Question 1

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%?

Accepted Answer

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 similarly.
D)  neither bond will decrease in price, but their yields will increase.E) A) and B)
F) A) and C)

Question 2

Speculative-grade bonds have default risk; investment grade bonds do not.

Accepted Answer

A) True 
 B)False  False

Question 3

Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%.Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%.Which of these most likely occurred while the investor owned the bond?

Accepted Answer

A)  the bond's current yield increased above the bond's coupon rate.
B)  the inflation rate increased.
C)  new bonds with similar characteristics have coupon rates of 6.5%.
D)  market interest rates increased.E) A) and D)
F) C) and D)

Question 4

A bond has an ask quote of 99.5625 and a bid quote of 99.5475.How much will the bond dealer make on the purchase and resell of a $100,000 bond if they earn a 10% commission?

Accepted Answer

A)  $150
B)  $1,500
C)  $15
D)  $1.50E) None of the above
F) B) and D) C

Question 5

If a bond is priced at par value, then:

Accepted Answer

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.E) None of the above
F) C) and D)

Question 6

A bond's yield to maturity takes into consideration:

Accepted Answer

A)  current yield but not any price changes.
B)  price changes but not the current yield.
C)  both the current yield and any price changes.
D)  neither the current yield nor any price changes.E) A) and D)
F) All of the above

Question 7

The purpose of a floating-rate bond is to:

Accepted Answer

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.E) All of the above
F) A) and B)

Question 8

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

Accepted Answer

A)  dividend yield.
B)  yield to maturity.
C)  current yield.
D)  coupon rate.E) None of the above
F) A) and D)

Question 9

Which one of the following bond values will change when interest rates change?

Accepted Answer

A)  the expected cash flows
B)  the present value
C)  the coupon payment
D)  the maturity valueE) A) and D)
F) All of the above

Question 10

This morning, you purchased a bond.Which one of these should you expect to occur if you hold this bond during an inflationary period?

Accepted Answer

A)  the coupon payment will increase in real terms.
B)  the maturity value will increase in nominal terms.
C)  the market price will remain constant at par.
D)  the market price will decrease.E) C) and D)
F) All of the above

Question 11

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

Accepted Answer

A) True 
 B)False

Question 12

What are the conditions imposed on a debt issue that are designed to protect bondholders called?

Accepted Answer

A)  collateral agreements
B)  common restrictions
C)  protective covenants
D)  default provisionsE) A) and C)
F) B) and D)

Question 13

A Treasury bond's bid price will be lower than the ask price.

Accepted Answer

A) True 
 B)False  True

Question 14

As the coupon rate of a bond increases, the bond's:

Accepted Answer

A)  face value increases.
B)  current price decreases.
C)  interest payments increase.
D)  maturity date is extended.E) A) and D)
F) All of the above

Question 15

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?

Accepted Answer

A)  $917.06
B)  $928.84
C)  $987.50
D)  $1,000.00E) A) and C)
F) None of the above

Question 16

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?

Accepted Answer

A)  $904.90
B)  $925.39
C)  $947.93
D)  $1,000.00E) B) and C)
F) A) and B)

Question 17

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

Accepted Answer

A)  the bond's price will decline each year.
B)  coupon payments can change at any time.
C)  bonds selling for a premium have low default risk.
D)  taxes must be paid on the current yield.E) A) and C)
F) None of the above

Question 18

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

Accepted Answer

A) True 
 B)False

Question 19

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%?

Accepted Answer

A)  4.20%
B)  8.64%
C)  9.00%
D)  9.20%E) B) and C)
F) None of the above

Question 20

The current yield of a bond can be calculated by:

Accepted Answer

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.E) B) and D)
F) A) and B)

Exam 6: Valuing Bonds

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%?

Correct AnswerverifiedShow Answer

Speculative-grade bonds have default risk; investment grade bonds do not.

Correct AnswerverifiedFalse

Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%.Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%.Which of these most likely occurred while the investor owned the bond?

Correct AnswerverifiedShow Answer

A bond has an ask quote of 99.5625 and a bid quote of 99.5475.How much will the bond dealer make on the purchase and resell of a $100,000 bond if they earn a 10% commission?

Correct AnswerverifiedC

If a bond is priced at par value, then:

Correct AnswerverifiedShow Answer

A bond's yield to maturity takes into consideration:

Correct AnswerverifiedShow Answer

The purpose of a floating-rate bond is to:

Correct AnswerverifiedShow Answer

The discount rate that makes the present value of a bond's payments equal to its price is termed the:

Correct AnswerverifiedShow Answer

Which one of the following bond values will change when interest rates change?

Correct AnswerverifiedShow Answer

This morning, you purchased a bond.Which one of these should you expect to occur if you hold this bond during an inflationary period?

Correct AnswerverifiedShow Answer

A bond's rate of return is equal to its coupon payment divided by the price paid for the bond.

Correct AnswerverifiedShow Answer

What are the conditions imposed on a debt issue that are designed to protect bondholders called?

Correct AnswerverifiedShow Answer

A Treasury bond's bid price will be lower than the ask price.

Correct AnswerverifiedTrue

As the coupon rate of a bond increases, the bond's:

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

Correct AnswerverifiedShow Answer

It would be realistic to read an ask price listed as 100.127 and a bid price of 100.143.

Correct AnswerverifiedShow Answer

How much would an investor need to receive in nominal return if he desires a real return of 4% and the rate of inflation is 5%?

Correct AnswerverifiedShow Answer

The current yield of a bond can be calculated by:

Correct AnswerverifiedShow Answer

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False

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C

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