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Exam 6: Interest Rates and Bond Valuation

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Question 21

Multiple Choice

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Municipal bonds are:

A) generally purchased by tax-exempt investors.
B) risk-free.
C) issued by federal, state, and local governmental bodies.
D) zero-coupon bonds.
E) generally callable.

F) A) and C)
G) C) and E)

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Question 22

Multiple Choice

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This morning, Jeff found a bond certificate lying on the floor of a bank. He picked it up and noticed that the bond matured today. He presented the bond to the bank teller and received both the principal and interest payment. The bond that Jeff found must have been which one of the following?

A) Debenture
B) Note
C) Registered form bond
D) Bearer form bond
E) Callable bond

F) B) and C)
G) D) and E)

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Question 23

Multiple Choice

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The "R" in the Fisher effect formula represents the:

The yield to maturity on a discount bond is:

Over the next three years, you expect the rate of inflation to decrease, but yet remain positive. After that, you expect inflation to increase steadily for the next several years. Draw a term structure of interest rates graph based on this assumption and identify all the components of that structure.

Suppose your company needs to raise $28 million and you want to issue 15-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you're evaluating two issue alternatives: an 8 percent annual coupon and a zero coupon bond. Your company's tax rate is 35 percent. In 15 years, what will your company's repayment be if you issue the coupon bonds? What if you issue the zeroes? (Assume annual compounding on the zero coupon bond) .

Which of the following ratings indicate that a bond is low-quality? I. Baa II) BB III) B IV) Ba

Which one of the following terms applies to a bond that initially sells at a deep discount and pays no interest payments?

A bond has a par value of $1,000, a current yield of 7.606 percent, and semi-annual interest payments. The bond quote is 98.6. What is the amount of each coupon payment?

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

In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?

The price at which a dealer will purchase a bond is called the _____ price.

The current yield on a bond is equal to the annual interest divided by which one of the following?

A corporate bond pays 8.5 percent interest. You are in the 15 percent tax bracket. What is your after-tax yield on this bond?

If inflation is expected to steadily decrease in the future, the term structure of interest rates will most likely be:

Last year, you earned a rate of return of 11.29 percent on your bond investments. During that time, the inflation rate was 4.6 percent. What was your real rate of return?

A protective covenant:

Travis recently purchased a callable bond. However, that bond cannot be currently redeemed by the issuer. Thus, the bond must currently be:

If Treasury bills are currently paying 4.2 percent and the inflation rate is 2.6 percent, what is the approximate real rate of interest? The exact real rate?

The Hot Dog Shack wants to raise $1.2 million by selling some coupon bonds at par. Comparable bonds in the market have a 6.5 percent annual coupon, 15 years to maturity, and are selling at 97.687 percent of par. What coupon rate should The Hot Dog Shack set on its bonds?