Question 1

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Accepted Answer

A)  increases at an increasing rate.
B)  increases at a decreasing rate.
C)  increases at a constant rate.
D)  decreases at an increasing rate.
E)  decreases at a decreasing rate.F) B) and E)
G) None of the above

Question 2

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

Accepted Answer

A)  coupon rate
B)  face rate
C)  call rate
D)  yield to maturity
E)  interest rateF) A) and C)
G) A) and B)

Question 3

An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 4.5 percent. What does Sam believe the inflation rate will be for the next year?

Accepted Answer

A)  5.60 percent
B)  5.67 percent
C)  5.74 percent
D)  6.00 percent
E)  6.21 percentF) A) and E)
G) A) and D)

Question 4

The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 101.6. What is the current yield on these bonds?

Accepted Answer

A)  1.60 percent
B)  2.37 percent
C)  6.40 percent
D)  6.49 percent
E)  6.88 percentF) C) and D)
G) A) and E)

Question 5

A Treasury bond is quoted at a price of 106: 23 with a 3.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

Accepted Answer

A)  3.06 percent
B)  3.19 percent
C)  3.28 percent
D)  3.33 percent
E)  3.38 percentF) C) and D)
G) A) and C)

Question 6

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct?

Accepted Answer

A)  The bonds will become discount bonds if the market rate of interest declines.
B)  The bonds will pay 10 interest payments of $60 each.
C)  The bonds will sell at a premium if the market rate is 5.5 percent.
D)  The bonds will initially sell for $1,030 each.
E)  The final payment will be in the amount of $1,060.F) D) and E)
G) C) and D)

Question 7

A call-protected bond is a bond that:

Accepted Answer

A)  is guaranteed to be called.
B)  can never be called.
C)  is currently being called.
D)  is callable at any time.
E)  cannot be called during a certain period of time.F) A) and B)
G) A) and C)

Question 8

Which one of the following is the price a dealer will pay to purchase a bond?

Accepted Answer

A)  call price
B)  asked price
C)  bid price
D)  bid-ask spread
E)  par valueF) A) and E)
G) A) and B)

Question 9

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)  0.05/(1 - t*)  = 0.07.
B)  0.05 - (1 - t*)  = 0.07.
C)  0.07 + (1 - t*)  = 0.05.
D)  0.05 *(1 - t*)  = 0.07.
E)  0.05 F* (1 + t*)  = 0.07.F) A) and E)
G) A) and D)

Question 10

The pure time value of money is known as the:

Accepted Answer

A)  liquidity effect.
B)  Fisher effect.
C)  term structure of interest rates.
D)  inflation factor.
E)  interest rate factor.F) None of the above
G) D) and E)

Question 11

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

Accepted Answer

A)  3.5 percent.
B)  greater than 3.5 percent but less than 7 percent.
C)  7 percent.
D)  greater than 7 percent.
E)  Answer cannot be determined from the information provided.F) D) and E)
G) A) and E)

Question 12

Which one of the following premiums is compensation for expected future inflation?

Accepted Answer

A)  default risk
B)  taxability
C)  liquidity
D)  inflation
E)  interest rate riskF) A) and B)
G) C) and E)

Question 13

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?

Accepted Answer

A)  8 percent
B)  EAR of 8 percent compounded monthly
C)  comparable risk-free rate
D)  comparable real rate
E)  You cannot compare the present values of these two streams of cash flows.F) B) and E)
G) B) and C)

Question 14

The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054. What is the amount of the call premium on a $1,000 par value bond?

Accepted Answer

A)  $52
B)  $54
C)  $72
D)  $84
E)  $89F) C) and D)
G) B) and E)

Question 15

Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond?

Accepted Answer

A)  6.64 percent
B)  8.96 percent
C)  10.23 percent
D)  12.47 percent
E)  13.27 percentF) C) and D)
G) A) and D)

Question 16

Redesigned Computers has 5.25 percent coupon bonds outstanding with a current market price of $546.19. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

Accepted Answer

A)  6.64 years
B)  7.08 years
C)  12.41 years
D)  14.16 years
E)  28.32 yearsF) B) and C)
G) C) and D)

Question 17

The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.

Accepted Answer

A)  default
B)  market
C)  interest rate
D)  inflation
E)  maturityF) A) and D)
G) A) and C)

Question 18

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

Accepted Answer

A)  risk-free rate
B)  realized rate
C)  nominal rate
D)  real rate
E)  current rateF) A) and E)
G) All of the above

Question 19

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 6.5 percent?

Accepted Answer

A)  The bond price will increase by $57.14.
B)  The bond price will increase by 5.29 percent.
C)  The bond price will decrease by $53.62.
D)  The bond price will decrease by 5.43 percent.
E)  The bond price will decrease by 5.36 percent.F) B) and C)
G) B) and D)

Question 20

Pete paid $1,032 as his total cost of purchasing a bond. 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) All of the above
G) C) and D)

Exam 7: Interest Rates and Bond Valuation

A call-protected bond is a bond that:

Correct Answer
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Redesigned Computers has 5.25 percent coupon bonds outstanding with a current market price of $546.19. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

Correct Answer
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The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.

Correct Answer
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A Treasury bond is quoted at a price of 106: 23 with a 3.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

Correct Answer
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Which one of the following is the price a dealer will pay to purchase a bond?

Correct Answer
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Correct Answer
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Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

Correct Answer
verified

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

Correct Answer
verified

The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054. What is the amount of the call premium on a $1,000 par value bond?

Correct Answer
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The pure time value of money is known as the:

Correct Answer
verified

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 6.5 percent?

Correct Answer
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As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Correct Answer
verified

Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond?

Correct Answer
verified

An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 4.5 percent. What does Sam believe the inflation rate will be for the next year?

Correct Answer
verified

The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 101.6. What is the current yield on these bonds?

Correct Answer
verified

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

Correct Answer
verified

Which one of the following premiums is compensation for expected future inflation?

Correct Answer
verified

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

Correct Answer
verified

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 Answer
verified

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct?

Correct Answer
verified

Exam 7: Interest Rates and Bond Valuation

A call-protected bond is a bond that:

Correct AnswerverifiedShow Answer

Redesigned Computers has 5.25 percent coupon bonds outstanding with a current market price of $546.19. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

Correct AnswerverifiedShow Answer

The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return.

Correct AnswerverifiedShow Answer

A Treasury bond is quoted at a price of 106: 23 with a 3.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

Correct AnswerverifiedShow Answer

Which one of the following is the price a dealer will pay to purchase a bond?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054. What is the amount of the call premium on a $1,000 par value bond?

Correct AnswerverifiedShow Answer

The pure time value of money is known as the:

Correct AnswerverifiedShow Answer

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 6.5 percent?

Correct AnswerverifiedShow Answer

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk:

Correct AnswerverifiedShow Answer

Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond?

Correct AnswerverifiedShow Answer

An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 4.5 percent. What does Sam believe the inflation rate will be for the next year?

Correct AnswerverifiedShow Answer

The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 101.6. What is the current yield on these bonds?

Correct AnswerverifiedShow Answer

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be:

Correct AnswerverifiedShow Answer

Which one of the following premiums is compensation for expected future inflation?

Correct AnswerverifiedShow Answer

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following?

Correct AnswerverifiedShow Answer

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

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct?

Correct AnswerverifiedShow Answer

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