Question 1

The R in the Fisher effect formula represents the:

Accepted Answer

A)  current yield.
B)  real return.
C)  coupon rate.
D)  inflation rate.
E)  nominal return.F) B) and C)
G) A) and E) E

Question 2

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) A) and E)
G) B) and C)

Question 3

Which one of the following terms denotes for certain that a bond is unsecured?

Accepted Answer

A)  Debenture
B)  Bearer form
C)  Call provision
D)  Sinking fund
E)  Blanket mortgageF) C) and D)
G) B) and D)

Question 4

Today,you are buying a $1,000 face value bond at an invoice price of $987.The bond has a 6 percent coupon and pays interest semiannually.There are two months until the next coupon date.What is the clean price of this bond?

Accepted Answer

A)  $947
B)  $957
C)  $967
D)  $977
E)  $987F) A) and E)
G) A) and C)

Question 5

A 12-year,semiannual coupon bond is priced at $1,102.60.The bond has a $1,000 face value and a yield to maturity of 5.33 percent.What is the coupon rate?

Accepted Answer

A)  5.00 percent
B)  5.25 percent
C)  5.50 percent
D)  6.00 percent
E)  6.50 percentF) C) and E)
G) B) and E)

Question 6

Explain what a mortgage-backed security (MBS)is and how it functions.Also,explain why these securities were such a problem during 2008.

Accepted Answer

MBSs are bonds that are issued by a trust that is created by pooling individual mortgages.These securities were a problem in 2008 because real estate values plummeted and many homeowners defaulted on their monthly mortgage payments.When a homeowner defaults on a payment,there is no cash flow into the trust and therefore no funds available to pass on to MBS bondholders.

Question 7

A protective covenant:

Accepted Answer

A)  protects the borrower from unscrupulous practices by the lender.
B)  is designed to protect the bond dealer from potential legal liability related to the bond issue.
C)  prevents a bond from being called.
D)  limits the actions of the borrower.
E)  guarantees that a bond will be repaid in full with interest.F) C) and E)
G) A) and D)

Question 8

The 8 percent,$1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057.These bonds have 16 years left until maturity.What is the current yield?

Accepted Answer

A)  7.38 percent
B)  7.57 percent
C)  8.00 percent
D)  8.23 percent
E)  8.28 percentF) B) and E)
G) A) and D)

Question 9

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

Accepted Answer

A)  asked
B)  face
C)  call
D)  put
E)  bidF) B) and D)
G) All of the above E

Question 10

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 C)
G) All of the above

Question 11

A bond trader just purchased and resold a bond.The amount of profit earned by the trader from this purchase and resale is referred to as the:

Accepted Answer

A)  market yield.
B)  yield-to-call.
C)  bid-ask spread.
D)  current yield.
E)  bond premium.F) A) and D)
G) A) and E)

Question 12

Arts and Crafts Warehouse wants to issue 15-year,zero coupon bonds that yield 7.5 percent.What price should it charge for these bonds if the face value is $1,000? (Assume semiannual compounding.)

Accepted Answer

A)  $308.15
B)  $331.40
C)  $356.08
D)  $362.14
E)  $369.94F) D) and E)
G) A) and E)

Question 13

The 7 percent annual coupon bonds of IPO,Inc.are selling for $1,021.The bonds have a face value of $1,000 and mature in seven years.What is the yield to maturity?

Accepted Answer

A)  6.42 percent
B)  6.62 percent
C)  6.66 percent
D)  6.68 percent
E)  6.70 percentF) C) and E)
G) A) and B)

Question 14

You are buying a bond at a clean price of $1,140.The bond has a face value of $1,000,an 8 percent coupon,and pays interest semiannually.The next coupon payment is one month from now.What is the dirty price of this bond?

Accepted Answer

A)  $1,000.00
B)  $1,146.67
C)  $1,173.33
D)  $1,176.67
E)  $1,180.00F) All of the above
G) A) and E)

Question 15

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

Accepted Answer

A)  Issue price
B)  Maturity value
C)  Face amount
D)  Current market price
E)  Current par valueF) B) and E)
G) C) and E)

Question 16

Which one of the following statements is correct?

Accepted Answer

A)  Bond markets have less daily trading volume than equity markets.
B)  There are fewer bond issues than there are equity issues.
C)  Municipal bond prices are highly transparent.
D)  Bond markets are dealer based.
E)  Most bond trades occur on the NYSE.F) B) and E)
G) C) and D)

Question 17

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 D)
G) D) and E)

Question 18

A callable bond:

Accepted Answer

A)  is generally call protected during the entire term of the bond issue.
B)  generally will have a call protection period during the final three years prior to maturity.
C)  may be structured to pay bondholders the current value of the bond on the date of call.
D)  is prohibited from having a sinking fund also.
E)  is frequently called at a price that is less than par value.F) B) and C)
G) None of the above

Question 19

What is the primary purpose of bond covenants?

Accepted Answer

A)  Meet regulatory requirements
B)  Describe repayment terms
C)  Protect the lender
D)  Define a bond's rating
E)  Increase a bond's seniority positionF) B) and D)
G) C) and D)

Question 20

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

Accepted Answer

A)  OTC
B)  Death
C)  CAT
D)  PETS
E)  TIPSF) A) and E)
G) D) and E)

Exam 6: Interest Rates and Bond Valuation

The R in the Fisher effect formula represents the:

Correct Answer
verified
E

The primary purpose of protective covenants is to help:

Correct Answer
verified

Which one of the following terms denotes for certain that a bond is unsecured?

Correct Answer
verified

Today,you are buying a $1,000 face value bond at an invoice price of $987.The bond has a 6 percent coupon and pays interest semiannually.There are two months until the next coupon date.What is the clean price of this bond?

Correct Answer
verified

A 12-year,semiannual coupon bond is priced at $1,102.60.The bond has a $1,000 face value and a yield to maturity of 5.33 percent.What is the coupon rate?

Correct Answer
verified

Explain what a mortgage-backed security (MBS)is and how it functions.Also,explain why these securities were such a problem during 2008.

A protective covenant:

Correct Answer
verified

The 8 percent,$1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057.These bonds have 16 years left until maturity.What is the current yield?

Correct Answer
verified

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

Correct Answer
verified
E

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

Correct Answer
verified

A bond trader just purchased and resold a bond.The amount of profit earned by the trader from this purchase and resale is referred to as the:

Correct Answer
verified

Arts and Crafts Warehouse wants to issue 15-year,zero coupon bonds that yield 7.5 percent.What price should it charge for these bonds if the face value is $1,000? (Assume semiannual compounding.)

Correct Answer
verified

The 7 percent annual coupon bonds of IPO,Inc.are selling for $1,021.The bonds have a face value of $1,000 and mature in seven years.What is the yield to maturity?

Correct Answer
verified

You are buying a bond at a clean price of $1,140.The bond has a face value of $1,000,an 8 percent coupon,and pays interest semiannually.The next coupon payment is one month from now.What is the dirty price of this bond?

Correct Answer
verified

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

Correct Answer
verified

Which one of the following statements is correct?

Correct Answer
verified

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

Correct Answer
verified

A callable bond:

Correct Answer
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What is the primary purpose of bond covenants?

Correct Answer
verified

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

Correct Answer
verified

Exam 6: Interest Rates and Bond Valuation

The R in the Fisher effect formula represents the:

Correct AnswerverifiedE

The primary purpose of protective covenants is to help:

Correct AnswerverifiedShow Answer

Which one of the following terms denotes for certain that a bond is unsecured?

Correct AnswerverifiedShow Answer

Today,you are buying a $1,000 face value bond at an invoice price of $987.The bond has a 6 percent coupon and pays interest semiannually.There are two months until the next coupon date.What is the clean price of this bond?

Correct AnswerverifiedShow Answer

A 12-year,semiannual coupon bond is priced at $1,102.60.The bond has a $1,000 face value and a yield to maturity of 5.33 percent.What is the coupon rate?

Correct AnswerverifiedShow Answer

Explain what a mortgage-backed security (MBS)is and how it functions.Also,explain why these securities were such a problem during 2008.

A protective covenant:

Correct AnswerverifiedShow Answer

The 8 percent,$1,000 face value bonds of Sweet Sue Foods are currently selling at $1,057.These bonds have 16 years left until maturity.What is the current yield?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedE

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

Correct AnswerverifiedShow Answer

A bond trader just purchased and resold a bond.The amount of profit earned by the trader from this purchase and resale is referred to as the:

Correct AnswerverifiedShow Answer

Arts and Crafts Warehouse wants to issue 15-year,zero coupon bonds that yield 7.5 percent.What price should it charge for these bonds if the face value is $1,000? (Assume semiannual compounding.)

Correct AnswerverifiedShow Answer

The 7 percent annual coupon bonds of IPO,Inc.are selling for $1,021.The bonds have a face value of $1,000 and mature in seven years.What is the yield to maturity?

Correct AnswerverifiedShow Answer

You are buying a bond at a clean price of $1,140.The bond has a face value of $1,000,an 8 percent coupon,and pays interest semiannually.The next coupon payment is one month from now.What is the dirty price of this bond?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A callable bond:

Correct AnswerverifiedShow Answer

What is the primary purpose of bond covenants?

Correct AnswerverifiedShow Answer

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

Correct AnswerverifiedShow Answer

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E

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E

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