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QUESTIONS :

 

1. A long-term contract under which a borrower agrees to make payments of interest and principal on specific dates is called a:

 

 

 

a. common stock.

 

 

 

b. preferred stock.

 

 

 

c. equity contract.

 

 

 

d. bond.

 

 

 

 

 

 

 

 

 

 

 

2. Bonds issued by corporations that are exposed to default risk are called:

 

 

 

a. Treasury bonds.

 

 

 

b. municipal bonds.

 

 

 

c. corporate bonds.

 

 

 

d. personal bonds.

 

 

 

 

 

 

 

 

 

 

 

3.                      are issued by the Federal government and have no default risk.

 

 

 

a. Treasury bonds

 

 

 

b. Municipal bonds

 

 

 

c. Corporate bonds

 

 

 

d. Personal bonds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.                      are issued by state and local governments.

 

 

 

a. Treasury bonds

 

 

 

b. Municipal bonds

 

 

 

c. Corporate bonds

 

 

 

d. Personal bonds

 

 

 

 

 

 

 

 

 

 

 

5. The                           of a bond generally represents the amount of money the issuer promises to repay on the maturity date.

 

 

 

a. coupon interest rate

 

 

 

b. coupon payment

 

 

 

c. sinking fund

 

 

 

d. par value

 

 

 

 

 

 

 

 

 

 

 

6. The                           is the stated annual interest rate on a bond.

 

 

 

a. coupon interest rate

 

 

 

b. discount rate

 

 

 

c. yield-to-maturity

 

 

 

d. coupon payment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7. A bond that pays no annual interest but is sold at a discount below the par value is called:

 

 

 

a. an original maturity bond.

 

 

 

b. a floating rate bond.

 

 

 

c. a fixed maturity date bond.

 

 

 

d. a zero coupon bond.

 

 

 

 

 

 

 

 

 

 

 

8. A sinking fund provision in a bond contract gives the issuer the right to redeem the bonds under specific terms prior to the normal maturity date.

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

 

 

 

 

9. The interest earned on most municipal bonds is exempt from federal taxes.

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

 

 

 

 

10. If denominated in a currency other than the investor’s home currency, the purchase of foreign bonds adds the additional risk of changes in the relative value of the two currencies.

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11. A call provision gives the investor the right to force the issuer to buy the bonds back before maturity.

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

 

 

 

 

12. Convertible bond are bonds that may be converted (exchanged) into shares of common stock, at a fixed price, at the option of the bondholder.

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

.

 

 

 

13. Other things held constant, if a bond indenture contains a call provision, the yield to maturity that would exist without such a call provision will generally be                        the YTM with a call provision.

 

 

 

a. Higher than.

 

 

 

b. Lower than.

 

 

 

c. The same as.

 

 

 

d. Either higher or lower (depending on the level of the call premium) than.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14. The value of a bond is the present value of the future cash flows from the bond (consisting of the par value at maturity and all intervening coupon payments).

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15.  If a coupon bond is selling at par, its current yield:

 

 

 

a. is less than its yield to maturity

 

 

 

b. equals its yield to maturity.

 

 

 

c. is greater than its yield to maturity

 

 

 

 

 

 

 

 

 

 

 

16. The rate of return earned on a bond if it is held until maturity is its:

 

 

 

a. yield-to-call.

 

 

 

b. coupon payment.

 

 

 

c. yield-to-maturity.

 

 

 

d. sinking fund yield.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17. The rate of return earned on a bond if it is called before its maturity date is its:

 

 

 

a. yield-to-call.

 

 

 

b. coupon payment.

 

 

 

c. yield-to-maturity.

 

 

 

d. sinking fund yield.

 

 

 

 

 

 

 

 

 

 

 

18. If a bond is selling for a premium, this implies that the bond’s yield to maturity:

 

 

 

a. exceeds its coupon rate.

 

 

 

yield-to-maturity must be larger than the coupon rate.

 

 

 

b. is equal to its coupon rate

 

 

 

c. is less than its coupon rate

 

 

 

 

 

 

 

 

 

 

 

19. All else equal, if a bond’s yield-to-maturity increases:

 

 

 

a. its price will rise

 

 

 

b. its price will remain unchanged

 

 

 

c. its price will fall.

 

 

 

 

 

 

 

 

 

 

 

20. A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is most correct?

 

 

 

a. The bond’s yield to maturity is greater than its coupon rate.

 

 

 

b. If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.

 

 

 

c. The bond’s current yield is equal to the bond’s coupon rate.

 

 

 

sells at par.

 

 

 

d. All of the statements above are correct.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21. All else equal,                     bonds have more interest rate risk than                      bonds.

 

 

 

a. short-term; long-term

 

 

 

b. callable; municipal

 

 

 

c. long-term; short-term

 

 

 

d. non-callable; corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22. All else equal, _______________ bonds have more reinvestment rate risk than ____________ bonds.

 

 

 

a. high-coupon; low-coupon

 

 

 

b. low-coupon; high-coupon

 

 

 

c. non-callable; corporate

 

 

 

d. callable; municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23.                    is the risk that a decline in interest rates will lead to a decline in income from a bond portfolio.

 

 

 

a. investment horizon

 

 

 

b. sinking fund

 

 

 

c. reinvestment rate risk

 

 

 

d. market risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24. All else equal, short-term bonds have more reinvestment rate risk than do long-term bonds.

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25. Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent?

 

 

 

a. 20-year, zero coupon bond.

 

 

 

b. 10-year, zero coupon bond.

 

 

 

c. 20-year, 10 percent coupon bond.

 

 

 

d. 20-year, 5 percent coupon bond.

 

 

 

 

 

 

 

 

 

 

 

26. Which of the following statements is most correct?

 

 

 

a. Junk bonds typically have a lower yield to maturity relative to investment grade bonds.

 

 

 

b. A debenture is a secured bond that is backed by some or all of the firm’s fixed assets.

 

 

 

c. Subordinated debt is paid before senior debt in the event of default.

 

 

 

d. All of the statements above are correct.

 

 

 

e. Neither of the statements above is correct.

 

 

 

 

 

 

 

 

 

 

 

27. A company’s bond rating is not affected by its financial performance and provisions in the bond contract.

 

 

 

a. True

 

 

 

b. False

 

 

 

  

 

 

 

 

 

 

 

28. Bonds are traded primarily in the over-the-counter market.

 

 

 

a. True

 

 

 

b. False

 

 

 

 

 

 

 

 

 

 

 

29. You are considering buying bonds in ACBB, Inc.  The bonds have a par value of $1,000 and mature in 40 years.  The annual coupon rate is 9.0% and the coupon payments are annual.  If you believe that the appropriate discount rate for the bonds is 20.0%, what is the value of the bonds to you?

 

 

 

a. $2,183.31

 

 

 

b. $540.31

 

 

 

c. $450.37

 

 

 

d. $2,376.94

 

 

 

e. $499.84

 

 

 

 

 

 

 

 

 

 

 

30. XZYY, Inc. currently has an issue of bonds outstanding that will mature in 23 years.  The bonds have a face value of $1,000 and a stated annual coupon rate of 13.0% with annual coupon payments.  The bond is currently selling for $804.  The bonds may be called in 3 years for 113.0% of the par value.  What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity?

 

 

 

a. 26.65%

 

 

 

b. 16.30%

 

 

 

c. 14.85%

 

 

 

d. 19.39%

 

 

 

e. 34.11%

 

 

 

 

 

 

 

 

 

 

 

31. Again, Inc. bonds have a par value of $1,000, a 20 year maturity, and an annual coupon rate of 13.0% with annual coupon payments.  The bonds are currently selling for $898.  The bonds may be called in 6 years for 113.0% of par.  What quoted annual rate of return do you expect to earn if you buy the bonds and company calls them when possible?

 

 

 

a. 14.59%

 

 

 

b. 17.26%

 

 

 

Correct. N=6; PV=-898; FV=1130; PMT=130; Solve for I.

 

 

 

c. 18.97%

 

 

 

d. 15.75%

 

 

 

e. 14.74%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32. Within Year, Inc. has bonds outstanding with a $1,000 par value and a maturity of 39 years.  The bonds have an annual coupon rate of 8.0% with semi-annual coupon payments.  You would expect a quoted annual return of 9.0% if you purchased these bonds.  What are the bonds worth to you?

 

 

 

a. $892.48

 

 

 

b. $892.74

 

 

 

c. $1,119.13

 

 

 

d. $908.85

 

 

 

e. $1,752.67

 

 

 

 

 

 

 

 

 

 

 

33. Yes They May, Inc. has a bond issue outstanding with a $1,000 par value and a maturity of 20 years.  The bonds have an annual coupon rate of 20.0% with semi-annual coupon payments.  The current market price for the bonds is $876.  The bonds may be called in 5 years for 120.0% of par.  What is the quoted annual yield-to-maturity for the bonds?

 

 

 

a. 31.16%

 

 

 

b. 11.44%

 

 

 

c. 13.39%

 

 

 

d. 26.77%

 

 

 

e. 22.87%

 

 

 

 

 

 

 

 

 

 

 

34. Yes They Can, Inc. has a bond issue outstanding with a $1,000 par value and a maturity of 34 years.  The annual coupon rate is 11.0% with quarterly coupon payments.  The bonds are currently selling for $1,054.  The bonds may be called in 4 years for 111.0% of par.  What is the quoted annual yield-to-call for these bonds?

 

 

 

a. 2.88%%

 

 

 

b. 14.93%

 

 

 

c. 11.50%

 

 

 

d. 2.60%

 

 

 

e. 10.42%

 

 

 

 

 

 

 

 

 

 

 

35. You are considering buying bonds in AZYX, Inc.  The bonds have a par value of $1,000 and mature in 11 years.  The annual coupon rate is 14.0% and the coupon payments are annual.  The bonds are currently selling for $775.68 based on a yield-to-maturity of 19.0%.  What is the bond’s current yield?

 

 

 

a. 10.86%

 

 

 

b. 14.00%

 

 

 

c. 19.00%

 

 

 

d. 24.49%

 

 

 

e. 18.05%

 

 

 

 

 

 

 

 

 

 

 

36. You are considering buying bonds in AZYX, Inc.  The bonds have a par value of $1,000 and mature in 11 years.  The annual coupon rate is 14.0% and the coupon payments are annual.  The bonds are currently selling for $775.68 based on a yield-to-maturity of 19.0%.  What is the bond’s expected capital gain/loss if the bonds are held until maturity?

 

 

 

a. 8.14%

 

 

 

b. 5.00%

 

 

 

c. 0.00%

 

 

 

d. -5.49%

 

 

 

e. 0.95%

 

 

 

 

 

 

 

 

 

 

 

37. XZYY, Inc. currently has an issue of bonds outstanding that will mature in 25 years.  The bonds have a face value of $1,000 and a stated annual coupon rate of 11.0% with annual coupon payments.  The bond is currently selling for $1000.  What is the yield-to-maturity for the bonds?

 

 

 

a. 8%

 

 

 

b. 9%

 

 

 

c. 10%

 

 

 

d. 11%

 

 

 

e. 12%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38. One year ago, Paul purchased a $1,000 face value corporate bond with a 12 percent annual coupon rate and a 10-year maturity. At the time of the purchase, the bonds had an expected yield-to-maturity of 10.5 percent. Today he sold the bond for $1125.  What is the one-year return that Paul earned on this investment?

 

 

 

a. 3.2%

 

 

 

b. 11%

 

 

 

c. 12%

 

 

 

d. 14.2%

 

 

 

e. 17.3%