Question 1

Changes in interest rates affect bond prices.Which one of the following compensates bond investors for this risk?

Accepted Answer

A)  Taxability risk premium
B)  Default risk premium
C)  Interest rate risk premium
D)  Real rate of return
E)  Bond premiumF) A) and E)
G) All of the above

Question 2

A bond has a $1,000 face value, a market price of $1,023.32, and pays interest payments of $54.00 every year.What is the coupon rate?

Accepted Answer

A)  6.76 percent
B)  4.50 percent
C)  5.27 percent
D)  5.40 percent
E)  5.35 percentF) B) and E)
G) C) and D)

Question 3

Zero coupon bonds:

Accepted Answer

A)  are valued using simple interest.
B)  are issued only by the U.S.Treasury.
C)  create a tax deduction for the issuer only at maturity.
D)  are issued at a premium.
E)  create annual taxable income to individual bondholders.F) B) and E)
G) B) and D)

Question 4

A bond dealer sells at the _____ price and buys at the _____ price.

Accepted Answer

A)  clean; dirty
B)  dirty; clean
C)  bid; asked
D)  asked; bid
E)  asked; askedF) C) and D)
G) A) and D)

Question 5

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

Accepted Answer

A)  The clean price of the bond must equal the bond's dirty price.
B)  The bond must be a zero coupon bond and mature in exactly one year.
C)  The market price must exceed the par value by the value of one year's interest.
D)  The bond must be priced at par.
E)  There is no condition under which this can occur.F) C) and D)
G) None of the above

Question 6

The primary purpose of protective covenants is to help:

Accepted Answer

A)  reduce interest rate risk.
B)  the issuer in case of default.
C)  protect bondholders from issuer actions.
D)  bondholders whose bonds are called.
E)  convert bearer bonds into registered form.F) None of the above
G) B) and E)

Question 7

One year ago, Alpha Supply issued 15-year bonds at par.The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000.Today, the market yield on these bonds is 7.2 percent.What is the percentage change in the bond price over the past year?

Accepted Answer

A)  5.94 percent
B)  5.38 percent
C)  -6.11 percent
D)  -5.87 percent
E)  The bond price did not change.F) C) and D)
G) B) and E)

Question 8

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

Accepted Answer

A)  Speculative
B)  5B
C)  Fallen angel
D)  Junk
E)  Triple AF) A) and D)
G) A) and C)

Question 9

You purchase a bond with an invoice price of $1,108.48.The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date.What is the clean price of the bond?

Accepted Answer

A)  $1,086.35
B)  $1,090.15
C)  $1,050.20
D)  $998.50
E)  $1,057.50F) A) and B)
G) All of the above

Question 10

The 5 percent semiannual coupon bonds of Under The Counter, Inc., are selling for $995.25.The bonds have a face value of $1,000 and mature in 12 years.What is the yield to maturity?

Accepted Answer

A)  5.09 percent
B)  5.05 percent
C)  10.07 percent
D)  5.26 percent
E)  11.1 percentF) B) and C)
G) D) and E)

Question 11

Warson Motors wants to raise $2 million by selling 20-year coupon bonds at par.Comparable bonds in the market have a coupon rate of 6.3 percent, semiannual payments, 20 years to maturity, and are selling at 96.5 percent of par.What coupon rate should Warson Motors set on its bonds?

Accepted Answer

A)  6.25 percent
B)  6.40 percent
C)  3.31 percent
D)  6.79 percent
E)  6.62 percentF) C) and D)
G) None of the above

Question 12

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

Accepted Answer

A)  upward sloping.
B)  flat.
C)  humped.
D)  downward sloping.
E)  double-humped.F) C) and E)
G) B) and D)

Question 13

The primary purpose of bond covenants is to:

Accepted Answer

A)  meet regulatory requirements.
B)  define the bond's repayment terms.
C)  protect the bondholders.
D)  identify the bond's rating.
E)  protect the bond issuer from lawsuits.F) None of the above
G) A) and B)

Question 14

A call provision grants the bond issuer the:

Accepted Answer

A)  right to contact each bondholder to determine if he or she would like to extend the term of his or her bonds.
B)  option to exchange the bonds for equity securities.
C)  right to automatically extend the bond's maturity date.
D)  right to repurchase the bonds on the open market prior to maturity.
E)  option of repurchasing the bonds prior to maturity at a prespecified price.F) C) and D)
G) A) and D)

Question 15

A $1,000 face value bond is currently quoted at 100.8.The bond pays semiannual payments of $22.50 each and matures in six years.What is the coupon rate?

Accepted Answer

A)  2.72 percent
B)  2.85 percent
C)  4.46 percent
D)  2.25 percent
E)  4.50 percentF) All of the above
G) D) and E)

Question 16

A bond's annual interest divided by its face value is referred to as the:

Accepted Answer

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

Question 17

The term structure of interest rates is primarily based on which three of the following?
I.Interest rate risk premium
II.Real rate of interest
III.Default risk premium
IV.Inflation premium
V.Liquidity premium

Accepted Answer

A)  I, II, and V
B)  I, III, and V
C)  II, III, and IV
D)  I, II, and IV
E)  II, IV, and VF) A) and D)
G) All of the above

Question 18

Which one of the following individuals is most apt to purchase a municipal bond?

Accepted Answer

A)  Minimum-wage employee
B)  Retired individual with minimal current income
C)  Recent college graduate
D)  Tax-exempt organization
E)  Highly compensated business ownerF) None of the above
G) A) and B)

Question 19

This morning, Jeff found an aged bond certificate lying on the street.He picked it up and noticed that it was a 50-year bond that matured today.He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment.The bond that Jeff found must have been which one of the following?

Accepted Answer

A)  Debenture
B)  Note
C)  Registered-form bond
D)  Bearer-form bond
E)  Callable bondF) C) and E)
G) C) and D)

Question 20

Which one of the following is a unique characteristic of an income bond?

Accepted Answer

A)  Interest income is tax-free.
B)  Interest income is paid at the time of issuance.
C)  Coupon payments are dependent on the issuer's income.
D)  Coupon payments are paid on a regular monthly basis.
E)  Coupon payments can be converted into equity shares.F) B) and C)
G) C) and E)

Exam 6: Interest Rates and Bond Valuation

The primary purpose of protective covenants is to help:

Correct Answer
verified

The term structure of interest rates is primarily based on which three of the following? I.Interest rate risk premium II.Real rate of interest III.Default risk premium IV.Inflation premium V.Liquidity premium

Correct Answer
verified

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

Correct Answer
verified

Changes in interest rates affect bond prices.Which one of the following compensates bond investors for this risk?

Correct Answer
verified

Warson Motors wants to raise $2 million by selling 20-year coupon bonds at par.Comparable bonds in the market have a coupon rate of 6.3 percent, semiannual payments, 20 years to maturity, and are selling at 96.5 percent of par.What coupon rate should Warson Motors set on its bonds?

Correct Answer
verified

The primary purpose of bond covenants is to:

Correct Answer
verified

Which one of the following individuals is most apt to purchase a municipal bond?

Correct Answer
verified

The 5 percent semiannual coupon bonds of Under The Counter, Inc., are selling for $995.25.The bonds have a face value of $1,000 and mature in 12 years.What is the yield to maturity?

Correct Answer
verified

A $1,000 face value bond is currently quoted at 100.8.The bond pays semiannual payments of $22.50 each and matures in six years.What is the coupon rate?

Correct Answer
verified

Correct Answer
verified

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

Correct Answer
verified

A call provision grants the bond issuer the:

Correct Answer
verified

A bond has a $1,000 face value, a market price of $1,023.32, and pays interest payments of $54.00 every year.What is the coupon rate?

Correct Answer
verified

One year ago, Alpha Supply issued 15-year bonds at par.The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000.Today, the market yield on these bonds is 7.2 percent.What is the percentage change in the bond price over the past year?

Correct Answer
verified

Which one of the following is a unique characteristic of an income bond?

Correct Answer
verified

A bond's annual interest divided by its face value is referred to as the:

Correct Answer
verified

Zero coupon bonds:

Correct Answer
verified

A bond dealer sells at the _ price and buys at the _ price.

Correct Answer
verified

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

Correct Answer
verified

You purchase a bond with an invoice price of $1,108.48.The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date.What is the clean price of the bond?

Correct Answer
verified

Exam 6: Interest Rates and Bond Valuation

The primary purpose of protective covenants is to help:

Correct AnswerverifiedShow Answer

The term structure of interest rates is primarily based on which three of the following? I.Interest rate risk premium II.Real rate of interest III.Default risk premium IV.Inflation premium V.Liquidity premium

Correct AnswerverifiedShow Answer

If intermediate-term, default-free, pure discount bonds have a higher rate of return than either the comparable shorter-term or longer-term bonds, the term structure of interest rates will be:

Correct AnswerverifiedShow Answer

Changes in interest rates affect bond prices.Which one of the following compensates bond investors for this risk?

Correct AnswerverifiedShow Answer

Warson Motors wants to raise $2 million by selling 20-year coupon bonds at par.Comparable bonds in the market have a coupon rate of 6.3 percent, semiannual payments, 20 years to maturity, and are selling at 96.5 percent of par.What coupon rate should Warson Motors set on its bonds?

Correct AnswerverifiedShow Answer

The primary purpose of bond covenants is to:

Correct AnswerverifiedShow Answer

Which one of the following individuals is most apt to purchase a municipal bond?

Correct AnswerverifiedShow Answer

The 5 percent semiannual coupon bonds of Under The Counter, Inc., are selling for $995.25.The bonds have a face value of $1,000 and mature in 12 years.What is the yield to maturity?

Correct AnswerverifiedShow Answer

A $1,000 face value bond is currently quoted at 100.8.The bond pays semiannual payments of $22.50 each and matures in six years.What is the coupon rate?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive.

Correct AnswerverifiedShow Answer

A call provision grants the bond issuer the:

Correct AnswerverifiedShow Answer

A bond has a $1,000 face value, a market price of $1,023.32, and pays interest payments of $54.00 every year.What is the coupon rate?

Correct AnswerverifiedShow Answer

One year ago, Alpha Supply issued 15-year bonds at par.The bonds have a coupon rate of 6.5 percent, paid semiannually, and a face value of $1,000.Today, the market yield on these bonds is 7.2 percent.What is the percentage change in the bond price over the past year?

Correct AnswerverifiedShow Answer

Which one of the following is a unique characteristic of an income bond?

Correct AnswerverifiedShow Answer

A bond's annual interest divided by its face value is referred to as the:

Correct AnswerverifiedShow Answer

Zero coupon bonds:

Correct AnswerverifiedShow Answer

A bond dealer sells at the _____ price and buys at the _____ price.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You purchase a bond with an invoice price of $1,108.48.The bond has a coupon rate of 5.5 percent, semiannual coupons, and there are two months to the next coupon date.What is the clean price of the bond?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A bond dealer sells at the _ price and buys at the _ price.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified