Tirth Patel

Week 4 Assignment (ch. 6) FIN315

1) Periodic receipts of interest by the bondholder are known as:

A. the coupon rate.

B. principal payments.
C. coupon payments.
D. the default premium
Answer: C

2) Assume a bond is currently selling at par value. What will happen in the future if the yield on
the bond is lower than the coupon rate?

A. The price of the bond will increase.

B. The coupon rate of the bond will increase.
C. The par value of the bond will decrease.
D. The coupon payments will be adjusted to the new discount rate.
Answer: A

3) If a bond’s asked price is 97.162, the investor:

A. receives 97.162% of the stated coupon payments.

B. receives $971.62 upon the maturity date of the bond.
C. pays 97.162% of face value for the bond.
D. pays $10,971.62 for a $10,000 face value bond.
Answer: C

4) How much does the $1,000 to be received upon a bond's maturity in 4 years add to the bond's
price if the appropriate discount rate is 6%?

A. $209.91
B. $260.00
C. $760.00
D. $792.09
Answer: D
5) What happens to a discount bond as the time to maturity decreases?

A. The coupon rate increases.

B. The bond price increases.
C. The coupon rate decreases.
D. The bond price decreases.
Answer: B

6) How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years
to maturity if the interest rate is 12%?

A. $927.90
B. $981.40
C. $1,000.00
D. $1,075.82
Answer: A

7) How much would an investor expect to pay for a $1,000 par value bond with a 9% annual
coupon that matures in 5 years if the interest rate is 7%?

A. $696.74
B. $1,075.82
C. $1,082.00
D. $1,123.01
Answer: D

8) Which of the following statements is correct for a 10% coupon bond that has a current yield of
7%?

A. The face value of the bond has decreased.

B. The bond's maturity value exceeds the bond's price.
C. The bond's internal rate of return is 7%.
D. The bond's market value is higher than its face value.
Answer: D
9) If an investor purchases a bond when its current yield is higher than the coupon rate, then the
bond's price will be expected to:

A. decline over time, reaching par value at maturity.

B. increase over time, reaching par value at maturity.
C. be less than the face value at maturity.
D. exceed the face value at maturity.
Answer: A

10) The current yield of a bond can be calculated by:

A. multiplying the price by the coupon rate.

B. dividing the price by the annual coupon payments.
C. dividing the price by the par value.
D. dividing the annual coupon payments by the price.
Answer: D

11) What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price
quote of 84?

A. 6.00%
B. 7.14%
C. 5.04%
D. 6.38%
Answer: B

12) What is the coupon payment for a bond with 6 years until maturity, a price of $984.32, and a
yield to maturity of 7%? Interest is paid semi-annually. What is the coupon rate?
Answer: 7.15%

13) A bond's par value can also be called its:

A. coupon payment.
B. present value.
C. market value.
D. face value.
Answer: D
14) What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46, and a
yield to maturity of 6%? Interest is paid annually.

A. 6%
B. 8%
C. 10%
D. 11%
Answer: C

15) What price will be paid for a Eurobond with an ask price of 116.08 if the face value is 30,000
euros?

A. 25,844 euros
B. 30,000 euros
C. 34,824 euros
D. 35,406 euros
Answer: C

16) What is the yield to maturity for a bond paying $100 annually that has 6 years until maturity
and sells for $1,000?

A. 6.0%
B. 8.5%
C. 10.0%
D. 12.5%
Answer: B

17) Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates
change from 8% to 6% the bond's price will:

A. increase by $51.54.
B. decrease by $51.54.
C. increase by $53.46.
D. decrease by $53.46.
Answer: C

18) Which one of the following bond values will change when interest rates change?
A. The expected cash flows
B. The present value
C. The coupon payment
D. The maturity value
Answer: B

19) What happens to the coupon rate of a $1,000 face value bond that pays $80 annually in
interest if market interest rates change from 9% to 10%?

A. The coupon rate increases to 10%.

B. The coupon rate remains at 9%.
C. The coupon rate remains at 8%.
D. The coupon rate decreases to 8%.
Answer: B

20) Which one of the following is fixed for the life of a given bond?

A. Current price
B. Current yield
C. Yield to maturity
D. Coupon rate
Answer: D

21) What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with an
annual coupon payment of 6.5% and sells the bond 1 year later for $1,037.19?

A. 4.53%
B. 5.33%
C. 5.16%
D. 4.92%
Answer: A

22) An investor purchases a Eurobond for 108.93 and sells it one year later at 107.30. The bond
pays an annual coupon of 6% and has 10 years until maturity. If the par value of the bond is
30,000 euros, what is the rate of return on the bond over year?

A. 3.0%
B. 4.0%
C. 6.0%
D. 8.0%
Answer: B

23) If the coupon rate on an outstanding bond is lower than the relevant current interest rate, then
the yield to maturity will be:

A. lower than current interest rates.

B. equal to the coupon rate.
C. higher than the coupon rate.
D. lower than the coupon rate.
Answer: C

24) If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90,
how much will it be worth 1 year from now if interest rates are constant?

A. $904.90
B. $925.39
C. $947.93
D. $1,000.00
Answer: C

25) What price will be paid for a U.S. Treasury bond with an ask price of 135.4062 if the face
value is $100,000?

A. $100,135.41
B. $135,000.41
C. $136,269.38
D. $135,406.20
Answer: C

26) You purchased a 6% annual coupon bond at face value and sold it one year later for
$1,015.16. What was your rate of return on this investment if the face value at maturity was
$1,000?

A. 4.48%
B. 6.15%
C. 7.52%
D. 6.07%
Answer: B

27) How does a bond dealer generate profits when trading bonds?

A. By maintaining bid prices lower than ask prices

B. By maintaining bid prices higher than ask prices
C. By retaining the bond’s next coupon payment
D. By lowering the bond’s coupon rate upon resale
Answer: A

28) When the yield curve is upward-sloping, then:

A. short-maturity bonds offer the highest coupon rates.

B. long-maturity bonds are priced above par value.
C. short-maturity bonds yield less than long-maturity bonds.
D. long-maturity bonds increase in price when interest rates increase.
Answer: C

29) Nominal U.S. Treasury bond yields:

A. are constant over time.

B. are equal to the real yields.
C. include a default premium.
D. include an inflation premium.
Answer: D

30) Which one of these is included in the yield of a bond with a low credit rating but not
included in a U.S. Treasury bond yield? Assume both bonds are selling at a premium.

A. Real rate of return

B. Inflation premium
C. Default premium
D. Loss of premium
Answer: C

31) The purpose of a floating-rate bond is to:

A. save interest expense for corporate issuers.

B. avoid making interest payments until maturity.
C. shift the yield curve.
D. offer rates that adjust to current market conditions.
Answer: D

32) Which of the following would not be associated with a zero-coupon bond?

A. Yield to maturity
B. Discount bond
C. Current yield
D. Interest-rate risk
Answer: C

33) Which one of the following bonds would be likely to exhibit a greater degree of interest rate
risk?

A. A zero-coupon bond with 20 years until maturity

B. A coupon-paying bond with 20 years until maturity
C. A floating-rate bond with 20 years until maturity
D. A zero-coupon bond with 30 years until maturity
Answer: A

34) A "convertible bond" provides the option to convert:

A. a bond into shares of common stock.

B. fixed-rate coupon payments into variable-rate payments.
C. a zero-coupon bond to a coupon-paying bond.
D. a junk bond to a zero-coupon investment-grade bond.
Answer: A

35) Rosita purchased a bond for $989 that had a 7% coupon and semiannual interest payments.
She sold the bond after 6 months and earned a total return of 4.8% on this investment. At what
price, did she sell the bond?

A. $1,001.47
B. $974.28
C. $981.06
D. $1,003.18
Answer: B

36) A U.S. Treasury security that pays a fixed coupon and has an initial maturity of 2 to 10 years
is called a:

A. TIPS.
B. Treasury bill.
C. Treasury bond.
D. Treasury note.
Answer: D

37) Which one of the following must be correct for a bond currently selling at a premium?

A. Its coupon rate is variable.

B. Its current yield is lower than its coupon rate.
C. Its yield to maturity is higher than its coupon rate.
D. Its coupon rate is lower than the current market rate on similar bonds.
Answer: D

38) A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3
years. What is its yield to maturity?

A. 4.78%
B. 5.48%
C. 9.57%
D. 12.17%
Answer: B

39) Which type of bond is certain to provide a capital loss if held to maturity?

A. Discount bond
B. Premium bond
C. Zero-coupon bond
D. Junk bond
Answer: B

40) Investors who purchase bonds having lower credit ratings should expect:
A. lower yields to maturity.
B. higher default possibilities.
C. lower coupon payments.
D. higher purchase prices.
Answer: B

41) A bond has a face value of $1,000, has 5 years until maturity, and an annual coupon rate of
7%? It yields 5% currently. By how much will the price change over the next year if the yield
remains constant?

A. Zero
B. Decline by $86.59
C. Decline by $15.67
D. Rise by $15.67
Answer: D

42) If a bond is priced at par value, then:

A. it has a very low level of default risk.

B. its coupon rate equals its yield to maturity.
C. it must be a zero-coupon bond.
D. the bond is quite close to maturity.
Answer: B

43) The existence of an upward-sloping yield curve suggests that:

A. bonds should be selling at a discount to par value.

B. bonds will not return as much as common stocks.
C. interest rates may be increasing in the future.
D. real interest rates will be increasing soon.
Answer: C

44) What is the amount of the annual coupon payment for a bond that has 6 years until maturity,
sells for $1,050, and has a yield to maturity of 9.37%?

A. $98.64
B. $95.27
C. $101.38
D. $104.97
Answer: B

45) Many investors may be drawn to municipal bonds because of the bonds':

A. speculative grade ratings.

B. high coupon payments.
C. long periods until maturity.
D. income exemption from federal taxes.
Answer: D

46) Two years ago bonds were issued at par with 10 years until maturity and a 7% annual
coupon. If interest rates for that grade of bond are currently 8.25%, what will be the market price
of these bonds?

A. $917.06
B. $928.84
C. $987.50
D. $1,000.00
Answer: A

47) Which one of the following must be correct for a bond currently selling at a premium?

A. Its coupon rate is variable.

B. Its current yield is lower than its coupon rate.
C. Its yield to maturity is higher than its coupon rate.
D. Its coupon rate is lower than the current market rate on similar bonds.
Answer: D

48) A bond has a coupon rate of 8%, pays interest semiannually, sells for $960, and matures in 3
years. What is its yield to maturity?

A. 4.78%
B. 5.48%
C. 9.57%
D. 12.17%
Answer: B
49) If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:

A. bond is selling at a discount.

B. bond has a high default premium.
C. promised yield is not likely to materialize.
D. bond must be a Treasury Inflation-Protected Security.
Answer: A

50) Which one of the following is correct concerning real interest rates?

A. Real interest rates are constant.

B. Real interest rates must be positive.
C. Real interest rates must be less than nominal interest rates.
D. Real interest rates, if positive, increase purchasing power over time.
Answer: D

51) An investor holds two bonds, one with 5 years until maturity and the other with 20 years
until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

A. The 5-year bond will decrease more in price.

B. The 20-year bond will decrease more in price.
C. Both bonds will decrease in price by the same proportion.
D. Neither bond will decrease in price, but their yields will increase.
Answer: B

52) How much should you be prepared to pay for a 10-year bond with an annual coupon of 6%
and a yield to maturity of 7.5%?

A. $411.84
B. $897.04
C. $985.00
D. $1,000.00
Answer: C

53) The market price of a bond with 12 years until maturity and an annual coupon rate of 8%
increased yesterday. Which one of these may have caused this price increase?

A. The bond's rating was downgraded.

B. The issuing firm announced the next interest payment.
C. The issuing firm announced that its annual earnings met investor expectations.
D. Market interest rates decreased.
Answer: D

54) An investor buys a 10-year, 7% coupon bond for $1,050, holds it for 1 year, and then sells it
for $1,040. What was the investor's rate of return?

A. 5.71%
B. 6.00%
C. 6.67%
D. 7.00%
Answer: A

55) What are the conditions imposed on a debt issuer that are designed to protect bondholders?

A. Collateral agreements
B. Vanilla wrappers
C. Protective covenants
D. Default provisions
Answer: C

56) The holder of which one of these securities has first claim on the assets of a firm?

A. Senior debt
B. Common stock
C. Subordinated debt
D. Preferred stock
Answer: A

57) Which of these bond ratings is the lowest of Moody's investment-grade ratings?

A. A
B. Ba
C. Aa
D. Baa
Answer: D
58) If a bond offers an investor 11% in nominal return during a year in which the rate of inflation
is 4%, then her real return is:

A. 6.73%.
B. 6.31%.
C. 15.44%.
D. 10.56%.
Answer: B

59) If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3
years later if interest rates have remained stable?

A. $848.12
B. $923.50
C. $862.92
D. $911.15
Answer: C

60) What causes bonds to sell for a premium?

A. Investment-quality ratings
B. Long periods until maturity
C. Coupon rates that exceed market rates
D. Speculative-grade ratings
Answer: C