assuming the market is in
equilibrium, what interest rate does the market expect a new one year bond to have one year
from now?
a.
0.42%
b.
1.18%
c.
1.25%
d.
1.88%
ANS: D
1.0146 2 /1.0104 - 1 = .0188
PTS: 1
DIF: E
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
32.
The value of any asset
a.
b.
is based upon the benefits provided by the asset in prior years.
is based upon the benefits that the asset will provide the owner
of the asset this year.
equals the present value of future benefits accruing to the
asset’s owner.
is not described by any of the above.
c.
d.
ANS: C
PTS: 1
NAT: Reflective thinking
33.
a.
b.
c.
d.
DIF: E
REF: Learning Objectives
LOC: understand stocks and bonds
The greater the uncertainty about an asset’s future benefits,
the lower the discount rate investors will apply when
discounting those benefits to the present.
the higher the discount rate investors will apply when
discounting those benefits to the present.
the greater is the present value of those benefits.
none of the above.
a.
the lower the discount rate investors will apply when
discounting those benefits to the present.
the higher the discount rate investors will apply when
discounting those benefits to the present.
the greater is the present value of those benefits.
none of the above.
b.
c.
d.
ANS: B
PTS: 1
NAT: Reflective thinking
DIF: M
REF: 4.1 Valuation Basics
LOC: acquire an understanding of risk and return
34.
You will be receiving $204,000.00 at the end of each year for the next 20
years. If the correct discount rate for such a stream of cash flows is 10% then what is the
present value of the cash flows?
a.
$1,736,767.00
b.
$4,080,000.00
c.
$185,454.55
d.
none of the above
ANS: A
204,000 * (1/.1) - ((1/.1) ´ (1.1) 20 = 1,736,767.00
PTS: 1
DIF: E
REF: 4.1 Valuation Basics | 4.1 The Fundamental Valuation Model
NAT: Analytic skills
LOC: understand the time value of money
35.
A bond’s coupon rate
a.
equals its annual coupon payment divided by the bonds’
current market price.
varies during the life of the bond.
equals its annual coupon payment divided by its par value.
both a and b are correct.
b.
c.
d.
ANS: C
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
36.
WeOweYou, Inc. has a 12-year bond outstanding that makes 9.5% ANNUAL
coupon payments. If the appropriate discount rate for such a bond is 7%, what the
appropriate price for the bond?
a.
$1,200.73
b.
$1,000.00
c.
$1,198.57
d.
$754.56
ANS: C
95 ( (1/.07) - ((1/.07) ´ (1.07) -12 ) ) + 1,000 (1.07) -12 = 1,198.57
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
37.
WeOweEveryone, Inc. has a 12-year bond outstanding that has 9.5% coupon
rate. If the appropriate discount rate for such a bond is 7%, what the appropriate price for the
SEMIANNUAL coupon paying bond?
a.
$1,200.73
b.
$1,198.57
c.
$1,000.00
d.
$762.77
ANS: A
47.50 ( (1/.035) - ((1/.035) ´ (1.035) -24 ) ) + 1,000 (1.035) -24 = 1,200.73
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
38.
Astro Investors is interested in purchasing the bonds of the Jetson Company.
Jetson’s bonds are currently priced at $1,100.00 and have 14.5 years to maturity. If the
bonds have a 6% coupon rate what is the yield-to-maturity of these SEMIANNUAL coupon
paying bonds?
a.
5.00%
b.
5.02%
c.
2.51%
d.
2.50%
ANS: B
30 ( (1/y) - ((1/.y) ´ (1+ y)-29 ) ) + 1,000 (1 + y)-29 = 1,100.00
y = .0251 ====> 2 ´ y = 5.02%
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
39.
Elroy Investors is interested in purchasing the bonds of the Judy Company.
Judy’s bonds are currently priced at $1,100.00 and have 14 years to maturity. If the bonds
have a 6% coupon rate what is the yield-to-maturity of these ANNUAL coupon paying
bonds?
a.
5.00%
b.
4.99%
c.
2.50%
d.
none of the above.
ANS: B
60 ( (1/y) - ((1/.y) ´ (1+ y)-14 ) ) + 1,000 (1 + y)-14 = 1,100.00
y = 4.99%
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
40.
You recently earned a 13% return on an investment during the preceding
year. If the rate of inflation during that period is 8% what was your real return during that
period?
a.
5%
b.
4.63%
c.
4.42%
d.
none of the above.
ANS: B
( (1.13/1.08) -1) = .0463
PTS: 1
DIF: E
REF: 4.2 Bond Prices and Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
41.
You are considering the purchase of a motorized scooter where the price of
the scooter is based upon the miles per gallon (mpg) of gasoline that the scooter can achieve.
That is, the current price of the scooter that you want is $1,000 because the scooter can
achieve 100 miles per gallon and the cost per mpg is $10. Right before you are about to
purchase the scooter, your best friend requests that you loan him $1,000 for one year. You
make the loan in order to be able to buy a 105 mpg scooter at the conclusion of the loan. If
you anticipate that the cost per mpg will increase to $11, what rate of interest do you charge
your friend?
a.
5%
b.
10%
c.
15%
d.
15.5%
ANS: D
real rate = 5%, inflation rate = 10% ======>
((1.05) ´ (1.1)) - 1 = .155
PTS: 1
DIF: H
NAT: Analytic skills
are
a.
b.
c.
d.
42.
REF: 4.2 Bond Prices and Interest Rates
LOC: understand the time value of money
Unsecured bonds that have legal claims inferior to other outstanding bonds
debentures.
mortgage bonds.
subordinated debentures.
discount bonds.
ANS: C
PTS: 1
DIF: E
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
43.
a.
b.
c.
d.
ANS: C
With respect to the company that has issued a callable bond,
the value of the call increases as the stock price increases.
the value of the call increases as interest rates increase.
the value of the call increases as interest rates decrease.
none of the above.
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
44.
With respect to the owner of a putable bond,
a.
b.
c.
the value of the put increases as interest rates increase.
the value of the put increases as interest rates decrease.
the value of the put increases as the value of the stock
decreases.
none of the above.
d.
ANS: A
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
45.
You notice that the price of a 4.0% coupon, 12-year Treasury Note is priced
at 90:16 in the Wall Street Journal. What is the bond’s yield to maturity?
a.
2.56%
b.
2.565%
c.
5.07%
d.
5.13%
ANS: C
90:16 = 90 + 16/32 = 90.5 ====> $905
20 ( (1/y) - ((1/.y) ´ (1+ y)-24 ) ) + 1,000 (1 + y)-24 = 905
y = .02535====> 2 ´ y = 5.07%
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
46.
You read in the financial press that a company’s Moody’s debt rating is one
step above junk. What is the rating?
a.
Ba1
b.
BB+
c.
Baa3
d.
BBBANS: C
PTS: 1
DIF: H
REF: 4.2 Bond Prices and Interest Rates | 4.1 Bond Ratings
LOC: understand stocks and bonds
NAT: Reflective thinking
47.
You are trying to find the correct yield spread for a Standard and Poor’s
rated A+, 7-year maturity bond. You find that a 7-year maturity, AA- bond’s spread is 65
basis points while that of a 7-year maturity A bond’s spread is 80 basis points. Which of the
following should be a possibility for the spread of the A+ rated bond?
a.
64 basis points
b.
70 basis points
c.
80 basis points
d.
both b and c are possible spreads for the bond.
ANS: B
PTS: 1
DIF: M
REF: 4.4 Bond Markets | 4.1 Bond Ratings
LOC: understand stocks and bonds
NAT: Analytic skills
48.
The relationship between time to maturity and yield to maturity for bonds of
equal risk is referred to as
a.
the term structure of interest rates.
b.
the forward rate.
c.
the spot curve.
d.
the forward curve.
ANS: A
PTS: 1
DIF: E
REF: 4.5 The Term Structure of Interest Rates
NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates
49.
You find that the yield on a 4-year bond is 10% while that of a 2-year bond
is 8%. What should be the yield on a 2-year bond beginning two years from now as
predicted by the expectations’ theory?
a.
2.00%
b.
12.04%
c.
25.25%
d.
none of the above
ANS: B
(1.1) 4 = (1.08)2 ´ (1 + r)2 ====> (1.1)4 /(1.08)2 = (1 + r)2 =====> r = .1204
PTS: 1
DIF: M
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
50.
You find that the yield on a 6-year bond is 12% while that of a 4-year bond
is 9%. What should be the yield on a 2-year bond beginning four years from now as
predicted by the expectations’ theory?
a.
3.00%
b.
18.25%
c.
39.83%
d.
none of the above
ANS: B
(1.12) 6 = (1.09)4 ´ (1 + r)2 ====> (1.12)6 /(1.09)4 = (1 + r)2 =====> r = .1825
PTS: 1
DIF: H
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
51.
You find that the yield on a 4-year bond is 9% while the yield on a 2-year
bond beginning four years from now is 10%. What should be the yield on a 6-yr bond as
predicted by the expectations’ theory?
a.
1.00%
b.
9.33%
c.
14.32%
d.
70.80%
ANS: B
(1 + r)6 = (1.09)4 ´ (1.1) 2 ====> (1 + r)6 = (1.7080137) 6 =====> r = .0933
PTS: 1
DIF: M
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
52.
If you were trying to describe the effect on the yield curve that certain
investors have a definite preference for the maturity of the bonds that they invest in, then
you would be referring to
a.
the expectations theory.
b.
the liquidity preference theory.
c.
the preferred habitat theory.
d.
none of the above.
ANS: C
PTS: 1
DIF: M
REF: 4.5 The Term Structure of Interest Rates
NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates
53.
Fence Place Diary Company (FPD) has a 15-year maturity bond outstanding
that is currently convertible into 50 shares of FPD common stock. FPD common stock
currently sells for $25 a share and the coupon rate (SEMIANNUAL coupons) for the bond is
5%. If the yield on a similarly rated convertible bond (on The New York Calendar Corp.) is
5%, then what should be the correct price of the FPD convertible bond?
a.
$750.00
b.
$1,000
c.
$1,250
d.
either a or b
ANS: C
Conversion Price: 50 * 25 = 1,250
Pure Bond Price: Coupon Rate = Yield ===> 1,000
Max(1,000, 1,250) = 1,250
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
54.
You own a bond that pays a 12% annualized SEMIANNUAL coupon rate.
The bond has 10 years to maturity. If the discount rate suddenly moves from 14% to 16%,
then what is the dollar increase (decrease) in value for the bond?
a.
($90.42)
b.
($89.01)
c.
$89.01
d.
$90.42
a.
b.
c.
d.
($90.42)
($89.01)
$89.01
$90.42
ANS: A
Price before shift: 60PVIFA(7%,20) + 1000PVIF(7%,20) = 894.06
Price after shift: 60PVIFA(8%,20) + 1000PVIF(8%,20) = 803.64
Difference: Price after shift - Price before shift = 803.64 - 894.06 = -90.42
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
55.
You own a bond that pays a 12% annualized SEMIANNUAL coupon rate
and has 10 years to maturity. If the discount rate increases from 14% to 16% during the next
two years of the bonds life, then what is the dollar increase (decrease) in value for the bond
during the two year period?
a.
($69.42)
b.
($71.09)
c.
$69.42
d.
$71.09
ANS: B
Price before: 60PVIFA(7%,20) + 1000PVIF(7%,20) = 894.06
Price after 2 years: 60PVIFA(8%,16) + 1000PVIF(8%,16) = 822.97
Difference: Price after 2 years - Price before = 822.97 - 894.06 = -71.09
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
56.
Oogle Corp. has decided to do things differently with respect to their
corporate bond issue. They have a bond outstanding that makes quarterly coupon payments
instead of SEMIANNUALLY. The stated coupon rate on the bond is 10% and the yield to
maturity on the 5-year bond is 12%. What is the price of the bond?
a.
$927.90
b.
$926.40
c.
$925.61
d.
none of the above
ANS: C
Price : 25PVIFA(3%,20) + 1000PVIF(3%,20) = 925.61
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
57.
Suppose investment A and investment B have identical cash flows. Why
would an investor pay more for investment A than investment B?
a.
This is incorrect. You would always pay the same amount for
two investments with equal future cash flows.
b.
The risk in the cash flows for investment A is greater than the
risk of the cash flows of investment B.
c.
The risk in the cash flows for investment B is greater than the
risk of the cash flows of investment A.
d.
The return required for investment B is lower than the return
required for investment A.
ANS: C
PTS: 1
NAT: Reflective thinking
DIF: E
REF: 4.1 Valuation Basics
LOC: acquire an understanding of risk and return
58.
A bond pays an ANNUAL coupon rate of 7% with a face value of $1,000.
The bond is scheduled to mature in two years and currently trades at $920.00. What is the
coupon yield of the bond currently?
a.
7.00%
b.
7.61%
c.
14.00%
d.
15.22%
ANS: B
7%*$1000/$920= 7.61%
PTS: 1
DIF: E
NAT: Analytic skills
59.
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
Consider the following details for a bond issued by Bravo Incorporated.
Issue Date
Maturity Date
Coupon Rate (ANNUAL coupons)
Face Value
8/5/2000
8/5/2030
9%
$1,000
Suppose that today’s date is 8/5/2004, what should the current trading price be for this bond
if investors want a 12% ANNUAL return?
a.
$658.09
b.
$763.13
c.
$908.88
d.
$1,000.00
ANS: B
n = 26, r = 12%, PV =?, PMT = 9%*1000, FV = $1000
PV = $763.13
PTS: 1
DIF: M
NAT: Analytic skills
60.
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
Consider the following details for a bond issued by Bravo Incorporated.
Issue Date
Maturity Date
Annual Coupon Rate (semi-annual coupons)
Face Value
8/5/2000
8/5/2030
9%
$1,000
Suppose that today’s date is 8/5/2004, what should the current trading price by for this bond
if investors want a 12% annual return?
a.
$762.08
b.
$763.13
c.
$906.85
d.
$1,000.00
ANS: A
n’ = 52, r’ = 6%, PV =?, PMT = 9%*1000/2, FV = $1000
PV = $762.08
PTS: 1
DIF: M
NAT: Analytic skills
61.
a.
b.
c.
d.
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
Which answer is FALSE regarding bond prices and interest rates?
Bond prices and interest rates move in opposite directions.
The price of a bond is the present value of the coupon
payments and the face value.
The prices of short-term bonds display greater price sensitivity
to interest rate changes than do the prices of long-term bonds.
Interest rate risk can be described as the risk that changes in
market interest rates will cause fluctuations in the bond’s
price.
ANS: C
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
62.
A bond is priced such that it has a 9% yield to maturity. However, inflation is
expected to be 2% per year over the remaining life of the bond. What is the real return for
this investment?
a.
4.50%
b.
6.86%
c.
7.00%
d.
9.00%
ANS: B
1 + real return = (1.09)/(1.02)
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
63.
A bond issued by the Federal Home Loan Bank or the Federal Home Loan
Mortgage Corporation are examples of what type of bond?
a.
Treasury bond
b.
Corporate bond
c.
Municipal bond
d.
Agency bond
ANS: D
PTS: 1
NAT: Reflective thinking
DIF: E
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
64.
The Treasury Department sells a zero-coupon bond that will mature in two
years. The bond has a face value of $10,000, and sold at auction for $9,400. What is the
annual return for an investor buying the bond?
a.
3.00%
b.
3.14%
c.
6.38%
d.
7.00%
ANS: B
n = 2, r = YTM = ?, PV = -$9400, PMT = 0, FV = $10,000
r = 3.14%
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.3 Types of Bonds
LOC: acquire an understanding of risk and return
65.
A bond is trading on the secondary market and will mature in 10 years. The
bond has a face value of $1,000 that will be paid at maturity. Further, the bond pays an
ANNUAL coupon at 9% of face value. What should the trading price be for the bond if
investors seek a 12% on their investment?
a.
$1,192.53
b.
$830.49
c.
$827.95
d.
$508.52
ANS: B
n = 10, r = 12%, PV = ?, PMT = 9%*1000, FV = $1,000
PV = $830.49
PTS: 1
DIF: E
NAT: Analytic skills
66.
a.
b.
c.
d.
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
Which type of bond has the highest daily trading volume in our economy?
Treasury bonds
Agency bonds
Corporate bonds
Municipal bonds
ANS: A
PTS: 1
NAT: Reflective thinking
DIF: E
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
67.
A bond currently trades at $975 on the secondary market. The bond has 10
years until maturity and pays an ANNUAL coupon at 9% of face value. The face value of the
bond is $1,000. What is the yield to maturity for this bond?
a.
8.86%
b.
9.00%
c.
9.23%
d.
9.40%
ANS: D
n = 10, r = YTM=?, PV = -$975, PMT = $90, FV = $1,000
r = 9.40%
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
68.
A bond currently trades at $980 on the secondary market. The bond has 10
years until maturity and pays a SEMIANNUAL coupon at 9% APR of face value. The face
value of the bond is $1,000. What is the yield to maturity for this bond?
a.
9.00%
b.
9.18%
c.
9.25%
d.
9.31%
ANS: D
n’ = 20, r’= YTM/2, PV = -$980, PMT = 9%*1000/2, FV = $1,000
r’ = 4.656%
YTM = 4.656% * 2 = 9.31%
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
69.
A bond currently trades at $975 on the secondary market. The bond has 10
years until maturity and pays an ANNUAL coupon at 9% of face value. The face value of the
bond is $1,000. What is the coupon yield for this bond?
a.
8.86%
b.
9.00%
c.
9.23%
d.
9.40%
ANS: C
$90/$975 = 9.23%
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
NARRBEGIN: Exhibit 4-1
Exhibit 4-1
In the financial section of your local paper, you see the following bond quotation:
Company
RATE
BIG CITY
7.00%
MATURITY
MO/YR
Aug 12
BID
ASK
CHG
104:07
104:08
2
NARREND
70.
Given Exhibit 4-1, what is the current ask yield of the Big City bond?
Assume that today’s date is August, 2004.
a.
6.14%
b.
6.31%
c.
6.58%
d.
6.73%
ANS: B
N = 8, r = ?, PV = -$1042.50, PMT = $70, FV = $1,000
r’ = 6.31%
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
71.
Given Exhibit 4-1, what is the current coupon yield of the Big City bond?
Assume that today’s date is August, 2004.
a.
6.14%
b.
6.34%
c.
6.58%
d.
6.71%
ANS: D
$70/$1042.50
PTS: 1
DIF: H
NAT: Analytic skills
grade?
a.
b.
c.
d.
72.
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
What is the minimum rating required for a bond to be considered investment
ANS: C
PTS: 1
NAT: Reflective thinking
AA
A
BBB
BB
DIF: E
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
73.
Your friend wants you to invest in his new sporting goods store. For an initial
investment, he will pay you $2,000 per year for the next twenty years. All payments are at
the end of the year. You realize that this is a very risky investment and want a 20% return on
each invested dollar. How much are you willing to loan him today for his new store?
a.
$5,946
b.
$9,739
c.
$10,000
d.
$17,027
ANS: B
n = 20, r = 20%, PV =?, PMT = $2,000, FV = $0
PV = $9,739
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.1 Valuation Basics
LOC: understand the time value of money
ASK
YLD
?????
74.
A $1,000 par value bond makes two coupon payments per year of $60 each.
What is the bond’s yield to maturity if the bond currently trades at $1,200 and will mature in
two years?
a.
1.78%
b.
3.48%
c.
6.00%
d.
6.43%
ANS: A
n’ = 4, r’ = YTM/2, PV = -$1,200, FV = $1,000, PMT = $60
r’=0.888%
YTM =1.78%
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
75.
A one-year Treasury security currently returns a 4.50% yield to maturity. A
two-year Treasury security offers a 4.80% yield to maturity. If the expectations hypothesis is
true, what is the expected return on a one-year security next year?
a.
4.80%
b.
4.90%
c.
5.00%
d.
5.10%
ANS: D
(1.045)*(1+x)=(1.048)*(1.048)
PTS: 1
DIF: H
REF: 4.5 The Term Structure of Interest Rates
NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates
76.
A TIPS bond issued by the Treasury Department was issued with an
ANNUAL coupon of 5%. The bond has a par value of $1,000 and will mature in 10 years.
Suppose that inflation during the first year of the bond’s life was 3%. What is the new
coupon payment for this bond?
a.
$50.97
b.
$51.50
c.
$53.00
d.
$81.50
ANS: B
5%*1000 = $50
$50 * (1+.03) = $51.50
PTS: 1
DIF: M
NAT: Analytic skills
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
77.
Suppose you have a chance to buy a Treasury strip. The strip is from a
government bond with a 6% coupon rate (face value of $1,000). You will receive this strip
in one year and have a discount rate of 10%. What is the price you are willing to pay for this
strip?
a.
$36.87
b.
$54.55
c.
$60.00
d.
$94.34
ANS: B
6%*1000 = $60
PV = $60/1.10
PTS: 1
DIF: E
NAT: Analytic skills
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
NARRBEGIN: EarthCOM
EarthCOM
On October 4th, 2000, long distance company, EarthCOM, issued bonds to finance a new
wireless product. The bonds were issued for 30 years (mature on October 4th, 2030), with a
face value of $1,000, and SEMIANNUAL coupons. The coupon rate on these bonds is 8%
APR. Over the last 4 years, the company has experienced financial difficulty as the long
distance market has grown more competitive.
NARREND
78.
Refer to EarthCOM. The risk associated with EarthCOM bonds has increased
dramatically, as investors now want a 15% APR return to hold the bonds. What price should
the bonds trade at TODAY (October 4th, 2004)?
a.
b.
c.
d.
$544.19
$545.66
$794.99
$800.15
ANS: A
n’ = 26, r’ = 7.50%, PV = ?, PMT = 8%*1000/2 = $40, FV = $1,000
PV = $544.19
PTS: 1
DIF: H
NAT: Analytic skills
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
79.
Refer to EarthCOM. Suppose that today (October 4th, 2002), EarthCOM
admits to fraud in reporting revenues over the last 3 years. The price of EarthCOM
immediately tumbles to $500. What is the new yield-to-maturity on EarthCOM bonds?
(Express as an APR)
a.
16.04%
b.
16.21%
c.
18.12%
d.
20.77%
ANS: B
n’ = 52, r’ = YTM/2, PV = -$500, PMT = 8%*1000/2 = $40, FV = $1,000
r’ = 8.104%
YTM = 16.21%
PTS: 1
DIF: H
NAT: Analytic skills
80.
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
Which of the following statements are CORRECT?
Statement I:
A change in a bond’s interest rate risk has a greater price
impact on bonds with longer maturities.
Government bonds have lower default risk than corporate
bonds or municipal bonds.
Trading volume is greater for corporate bonds than
government bonds.
Statement II:
Statement III:
a.
b.
c.
d.
Statement I only
Statement II only
Statements I and II only
Statements II and III only
ANS: C
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
81.
A bond pays $60 interest payments twice a year. What is the coupon rate for
the bond if the par value of the bond is $1,000?
a.
6.00%
b.
9.00%
c.
12.00%
d.
15.00%
ANS: C
$60 * 2 = $120
$120/$1,000 = .12
PTS: 1
DIF: E
NAT: Analytic skills
82.
REF: 4.1 Valuation Basics
LOC: understand stocks and bonds
Which of the following statements is FALSE?
a.
b.
c.
d.
e.
ANS: E
PTS: 1
NAT: Reflective thinking
The valuation process involves linking an asset's past benefits
and uncertainty to determine a fair present value.
Holding future benefits in the form of cash flows constant, the
riskier the benefits the higher the estimated present value.
Finance theory focuses primarily on intangible benefits
expected from an asset.
All of the above statements are true.
All of the above statements are false.
DIF: M
REF: 4.1 Valuation Basics
LOC: understand stocks and bonds
83.
The required rate of return:
a.
is used as the discount rate when valuing an asset's expected
cash flows.
is increased when an asset's cash flows are considered to be
riskier.
is a fixed rate that remains the same for all investors regardless
of changes in the market.
Both (a) and (b)
All of the above
b.
c.
d.
e.
ANS: D
PTS: 1
NAT: Reflective thinking
84.
DIF: E
REF: 4.1 Valuation Basics
LOC: acquire an understanding of risk and return
Additional features offered by bonds may include:
a.
a call feature which allows the issuer to redeem the bond at a
predetermined price prior to maturity.
the issuer's right to forgo interest payments to the bondholders
without repercussion in the event that the firm is undergoing
financial difficulty.
the ability of the bondholder to convert to a predetermined
number of shares of the issuer's common stock.
All of the above
Both (a) and (c)
b.
c.
d.
e.
ANS: E
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
85.
The holding period yield (HPY) calculation differs from the yield to maturity
(YTM) calculation in that:
a.
the future value for the HPY calculation is always the par
value of the bond
b.
the future value for the HPY calculation is the sale price of the
bond
c.
the time period for the HPY calculation is the number of time
periods until the bond matures
d.
the time period for the HPY calculation is the number of time
periods the bond was actually held
e.
Both (b) and (d)
ANS: E
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
86.
Assuming a 28% lender's affordability ratio, estimated monthly property
taxes and insurance of $250, a 25% down payment (of the purchase price), and an annual
gross income of $84,800, calculate the maximum purchase price based on monthly income.
The monthly payment will occur at the end of the month and you plan to pay off the
mortgage over a 30-year period at a 6.25% annual interest rate.
a.
$374,343
b.
$280,757
c.
$282,219
d.
$321,360
e.
None of the above
ANS: A
84,800/12 = 7,067 * .28 = $1,978.67
$1,978.67 - $250 = $1,728.67
Maximum mortgage:
n = 360
i = 6.25/12
PMT = 1728.67
FV = 0
PV = 280,757
x(0.75) = 280,757
x = 374,343
PTS: 1
DIF: H
NAT: Analytic skills
87.
REF: 4.2 Bond Prices and Interest Rates
LOC: understand the time value of money
Which of the following statements is true?
a.
As time passes and a bond approaches its maturity date the
price will converge to par value plus the final interest
payment.
The most important factor having an impact on a bond's price
is the current yield on the bond.
Bond prices and interest rates move in the same direction.
Shorter-term bonds are more sensitive to changes in interest
rates than longer-term bonds.
None of the above statements is true.
b.
c.
d.
e.
ANS: A
PTS: 1
DIF: M
REF: 4.2 Bond Prices and Interest Rates NAT: Reflective thinking
LOC: understand stocks and bonds
88.
Bond ratings:
a.
b.
have no impact on a bond's price.
are based upon the bond rating agencies' assessment of the
borrower's default risk
result in yield spreads between different quality bonds.
Both (b) and (c)
All of the above
c.
d.
e.
ANS: D
PTS: 1
NAT: Reflective thinking
DIF: M
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
89.
Yield spreads are quoted in terms of basis points. Which of the following is
true for basis points?
a.
10 basis points = 10%
b.
100 basis points = 1%
c.
1 basis point = 1%
d.
100 basis points = 100%
ANS: B
PTS: 1
NAT: Reflective thinking
90.
DIF: E
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
The yield curve:
a.
b.
is a graph showing the term structure of interest rates.
generally shows that longer-term bonds offer lower yields
than shorter-term bonds.
generally slopes down
Both (a) and (b)
Both (b) and (c)
c.
d.
e.
ANS: A
PTS: 1
DIF: E
REF: 4.5 The Term Structure of Interest Rates
NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates
91.
a.
b.
c.
d.
e.
The expectations theory ignores several factors including the idea that:
investors may have a preference for investing in longer-term
bonds due to the added risk they offer over shorter-term
bonds.
investors may have a preference for investing in shorter-term
bonds due to the added risk offered by longer-term bonds.
some investors such as pension funds have a desire to match
the maturity of their liabilities.
All of the above
both (b) and (c)
ANS: E
PTS: 1
DIF: M
REF: 4.5 The Term Structure of Interest Rates
NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates
92.
Roxy Bonds have 14 years to maturity, with a coupon rate of 8%, paid
ANNUALLY; if the appropriate discount rate is 8% what is the current value of Roxy Bonds?
a.
$1,000
b.
$ 920
c.
$1,080
d.
$1,800
ANS: A
N=14
I/Y=8
CR*1000=PMT=80
FV=1000
PV=1000
PTS: 1
NAT: Analysis
DIF: E
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
93.
Louis Bonds have 14 years to maturity, with a coupon rate of 8%, paid
ANNUALLY; if the appropriate discount rate is 12% what is the current value of Louis
Bonds?
a.
$1,000.00
b.
$ 734.87
c.
$ 340.46
d.
$ 350.56
ANS: B
N=14
I/Y=12
CR*1000=PMT=80
FV=1000
PV=734.87
PTS: 1
NAT: Analysis
DIF: E
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
94.
Emma Bonds have 14 years to maturity, with a coupon rate of 8%, paid
ANNUALLY; if the appropriate discount rate is 6% what is the current value of Emma
Bonds?
a.
$1,060.22
b.
$1,180.22
c.
$1,185.90
d.
$1,080.00
ANS: C
N=14
I/Y=6
CR*1000=PMT=80
FV=1000
PV=1185.90
PTS: 1
NAT: Analysis
DIF: E
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
95.
Roxy Bonds have 15 years to maturity, with a coupon rate of 4%, paid
ANNUALLY; if the bonds sell for $800, what is the yield to maturity of Roxy Bonds?
a.
b.
c.
d.
4.00%
5.25%
5.92%
6.07%
ANS: D
6.07
N=15
CR*1000=PMT=40
FV=1000
PV=800
I/Y=YTM=6.07
PTS: 1
NAT: Analysis
DIF: E
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
96.
Louis Bonds have 15 years to maturity, with a coupon rate of 4%, paid
ANNUALLY; if the bonds sell for $1100, what is the yield to maturity of Louis Bonds?
a.
b.
c.
d.
ANS: A
N=15
CR*1000=PMT=40
FV=1000
PV=1100
3.15%
2.03%
4.00%
4.26%
I/Y=YTM=3.15
PTS: 1
NAT: Analysis
DIF: E
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
97.
Emma Bonds have 12 years to maturity, with a coupon rate of 9%, paid
ANNUALLY; if the bonds sell for $1050, what is the yield to maturity of Emma Bonds?
a.
b.
c.
d.
8.33%
9.00%
7.08%
6.05%
ANS: A
N=12
CR*1000=PMT=90
FV=1000
PV=1050
I/Y=YTM=8.33
PTS: 1
NAT: Analysis
DIF: E
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
98.
Roxy Bonds have 14 years to maturity, with a coupon rate of 8%, paid
ANNUALLY; if the appropriate discount rate is 8% what is the CURRENT yield of Roxy
Bonds?
a.
b.
c.
d.
8.33%
8.00%
11.89%
12.62%
ANS: B
N=14
I/Y=8
CR*1000=PMT=80
FV=1000
PV=1000
CY=80/1000=8.00%
PTS: 1
NAT: Analysis
DIF: E
REF: 4.3 Bond Markets
LOC: understand stocks and bonds
99.
Louis Bonds have 14 years to maturity, with a coupon rate of 8%, paid
ANNUALLY; if the appropriate discount rate is 12% what is the CURRENT yield of Louis
Bonds?
a.
8.33%
b.
9.00%
c.
10.84%
d.
12.00%
ANS: C
N=14
I/Y=12
CR*1000=PMT=80
FV=1000
PV=734.87
CY=80/734.87=10.84%
PTS: 1
NAT: Analysis
DIF: M
REF: 4.3 Bond Markets
LOC: understand stocks and bonds
100. Louis Bonds have 14 years to maturity, with a coupon rate of 8%, paid
ANNUALLY; if the appropriate discount rate is 12% what is the CURRENT yield of Louis
Bonds?
a.
8.33%
b.
9.00%
c.
10.84%
d.
12.00%
ANS: C
N=14
I/Y=12
CR*1000=PMT=80
FV=1000
PV=734.87
CY=80/734.87=10.84%
PTS: 1
NAT: Analysis
DIF: M
REF: 4.3 Bond Markets
LOC: understand stocks and bonds
101. Roxy Bonds will mature in 16 years, the coupon rate of the bond is 5% paid
SEMIANNUALLY, if the appropriate discount rate is 7%; what is the value of the bond?
a.
$ 747.07
b.
$ 811.06
c.
$ 809.31
d.
$1,178.74
ANS: C
N=16*2=32
CR=>.05/2*1000=25=PMT
FV=1000
I/Y =7/2=3.5
PV=809.31
PTS: 1
NAT: Analysis
DIF: M
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
102. Louis Bonds will mature in 16 years, the coupon rate of the bond is 5% paid
SEMIANNUALLY, if the appropriate discount rate is 4%; what is the value of the bond?
a.
$ 731.89
b.
$1,178.74
c.
$1,116.52
d.
$1,117.34
ANS: D
N=16*2=32
CR=>.05/2*1000=25=PMT
FV=1000
I/Y =4/2=2.0
PV=1117.34
PTS: 1
NAT: Analysis
DIF: M
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
103. Emma Bonds will mature in 8 years, the coupon rate of the bond is 6% paid
SEMIANNUALLY, if the appropriate discount rate is 4%; what is the value of the bond?
a.
$1,135.78
b.
$1,293.02
c.
$1,073.25
d.
$1,543.11
ANS: A
N=8*2=16
CR=>.06/2*1000=30=PMT
FV=1000
I/Y =4/2=2.0
PV=1135.78
PTS: 1
NAT: Analysis
DIF: M
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
104. Roxy Bonds will mature in 16 years, the coupon rate of the bond is 5% paid
SEMIANNUALLY, if the bonds currently sell for $1180 what is the bond’s yield to
maturity?
a.
3.52%
b.
2.50%
c.
4.62%
d.
5.00%
ANS: A
N=16*2=32
CR=.05/2*1000=25=PMT
FV=1000
PV=1180
I/Y=1.759…*2=3.52
PTS: 1
NAT: Analysis
DIF: M
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
105. Emma Bonds will mature in 8 years, the coupon rate of the bond is 6% paid
SEMIANNUALLY, if bonds currently sell for $820 what is the bond’s yield to maturity?
a.
b.
c.
d.
9.23%
6.00%
4.61%
3.00%
ANS: A
N=8*2=16
CR=.06/2*1000=30=PMT
FV=1000
PV=820
I/Y=4.61…*2=9.23
PTS: 1
NAT: Analysis
DIF: M
REF: 4.2 Bond Prices and Interest Rates
LOC: understand stocks and bonds
106. Roxy Bonds will mature in 16 years; the coupon rate of the bond is 5% paid
SEMIANNUALLY, if bonds currently sell for $1180 what is the bond’s CURRENT yield?
a.
1.76%
b.
3.52%
c.
2.12%
d.
4.24%
ANS: D
50/1180=4.24%
PTS: 1
NAT: Analysis
DIF: E
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
107. Louis Bonds will mature in 16 years; the coupon rate of the bond is 5% paid
SEMIANNUALLY, if the discount rate is 4% what is the bond’s CURRENT yield?
a.
4.47%
b.
2.23%
c.
4.45%
d.
4.24%
ANS: A
N=16*2=32
CR=.05/2*1000=25=PMT
FV=1000
I/Y=4/2=2
PV=1117.34
CY=50/1117.34=4.47%
PTS: 1
NAT: Analysis
DIF: M
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
108. Emma Bonds will mature in 8 years; the coupon rate of the bond is 6% paid
SEMIANNUALLY, if the discount rate is 9% what is the bond’s CURRENT yield?
a.
b.
c.
d.
ANS: C
N=8*2=16
CR=.06/2*1000=30=PMT
FV=1000
I/Y=9/2=4.5
PV=831.49
CY=60/831.49=7.22%
4.47%
4.53%
7.22%
6.00%
PTS: 1
NAT: Analysis
DIF: M
REF: 4.4 Bond Markets
LOC: understand stocks and bonds
109. A zero coupon bond has a yield to maturity of 5%; what is the bond’s taxable
capital gain in last year of the bonds existence?
a.
$
47.61
b.
$ 1,000.00
c.
$
0.00
d.
$
45.26
ANS: A
1000/1.05=952.38
1000-952.38=47.61
PTS: 1
NAT: Analysis
DIF: M
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
110. A zero coupon bond has a yield to maturity of 8%; what is the bond’s taxable
capital gain in last year of the bonds existence?
a.
$ 74.07
b.
$ 1,000.00
c.
$ 80.00
d.
$ 920.00
ANS: A
1000/1.08=925.25…
1000-925.925=74.07
PTS: 1
NAT: Analysis
DIF: M
REF: 4.3 Types of Bonds
LOC: understand stocks and bonds
111. Observing the following term structure; a US treasury bond maturing in 1
year has a yield of 3% while US Treasury bond maturing in 2 years has a yield of 7%; what
is the expected 1 year rate, 1 year from now?
a.
10.16%
b.
11.00%
c.
11.16%
d.
11.23%
ANS: C
(1.07)^2=(1.03)(1+x)
11.16
PTS: 1
NAT: Analysis
DIF: M
REF: 4.5 The Term Structure of Interest Rates
LOC: understand stocks and bonds
112. Observing the following term structure; a US treasury bond maturing in 1
year has a yield of 5% while US Treasury bond maturing in 2 years has a yield of 6%; what
is the expected 1 year rate, 1 year from now?
a.
7.00%
b.
7.01%
c.
7.30%
d.
5.66%
ANS: B
(1.06)^2=(1.05)(1+x)
7.01
PTS: 1
NAT: Analysis
DIF: M
REF: 4.5 The Term Structure of Interest Rates
LOC: understand stocks and bonds
113. Observing the following term structure; a US treasury bond maturing in 5
years has a yield of 6% while US Treasury bond maturing in 3 years has a yield of 4%; what
is the expected 2 year rate, 3 years from now?
a.
10.00%
b.
9.07%
c.
8.86%
d.
9.00%
ANS: B
(1.06)^5=(1.04)^3 * (1+x)^2
x=9.07
PTS: 1
NAT: Analysis
DIF: H
REF: 4.5 The Term Structure of Interest Rates
LOC: understand stocks and bonds
114. Observing the following term structure; a US treasury bond maturing in 5
years has a yield of 6% while US Treasury bond maturing in 3 years has a yield of 8%; what
is the expected 2 year rate, 3 years from now?
a.
3.07%
b.
8.07%
c.
2.36%
d.
4.35%
ANS: A
(1.06)^5=(1.08)^3 * (1+x)^2
x=3.07
PTS: 1
NAT: Analysis
DIF: H
REF: 4.5 The Term Structure of Interest Rates
LOC: understand stocks and bonds