Question 1

Which one of these statements is correct?

Accepted Answer

A)   Most long-term bond issues are referred to as unfunded debt.
B)   Bonds often provide tax benefits to issuers.
C)   The risk of a company financially failing decreases when the company issues bonds.
D)   All bonds are treated equally in a bankruptcy proceeding.
E)   A debenture is a senior secured debt.F) D) and E)
G) A) and E)

Question 2

The 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value and matures in 12 years. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 4 months from today?

Accepted Answer

A)   $987.00
B)   $994.50
C)   $1,002.00
D)   $1,011.25
E)   $1,022.50F) All of the above
G) A) and E)

Question 3

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

Accepted Answer

A)   coupon rate will also increase.
B)   current yield will decrease.
C)   yield to maturity will be less than the coupon rate.
D)   market price of the bond will decrease.
E)   coupon payment will increase.F) D) and E)
G) C) and E)

Question 4

Samantha owns a reverse convertible bond. At maturity, the principal amount will be repaid in:

Accepted Answer

A)   shares of stock.
B)   cash while the interest is paid in shares of stock.
C)   the form of a newly issued bond.
D)   either shares of stock or a newly issued bond.
E)   either cash or shares of stock.F) C) and E)
G) A) and D)

Question 5

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Accepted Answer

A)   Debenture
B)   Callable
C)   Floating-rate
D)   Junk
E)   Zero couponF) All of the above
G) A) and E)

Question 6

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

Accepted Answer

A)   Default risk
B)   Taxability
C)   Liquidity
D)   Inflation
E)   Interest rate riskF) All of the above
G) None of the above

Question 7

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

Accepted Answer

A)   Coupon
B)   Face value
C)   Discount
D)   Yield
E)   Dirty priceF) A) and D)
G) C) and E)

Question 8

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

Accepted Answer

A)   dirty price.
B)   redemption value.
C)   call premium.
D)   original-issue discount.
E)   redemption discount.F) D) and E)
G) A) and B)

Question 9

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

Accepted Answer

A)   coupon rate.
B)   face rate.
C)   call rate.
D)   yield to maturity.
E)   current yield.F) B) and E)
G) A) and B)

Question 10

Which one of the following applies to a premium bond?

Accepted Answer

A)   Yield to maturity > Current yield > Coupon rate
B)   Coupon rate = Current yield = Yield to maturity
C)   Coupon rate > Yield to maturity > Current yield
D)   Coupon rate 
E)   Coupon rate > Current yield > Yield to maturityF) A) and D)
G) C) and D)

Question 11

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:

Accepted Answer

A)   force the issuer to repurchase the bond prior to maturity.
B)   convert the bond into equity shares.
C)   defer all taxable income until the bond matures.
D)   convert the bond into a perpetuity paying 5 percent.
E)   have the principal amount adjusted for inflation.F) B) and D)
G) A) and D)

Question 12

The yield to maturity on a bond is currently 8.76 percent. The real rate of return is 4.48 percent. What is the rate of inflation?

Accepted Answer

A)   4.10 percent
B)   5.64 percent
C)   7.24 percent
D)   12.04 percent
E)   13.63 percentF) None of the above
G) C) and D)

Question 13

Which one of the following relationships is stated correctly?

Accepted Answer

A)   The coupon rate exceeds the current yield when a bond sells at a discount.
B)   The call price must equal the par value.
C)   An increase in market rates increases the market price of a bond.
D)   Decreasing the time to maturity increases the price of a discount bond, all else constant.
E)   Increasing the coupon rate decreases the current yield, all else constant.F) D) and E)
G) B) and D)

Question 14

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

Accepted Answer

A)   .05/(1 − t*)  = .07.
B)   .05 − (1 − t*)  = .07.
C)   .07 + (1 − t*)  = .05.
D)   .05 (1 − t*)  = .07.
E)   .05 (1 + t*)  = .07.F) B) and C)
G) None of the above

Question 15

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

Accepted Answer

A)   default
B)   market movements
C)   interest rate changes
D)   inflation
E)   the time to maturityF) C) and D)
G) A) and C)

Question 16

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

Accepted Answer

A)   a premium; less than
B)   a premium; equal to
C)   a discount; less than
D)   a discount; higher than
E)   par; less thanF) B) and D)
G) B) and C)

Question 17

Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

Accepted Answer

A)   $1,199.80
B)   $999.85
C)   $903.42
D)   $1,091.00
E)   $1,007.52F) C) and E)
G) A) and B)

Question 18

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

Accepted Answer

A)   quoted price.
B)   spread price.
C)   clean price.
D)   dirty price.
E)   call price.F) A) and D)
G) A) and C)

Question 19

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Accepted Answer

A)   Note
B)   Discounted
C)   Zero-coupon
D)   Callable
E)   DebentureF) B) and D)
G) B) and E)

Question 20

Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?

Accepted Answer

A)   Decreased in value due to the change in inflation rates
B)   Experienced an increase in its bond rating
C)   Maintained a fixed real rate of return
D)   Increased in value in response to the change in market rates
E)   Increased in value due to a decrease in time to maturityF) B) and E)
G) All of the above

Exam 7: Interest Rates and Bond Valuation

Which one of the following applies to a premium bond?

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Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by .25 percent. Your bond has most likely done which one of the following since last year?

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Which one of the following relationships is stated correctly?

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The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

Correct AnswerverifiedShow Answer

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

Correct AnswerverifiedShow Answer

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

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A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

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Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

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The yield to maturity on a bond is currently 8.76 percent. The real rate of return is 4.48 percent. What is the rate of inflation?

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

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DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

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Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

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Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:

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Which one of these statements is correct?

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Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

Correct AnswerverifiedShow Answer

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

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The 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value and matures in 12 years. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 4 months from today?

Correct AnswerverifiedShow Answer

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Correct AnswerverifiedShow Answer

Samantha owns a reverse convertible bond. At maturity, the principal amount will be repaid in:

Correct AnswerverifiedShow Answer

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

Correct AnswerverifiedShow Answer

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

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