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Exam 7: Interest Rates and Bond Valuation

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Question 1

Multiple Choice

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Real rates are defined as nominal rates that have been adjusted for which of the following?

A) inflation
B) default risk
C) accrued interest
D) interest rate risk
E) both inflation and interest rate risk

F) All of the above
G) A) and E)

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Question 2

Multiple Choice

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Which of the following correctly describe U.S.Treasury bonds? I.have a "tick" size of 1/32 II.highly liquid III.quoted in dollars and cents IV.quoted at the dirty price

A) I and II only
B) I and IV only
C) II and III only
D) II and IV only
E) I, II, and III only

F) All of the above
G) D) and E)

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Question 3

Multiple Choice

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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 which one of the following?

The Leeward Company just issued 15-year,8 percent,unsecured bonds at par.These bonds fit the definition of which one of the following terms?

The Walthers Company has a semi-annual coupon bond outstanding.An increase in the market rate of interest will have which one of the following effects on this bond?

The pure time value of money is known as the:

Which one of the following statements is correct?

Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 16.5 years.The bonds have a par value of $1,000 and a market price of $944.30.Interest is paid semiannually.What is the yield to maturity?

The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change.If you actually sell the bond before it matures,your realized return is known as the holding period yield.Suppose that today,you buy a 12 percent annual coupon bond for $1,000.The bond has 13 years to maturity.Two years from now,the yield-to-maturity has declined to 11 percent and you decide to sell.What is your holding period yield?

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19.What is the change in the value of a bond that has a face value of $5,000?

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks.One stream is expressed in nominal values and the other stream is expressed in real values.You decide to discount the nominal cash flows using a nominal annual rate of 8 percent.What rate should you use to discount the real cash flows?

Define liquidity risk,default risk,and taxability risk and explain how these risks relate to bonds and bond yields.

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?

Which of the following are negative covenants that might be found in a bond indenture? I.The company shall maintain a current ratio of 1.10 or better. II.No debt senior to this issue can be issued. III.The company cannot lease any major assets without approval by the lender. IV.The company must maintain the loan collateral in good working order.

Which of the following relationships apply to a par value bond? I.coupon rate < yield-to-maturity II.current yield = yield-to-maturity III.market price = call price IV.market price = face value

Pete paid $1,032 as his total cost of purchasing a bond.This price is referred to as the:

Al is retired and enjoys his daily life.His one concern is that his bonds provide a steady stream of income that will continue to allow him to have the money he desires to continue his active lifestyle without lowering his present standard of living.Although he has sufficient principal to live on,he only wants to spend the interest income provided by his holdings and thus is concerned about the purchasing power of that income.Which one of the following bonds should best ease Al's concerns?

The taxability risk premium compensates bond holders for which one of the following?

An indenture is:

The Corner Grocer has a 7-year,6 percent annual coupon bond outstanding with a $1,000 par value.The bond has a yield to maturity of 5.5 percent.Which one of the following statements is correct if the market yield suddenly increases to 7 percent?