Ch7 Interest Rates And Bond Valuation Test Bank Answers

1.

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called? 
 

2.

Bert owns a bond that will pay him $75 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called? 
 

3.

A bond's coupon rate is equal to the annual interest divided by which one of the following? 
 

4.

The specified date on which the principal amount of a bond is payable is referred to as which one of the following? 
 

5.

Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following? 
 

6.

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

7.

An indenture is: 
 

8.

Atlas Entertainment has 15-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: 
 

9.

A bond that is payable to whomever has physical possession of the bond is said to be in: 
 

10.

The Leeward Company just issued 15-year, 8 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? 
 

11.

Which of the following defines a note?

I. secured
II. unsecured
III. maturity less than 10 years
IV. maturity in excess of 10 years 
 

12.

A sinking fund is managed by a trustee for which one of the following purposes? 
 

13.

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

14.

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called which one of the following? 
 

15.

A deferred call provision is which one of the following? 
 

16.

A call-protected bond is a bond that: 
 

17.

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the: 
 

18.

A bond that has only one payment, which occurs at maturity, defines which one of the following? 
 

19.

Which one of the following is the price a dealer will pay to purchase a bond? 
 

20.

You want to buy a bond from a dealer. Which one of the following prices will you pay? 
 

21.

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: 
 

22.

A bond is quoted at a price of $989. This price is referred to as which one of the following? 
 

23.

Pete paid $1,032 as his total cost of purchasing a bond. This price is referred to as the: 
 

24.

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

25.

Interest rates that include an inflation premium are referred to as: 
 

26.

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

27.

The pure time value of money is known as the: 
 

28.

Which one of the following premiums is compensation for expected future inflation? 
 

29.

The interest rate risk premium is the: 
 

30.

A Treasury yield curve plots Treasury interest rates relative to which one of the following? 
 

31.

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer? 
 

32.

The taxability risk premium compensates bond holders for which one of the following? 
 

33.

The liquidity premium is compensation to investors for: 
 

34.

An 8 percent corporate bond that pays interest semi-annually was issued last year. Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent?

I. a structure as an interest-only loan
II. a current yield that equals the coupon rate
III. a yield-to-maturity equal to the coupon rate
IV. a market price that differs from the face value 
 

35.

A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond?

I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coupon rate 
 

36.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. 
 

37.

The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? 
 

38.

Which of the following are characteristics of a premium bond?

I. coupon rate < yield-to-maturity
II. coupon rate > yield-to-maturity
III. coupon rate < current yield
IV. coupon rate > current yield 
 

39.

Which of the following relationships apply to a par value bond?

I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value 
 

40.

Which one of the following relationships is stated correctly? 
 

41.

Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct? 
 

42.

A newly issued bond has a 7 percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be: 
 

43.

Which of the following increase the price sensitivity of a bond to changes in interest rates?

I. increase in time to maturity
II. decrease in time to maturity
III. increase in coupon rate
IV. decrease in coupon rate 
 

44.

Which one of the following bonds is the least sensitive to interest rate risk? 
 

45.

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: 
 

46.

You own a bond that has a 6 percent annual coupon and matures 5 years from now. You purchased this 10-year bond at par value when it was originally issued. Which one of the following statements applies to this bond if the relevant market interest rate is now 5.8 percent? 
 

47.

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? 
 

48.

A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years. The bond was originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this bond today? 
 

49.

Which of the following statements concerning bonds are correct?

I. Bonds provide tax benefits to issuers.
II. The risk of a firm financially failing increases when the firm issues bonds.
III. Most long-term bond issues are referred to as unfunded debt.
IV. All bonds are treated equally in a bankruptcy proceeding. 
 

50.

Texas Foods has a 6 percent bond issue outstanding that pays $30 in interest every March and September. The bonds are investment grade and sell at par. The bonds are callable at a price equal to the present value of all future interest and principal payments discounted at a rate equal to the comparable Treasury rate plus 0.50 percent. Which of the following correctly describe the features of this bond?

I. bond rating of B
II. "make whole" call price
III. $1,000 face value
IV. offer price of $1,000 
 

51.

Last year, Lexington Homes issued $1 million in unsecured, non-callable debt. This debt pays an annual interest payment of $55 and matures 6 years from now. The face value is $1,000 and the market price is $1,020. Which one of these terms correctly describes a feature of this debt? 
 

52.

Callable bonds generally: 
 

53.

Which of the following are negative covenants that might be found in a bond indenture?

I. The company shall maintain a current ratio of 1.10 or better.
II. No debt senior to this issue can be issued.
III. The company cannot lease any major assets without approval by the lender.
IV. The company must maintain the loan collateral in good working order. 
 

54.

Protective covenants: 
 

55.

Which one of the following statements concerning bond ratings is correct? 
 

56.

A "fallen angel" is a bond that has moved from: 
 

57.

Bonds issued by the U.S. government: 
 

58.

Treasury bonds are: 
 

59.

Municipal bonds: 
 

60.

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as: 
 

61.

A zero coupon bond: 
 

62.

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond? 
 

63.

The collar of a floating-rate bond refers to the minimum and maximum: 
 

64.

Last year, you purchased a "TIPS" at par. Since that time, both market interest rates and the inflation rate have increased by 0.25 percent. Your bond has most likely done which one of the following since last year? 
 

65.

Recently, you discovered a putable income bond that is convertible. If you purchase this bond, you will have the right to do which of the following?

I. force the issuer to repurchase the bond prior to maturity
II. choose when you wish to receive interest payments
III. convert the bond into a TIPS
IV. convert the bond into equity shares 
 

66.

"Cat" bonds are primarily designed to help: 
 

67.

Mary is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own? 
 

68.

Al is retired and enjoys his daily life. His one concern is that his bonds provide a steady stream of income that will continue to allow him to have the money he desires to continue his active lifestyle without lowering his present standard of living. Although he has sufficient principal to live on, he only wants to spend the interest income provided by his holdings and thus is concerned about the purchasing power of that income. Which one of the following bonds should best ease Al's concerns? 
 

69.

Phil has researched TLM Technologies and believes the firm is poised to vastly increase in value. He wants to invest in this company. Phil has decided to purchase TLM Technologies bonds so that he can have a steady stream of interest income. However, he still wishes that he could share in the firm's success along with TLM's shareholders. Which one of the following bond features will help Phil fulfill his wish? 
 

70.

A U.S. Treasury bond that is quoted at 100:11 is selling: 
 

71.

Which of the following correctly describe U.S. Treasury bonds?

I. have a "tick" size of 1/32
II. highly liquid
III. quoted in dollars and cents
IV. quoted at the dirty price 
 

72.

A 6-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will the difference, if any, be between this bond's clean and dirty prices today? 
 

73.

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today? 
 

74.

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond? 
 

75.

Which one of the following statements is correct? 
 

76.

The Fisher Effect primarily emphasizes the effects of _____ on an investor's rate of return. 
 

77.

You are trying to compare the present values of two separate streams of cash flows which have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows? 
 

78.

Which of the following statements is correct concerning the term structure of interest rates?

I. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates.
II. The term structure of interest rates includes both an inflation premium and an interest rate risk premium.
III. The real rate of return has minimal, if any, affect on the slope of the term structure of interest rates.
IV. The term structure of interest rates and the time to maturity are always directly related. 
 

79.

Which two of the following factors cause the yields on a corporate bond to differ from those on a comparable Treasury security?

I. inflation risk
II. interest rate risk
III. taxability
IV. default risk 
 

80.

The bonds issued by Stainless Tubs bear an 8 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $952. What is the yield to maturity? 
 

81.

Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,062.50 per bond. The bonds mature in 16 years. What is the yield to maturity? 
 

82.

Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 16.5 years. The bonds have a par value of $1,000 and a market price of $944.30. Interest is paid semiannually. What is the yield to maturity? 
 

83.

Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000? 
 

84.

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent? 
 

85.

Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. 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? 
 

86.

Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $832. The yield to maturity is 16.28 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature? 
 

87.

Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percent. How many years is it until this bond matures? 
 

88.

You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? 
 

89.

Today, you want to sell a $1,000 face value zero coupon bond you currently own. The bond matures in 4.5 years. How much will you receive for your bond if the market yield to maturity is currently 5.33 percent? Ignore any accrued interest. 
 

90.

The zero coupon bonds of D&L Movers have a market price of $319.24, a face value of $1,000, and a yield to maturity of 8.45 percent. How many years is it until these bonds mature? 
 

91.

A 16-year, 4.5 percent coupon bond pays interest annually. 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? 
 

92.

The Corner Grocer has a 7-year, 6 percent annual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7 percent? 
 

93.

Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The bonds have a 5 percent coupon rate. What is the current yield on these bonds? 
 

94.

The outstanding bonds of The River Front Ferry carry a 6.5 percent coupon. The bonds have a face value of $1,000 and are currently quoted at 102.9. What is the current yield on these bonds? 
 

95.

The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054. What is the amount of the call premium on a $1,000 par value bond? 
 

96.

A corporate bond was quoted yesterday at 102.16 while today's quote is 102.19. What is the change in the value of a bond that has a face value of $5,000? 
 

97.

A 10-year, 4.5 percent, semiannual coupon bond issued by Tyler Rentals has a $1,000 face value. The bond is currently quoted at 98.7. What is the clean price of this bond if the next interest payment will occur 2 months from today? 
 

98.

A Treasury bond is quoted at a price of 105:10. What is the market price of this bond if the face value is $5,000? 
 

99.

A Treasury bond is quoted at a price of 101:14 with a current yield of 7.236 percent. What is the coupon rate? 
 

100.

A corporate bond is quoted at a price of 103.16 and carries a 5.20 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds? 
 

101.

A Treasury bond is quoted at a price of 106:23 with a 3.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds? 
 

102.

A Treasury bond is quoted as 99:18 asked and 99:09 bid. What is the bid-ask spread in dollars on a $5,000 face value bond? 
 

103.

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000? 
 

104.

A bond that pays interest annually yielded 7.47 percent last year. The inflation rate for the same period was 4 percent. What was the actual real rate of return on this bond for last year? 
 

105.

Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5.28 percent yield to maturity, and a face value of $1,000. The current rate of inflation is 4.1 percent. What is the real rate of return on these bonds? 
 

106.

The outstanding bonds of Winter Time Products provide a real rate of return of 5.6 percent. The current rate of inflation is 4.68 percent. What is the actual nominal rate of return on these bonds? 
 

107.

The yield to maturity on a bond is currently 8.46 percent. The real rate of return is 3.22 percent. What is the rate of inflation? 
 

108.

A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56. The bond matures in 22 years. What is the implicit interest, in dollars, for the first year of the bond's life? 
 

109.

Northern Warehouses wants to raise $11.4 million to expand its business. To accomplish this, it plans to sell 40-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 8.75 percent. What is the minimum number of bonds it must sell to raise the $11.4 million it needs? 
 

110.

You have won a contest and will receive $2,500 a year in real terms for the next 3 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 6.3 percent and the inflation rate is 3.1 percent. What are your winnings worth today? 
 

111.

You purchased an investment which will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 7.5 percent and the inflation rate is 2.9 percent. What is the present value of these payments? 
 

112.

Sylvan Trees has a 7 percent coupon bond on the market with ten years left to maturity. The bond makes annual payments and currently sells for $842.10. What is the yield-to-maturity? 
 

113.

Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01. At this price, the bonds yield 7.5 percent. What is the coupon rate? 
 

114.

Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments. The yield-to-maturity on these bonds is 9.2 percent. What is the current bond price? 
 

115.

Soo Lee Imports issued 17-year bonds 2 years ago at a coupon rate of 10.3 percent. The bonds make semiannual payments. These bonds currently sell for 102 percent of par value. What is the yield-to-maturity? 
 

116.

Bryceton, Inc. has bonds on the market with 13 years to maturity, a yield-to-maturity of 9.2 percent, and a current price of $802.30. The bonds make semiannual payments. What is the coupon rate? 
 

117.

Suppose the real rate is 9.5 percent and the inflation rate is 1.8 percent. What rate would you expect to see on a Treasury bill? 
 

118.

An investment offers a 10.5 percent total return over the coming year. Sam Bernanke thinks the total real return on this investment will be only 6.2 percent. What does Sam believe the inflation rate will be for the next year? 
 

119.

Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7 percent. If interest rates suddenly rise by 2 percent, what will the percentage change in the price of Bond T be? 
 

120.

Technical Sales, Inc. has 6.6 percent coupon bonds on the market with 9 years left to maturity. The bonds make semiannual payments and currently sell for 92.5 percent of par. What is the effective annual yield? 
 

121.

Bonner Metals wants to issue new 18-year bonds for some much-needed expansion projects. The company currently has 11 percent bonds on the market that sell for $1,459.51, make semiannual payments, and mature in 18 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par? 
 

122.

You purchase a bond with an invoice price of $1,460. The bond has a coupon rate of 7.5 percent, and there are 3 months to the next semiannual coupon date. What is the clean price of this bond? 
 

123.

Suppose the following bond quote for the Beta Company appears in the financial page of today's newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity on this bond?

   
 

124.

You want to have $1.04 million in real dollars in an account when you retire in 38 years. The nominal return on your investment is 8 percent and the inflation rate is 3.5 percent. What is the real amount you must deposit each year to achieve your goal? 
 

125.

The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today, you buy a 12 percent annual coupon bond for $1,000. The bond has 13 years to maturity. Two years from now, the yield-to-maturity has declined to 11 percent and you decide to sell. What is your holding period yield? 
 

126.

Define liquidity risk, default risk, and taxability risk and explain how these risks relate to bonds and bond yields. 
 

127.

Inflation has remained low for the past three years but you have come to the conclusion that trend is ending and inflation will increase significantly over the next 18 months. Assume you have reached this conclusion prior to other investors reaching the same conclusion. What adjustments should you make to your bond portfolio in light of your conclusions? 
 

128.

Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping. 
 

129.

Describe the relationships that exist between the coupon rate, the yield to maturity, and the current yield for both a discount bond and a premium bond.