Question 1

Callable bonds generally:

Accepted Answer

A)   grant the bondholder the option to call the bond any time after the deferment period.
B)   are callable at par as soon as the call-protection period ends.
C)   are called when market interest rates increase.
D)   are called within the first three years after issuance.
E)   have a sinking fund provision.F) None of the above
G) A) and B)

Question 2

You want to have $2 million in real dollars in an account when you retire in 35 years. The nominal return on your investment is 9.94 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal?

Accepted Answer

A)   $20,403
B)   $7,482
C)   $16,017
D)   $18,887
E)   $19,711F) A) and B)
G) A) and C)

Question 3

The $1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current price quote of 101.23. What is the current yield?

Accepted Answer

A)   6.60 percent
B)   6.37 percent
C)   6.42 percent
D)   6.49 percent
E)   6.58 percentF) B) and C)
G) B) and E)

Question 4

A newly issued 10-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding.

Accepted Answer

A)   $47.72
B)   $38.53
C)   $41.47
D)   $57.63
E)   $45.89F) B) and E)
G) B) and D)

Question 5

Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate?

Accepted Answer

A)   6.40 percent
B)   6.33 percent
C)   6.60 percent
D)   6.67 percent
E)   6.50 percentF) A) and B)
G) A) and C)

Question 6

The Fisher effect is defined as the relationship between which of the following variables?

Accepted Answer

A)   Default risk premium, inflation risk premium, and real rates
B)   Nominal rates, real rates, and interest rate risk premium
C)   Interest rate risk premium, real rates, and default risk premium
D)   Real rates, inflation rates, and nominal rates
E)   Real rates, interest rate risk premium, and nominal ratesF) A) and B)
G) D) and E)

Question 7

Which bond would you generally expect to have the highest yield?

Accepted Answer

A)   Risk-free Treasury bond
B)   Nontaxable, highly liquid bond
C)   Long-term, high-quality, tax-free bond
D)   Short-term, inflation-adjusted bond
E)   Long-term, taxable junk bondF) A) and E)
G) C) and E)

Question 8

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) A) and B)
G) A) and D)

Question 9

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature 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) A) and E)
G) A) and D)

Question 10

A discount bond's coupon rate is equal to the annual interest divided by the:

Accepted Answer

A)   call price.
B)   current price.
C)   face value.
D)   clean price.
E)   dirty price.F) D) and E)
G) A) and C)

Question 11

A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield?

Accepted Answer

A)   4.24 percent
B)   4.85 percent
C)   5.36 percent
D)   5.62 percent
E)   4.66 percentF) All of the above
G) D) and E)

Question 12

Suppose the real rate is 3.45 percent and the inflation rate is 2.2 percent. What rate would you expect to earn on a Treasury bill?

Accepted Answer

A)   1.25 percent
B)   3.30 percent
C)   5.73 percent
D)   6.56 percent
E)   7.75 percentF) B) and D)
G) A) and E)

Question 13

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

Accepted Answer

A)   at par.
B)   in registered form.
C)   in street form.
D)   as debentures.
E)   as callable bonds.F) A) and E)
G) A) and D)

Question 14

A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

Accepted Answer

A)   −1.79 percent
B)   −1.38 percent
C)   −1.64 percent
D)   1.79 percentE) All of the above
F) C) and D)

Question 15

Real rates are defined as nominal rates that have been adjusted for which of the following?

Accepted Answer

A)   Inflation
B)   Default risk
C)   Accrued interest
D)   Interest rate risk
E)   Both inflation and interest rate riskF) All of the above
G) None of the above

Question 16

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

Accepted Answer

A)   coupon rate increases.
B)   time to maturity decreases.
C)   coupon rate decreases and the time to maturity increases.
D)   time to maturity and coupon rate both decrease.
E)   coupon rate and time to maturity both increase.F) A) and B)
G) C) and D)

Question 17

A zero coupon bond:

Accepted Answer

A)   is sold at a large premium.
B)   pays interest that is tax deductible to the issuer at the time of payment.
C)   can only be issued by the U.S. Treasury.
D)   has more interest rate risk than a comparable coupon bond.
E)   provides no taxable income to the bondholder until the bond matures.F) A) and B)
G) C) and D)

Question 18

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Accepted Answer

A)   Par value
B)   Callable
C)   Senior
D)   Subordinated
E)   UnsecuredF) D) and E)
G) B) and E)

Question 19

Bonds issued by the U.S. government:

Accepted Answer

A)   are considered to be free of interest rate risk.
B)   generally have higher coupons than comparable bonds issued by a corporation.
C)   are considered to be free of default risk.
D)   pay interest that is exempt from federal income taxes.
E)   are called "munis."F) A) and C)
G) A) and B)

Question 20

Luxury Properties offers bonds with a coupon rate of 8.8 percent paid semiannually. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?

Accepted Answer

A)   $850.34
B)   $896.67
C)   $841.20
D)   $846.18
E)   $863.30F) All of the above
G) A) and B)

Exam 7: Interest Rates and Bond Valuation

Road Hazards has 12-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

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A newly issued 10-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding.

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The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

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A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield?

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The pure time value of money is known as the:

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Bonds issued by the U.S. government:

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Luxury Properties offers bonds with a coupon rate of 8.8 percent paid semiannually. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000?

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Suppose the real rate is 3.45 percent and the inflation rate is 2.2 percent. What rate would you expect to earn on a Treasury bill?

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Callable bonds generally:

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A discount bond's coupon rate is equal to the annual interest divided by the:

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Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

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A zero coupon bond:

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Wheeler's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate?

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Which bond would you generally expect to have the highest yield?

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A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

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You want to have $2 million in real dollars in an account when you retire in 35 years. The nominal return on your investment is 9.94 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal?

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A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

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The $1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current price quote of 101.23. What is the current yield?

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The Fisher effect is defined as the relationship between which of the following variables?

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Real rates are defined as nominal rates that have been adjusted for which of the following?

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