Question 1

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the real rate of return on the TIPS bond in the first year?

Accepted Answer

A)   5%
B)   8.15%
C)   7.15%
D)   4%E) B) and D)
F) A) and B)

Question 2

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

If interest rates are expected to rise, then Joe Hill should ________.

Accepted Answer

A)   prefer the Wildwood bond to the Asbury bond
B)   prefer the Asbury bond to the Wildwood bond
C)   be indifferent between the Wildwood bond and the Asbury bond
D)   The answer cannot be determined from the information given.E) None of the above
F) All of the above

Question 3

If you are holding a premium bond, you must expect a ________ each year until maturity. If you are holding a discount bond, you must expect a ________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

Accepted Answer

A)   capital gain; capital loss
B)   capital gain; capital gain
C)   capital loss; capital gain
D)   capital loss; capital lossE) B) and D)
F) A) and B)

Question 4

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

Accepted Answer

A)   4.3%
B)   4.5%
C)   5.2%
D)   5.5%E) A) and B)
F) C) and D)

Question 5

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is ________.

Accepted Answer

A)   6%
B)   6.49%
C)   6.73%
D)   7%E) C) and D)
F) None of the above

Question 6

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be ________.

Accepted Answer

A)   $1,140
B)   $1,170
C)   $1,180
D)   $1,200E) C) and D)
F) A) and B)

Question 7

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the nominal rate of return on the TIPS bond in the first year?

Accepted Answer

A)   5%
B)   5.15%
C)   8.15%
D)   9%E) A) and D)
F) B) and C)

Question 8

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

Accepted Answer

A)   $999.55
B)   $1,002.01
C)   $1,007.45
D)   $1,012.13E) B) and D)
F) None of the above

Question 9

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

Accepted Answer

A)   an asset-backed
B)   a TIPS
C)   a catastrophe
D)   a pay-in-kindE) B) and D)
F) A) and D)

Question 10

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

Accepted Answer

A)   $4.81
B)   $14.24
C)   $25
D)   $50E) A) and B)
F) All of the above

Question 11

Which one of the following statements is correct?

Accepted Answer

A)   invoice price = flat price - accrued interest
B)   invoice price = flat price + accrued interest
C)   flat price = invoice price + accrued interest
D)   invoice price = settlement price - accrued interestE) C) and D)
F) A) and D)

Question 12

You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to ________.

Accepted Answer

A)   $0
B)   $4.27
C)   $9.38
D)   $33.51E) A) and B)
F) None of the above

Question 13

To earn a high rating from the bond rating agencies, a company would want to have:
I. A low times-interest-earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio

Accepted Answer

A)   I only
B)   II and III only
C)   I and III only
D)   I, II, and IIIE) B) and D)
F) B) and C)

Question 14

Which of the following bonds would most likely sell at the lowest yield?

Accepted Answer

A)   a callable debenture
B)   a puttable mortgage bond
C)   a callable mortgage bond
D)   a puttable debentureE) All of the above
F) A) and B)

Question 15

A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

Accepted Answer

A)   callable
B)   coupon
C)   puttable
D)   TreasuryE) None of the above
F) C) and D)

Question 16

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

Accepted Answer

A)   mortgage bonds
B)   senior debentures
C)   preferred stock
D)   equipment obligation bondsE) None of the above
F) A) and B)

Question 17

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are ________.

Accepted Answer

A)   high grade
B)   intermediate grade
C)   investment grade
D)   junk bondsE) A) and D)
F) B) and D)

Question 18

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate ________.

Accepted Answer

A)   expected increases in inflation over time
B)   expected decreases in inflation over time
C)   the presence of a liquidity premium
D)   that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the marketE) None of the above
F) B) and C)

Question 19

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

Accepted Answer

A)   zero-coupon bonds
B)   coupon bonds selling at a discount
C)   coupon bonds selling at a premium
D)   floating-rate bondsE) B) and C)
F) A) and B)

Question 20

You would typically find all but which one of the following in a bond contract?

Accepted Answer

A)   a dividend restriction clause
B)   a sinking fund clause
C)   a requirement to subordinate any new debt issued
D)   a price-earnings ratioE) None of the above
F) A) and D)

Exam 10: Bond Prices and Yields

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is ________.

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Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year?

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You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to ________.

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If you are holding a premium bond, you must expect a ________ each year until maturity. If you are holding a discount bond, you must expect a ________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

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A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

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To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio

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A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be ________.

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In an era of particularly low interest rates, which of the following bonds is most likely to be called?

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If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

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You would typically find all but which one of the following in a bond contract?

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Which one of the following statements is correct?

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You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

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The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are ________.

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Which of the following bonds would most likely sell at the lowest yield?

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A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

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Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

Correct AnswerverifiedShow Answer

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ________.

Correct AnswerverifiedShow Answer

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

Correct AnswerverifiedShow Answer

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

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Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate ________.

Correct AnswerverifiedShow Answer

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If you are holding a premium bond, you must expect a each year until maturity. If you are holding a discount bond, you must expect a each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

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