Question 1

Which one of the following statements concerning sinking funds is correct?

Accepted Answer

A)  Bond issuers must fund a sinking fund at the time the bonds are issued.
B)  Sinking funds must include at least one "balloon payment."
C)  Sinking funds must be funded annually, starting on the issue date.
D)  Sinking funds may be used to purchase bonds in the open market.
E)  Sinking funds can be used only to call bonds.F) A) and B)
G) A) and C)

Question 2

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Accepted Answer

A)  Interest rate risk premium
B)  Inflation premium
C)  Liquidity premium
D)  Taxability premium
E)  Default risk premiumF) A) and D)
G) A) and B)

Question 3

You purchase a bond with a coupon rate of 6.15 percent, semiannual coupons, and a clean price of $998.40.If the next coupon payment is due in two months, what is the invoice price?

Accepted Answer

A)  $1,018.90
B)  $1,019.36
C)  $1,001.60
D)  $1,027.67
E)  $1,004.33F) A) and B)
G) A) and E)

Question 4

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

Accepted Answer

A)  Callable
B)  Income
C)  Zero coupon
D)  Convertible
E)  Tax-freeF) B) and E)
G) C) and D)

Question 5

A bond has a yield to maturity of 9.38 percent, a coupon of 7.5 percent paid semiannually, a $1,000 face value, and a maturity date 21 years from today.What is the current yield?

Accepted Answer

A)  7.91 percent
B)  8.47 percent
C)  9.05 percent
D)  9.38 percent
E)  9.46 percentF) A) and E)
G) B) and C)

Question 6

A $1,000 face value bond currently has a yield to maturity of 6.03 percent.The bond matures in thirteen years and pays interest semiannually.The coupon rate is6.25percent.What is the current price of this bond?

Accepted Answer

A)  $ 987.42
B)  $980.02
C)  $1,005.26
D)  $1,019.63
E)  $1,011.69F) A) and C)
G) D) and E)

Question 7

Keyser Materials has 6.5 percent coupon bonds on the market with 15 years to maturity.The bonds make semiannual payments and currently sell for 102 percent of par.What is the current yield? The YTM? The effective annual yield?

Accepted Answer

A)  6.37 percent; 6.29 percent; 6.39 percent
B)  7.84 percent; 7.92 percent; 7.95 percent
C)  7.84 percent; 7.92 percent; 7.97 percent
D)  7.80 percent; 7.84 percent; 7.92 percent
E)  7.80 percent; 7.92 percent; 6.39 percentF) A) and E)
G) B) and D)

Question 8

The 5.3 percent bond of Dominic Cyle Parts has a face value of $1,000, a maturity of 12 years, semiannual interest payments, and a yield to maturity of 6.12 percent.What is the current market price of the bond?

Accepted Answer

A)  $945.08
B)  $ 959.33
C)  $ 931.01
D)  $1,072.13
E)  $912.40F) All of the above
G) B) and E)

Question 9

The inflation premium:

Accepted Answer

A)  increases the real return.
B)  is inversely related to the time to maturity.
C)  remains constant over time.
D)  rewards investors for accepting interest rate risk.
E)  compensates investors for expected price increases.F) A) and B)
G) B) and E)

Question 10

What is the price of a $1,000 face value bond if the quoted price is 102.1?

Accepted Answer

A)  $102.10
B)  $1,002.10
C)  $1,020.01
D)  $1,020.10
E)  $1,021.00F) All of the above
G) A) and D)

Question 11

The current yield on a bond is equal to the annual interest divided by the:

Accepted Answer

A)  issue price.
B)  maturity value.
C)  face amount.
D)  current market price.
E)  current par value.F) B) and C)
G) B) and E)

Question 12

If Treasury bills are currently paying 3.05 percent and the inflation rate is 1.89 percent, what is the approximate real rate of interest? The exact real rate?

Accepted Answer

A)  1.16 percent; 1.14 percent
B)  1.21 percent; 1.14 percent
C)  1.20 percent; 1.21 percent
D)  1.19 percent; 1.16 percent
E)  1.19 percent; 1.21 percentF) C) and E)
G) A) and B)

Question 13

Which one of the following might be included in a bond's list of negative covenants?

Accepted Answer

A)  Maintain a current ratio of 1.2 or more
B)  Maintain a minimum cash balance of $1.2 million
C)  Limit cash dividends to $1 per share or less
D)  Maintain a times interest earned ratio of 2 or more
E)  Provide audited financial statements in a timely mannerF) A) and B)
G) B) and C)

Question 14

A real rate of return is defined as a rate that has been adjusted for which one of the following?

Accepted Answer

A)  Inflation
B)  Interest rate risk
C)  Taxes
D)  Liquidity
E)  Default riskF) B) and D)
G) A) and B)

Question 15

An upward-sloping term structure of interest rates indicates:

Accepted Answer

A)  the real rate of return is lower for short-term bonds than for long-term bonds.
B)  there is an indirect relationship between real interest rates and time to maturity.
C)  there is an indirect relationship between nominal interest rates and time to maturity.
D)  the nominal rate is declining as the real rate rises as the time to maturity increases.
E)  the nominal rate is increasing even though the real rate is constant as the time to maturity increases.F) B) and E)
G) B) and C)

Question 16

Generally speaking, bonds issued in the U.S.pay interest on a(n)  _____ basis.

Accepted Answer

A)  annual
B)  semiannual
C)  quarterly
D)  monthly
E)  dailyF) B) and D)
G) A) and E)

Question 17

The 7 percent semiannual coupon bonds of Over The Counter, Inc., are selling for $1,102.25.The bonds have a face value of $1,000 and mature in 18 years.What is the yield to maturity?

Accepted Answer

A)  5.54 percent
B)  6.06 percent
C)  12.55 percent
D)  6.27 percent
E)  12.1 percentF) None of the above
G) A) and E)

Question 18

Last year, you earned a rate of return of 5.89 percent on your bond investments.During that time, the inflation rate was 1.2 percent.What was your real rate of return?

Accepted Answer

A)  4.58 percent
B)  4.69 percent
C)  4.72 percent
D)  4.63 percent
E)  4.60 percentF) A) and B)
G) C) and D)

Question 19

Today, you are buying a $1,000 face value bond at an invoice price of $987.The bond has a coupon rate of 6 percent and pays interest semiannually.There are two months until the next coupon date.What is the clean price of this bond?

Accepted Answer

A)  $947
B)  $957
C)  $967
D)  $977
E)  $987F) C) and E)
G) A) and D)

Question 20

Russell's has a bond issue outstanding.The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance.This provision is referred to as the _____ provision.

Accepted Answer

A)  safeguard
B)  market
C)  liquidity
D)  deferred call
E)  sinking fundF) C) and D)
G) C) and E)

Exam 6: Interest Rates and Bond Valuation

The 5.3 percent bond of Dominic Cyle Parts has a face value of $1,000, a maturity of 12 years, semiannual interest payments, and a yield to maturity of 6.12 percent.What is the current market price of the bond?

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The inflation premium:

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A real rate of return is defined as a rate that has been adjusted for which one of the following?

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The current yield on a bond is equal to the annual interest divided by the:

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You purchase a bond with a coupon rate of 6.15 percent, semiannual coupons, and a clean price of $998.40.If the next coupon payment is due in two months, what is the invoice price?

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Which one of the following might be included in a bond's list of negative covenants?

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A $1,000 face value bond currently has a yield to maturity of 6.03 percent.The bond matures in thirteen years and pays interest semiannually.The coupon rate is6.25percent.What is the current price of this bond?

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Last year, you earned a rate of return of 5.89 percent on your bond investments.During that time, the inflation rate was 1.2 percent.What was your real rate of return?

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What is the price of a $1,000 face value bond if the quoted price is 102.1?

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An upward-sloping term structure of interest rates indicates:

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Russell's has a bond issue outstanding.The issue's indenture provision prohibits the firm from redeeming the bonds during the first five years following issuance.This provision is referred to as the _____ provision.

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Which one of the following statements concerning sinking funds is correct?

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If Treasury bills are currently paying 3.05 percent and the inflation rate is 1.89 percent, what is the approximate real rate of interest? The exact real rate?

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Keyser Materials has 6.5 percent coupon bonds on the market with 15 years to maturity.The bonds make semiannual payments and currently sell for 102 percent of par.What is the current yield? The YTM? The effective annual yield?

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A bond has a yield to maturity of 9.38 percent, a coupon of 7.5 percent paid semiannually, a $1,000 face value, and a maturity date 21 years from today.What is the current yield?

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The 7 percent semiannual coupon bonds of Over The Counter, Inc., are selling for $1,102.25.The bonds have a face value of $1,000 and mature in 18 years.What is the yield to maturity?

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Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

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Today, you are buying a $1,000 face value bond at an invoice price of $987.The bond has a coupon rate of 6 percent and pays interest semiannually.There are two months until the next coupon date.What is the clean price of this bond?

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Generally speaking, bonds issued in the U.S.pay interest on a(n) _____ basis.

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Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

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