Final Test Bank Docx Chapter 7 Valuing Bonds

Finance, 5e (Cornett)

Chapter 7 Valuing Bonds

1) Which of these statements is false?

A) Bonds are a more important capital sources than stocks for companies and governments.

B) Some bonds offer high potential for rewards and, consequently, higher risk.

C) The bond market is larger than the stock market.

D) Bonds are always less risky than stocks.

2) A bond's main characteristics include?

A) The date the principal will be paid

B) The par value of each bond

C) The coupon rate

D) All of the above

3) Bonds are issued by which of the following?

A) corporations

B) federal government or its agencies

C) state and local governments

D) All of these choices are correct.

4) Which of these statements answers why bonds are known as fixed income securities?

A) Many investors on fixed incomes buy them.

B) Investors know how much they will receive in interest payments.

C) Investors will not receive their principal when the bond's term is up.

D) All of the options.

5) The interest rate used to compute the bond's interest payment each year refers to:

A) Coupon rate

B) Par value

C) Bond price

D) None of the above

6) Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

A) call premium

B) maturity date

C) par or face value

D) time to maturity value

7) To compensate the bondholders for getting the bond called, the issuer pays which of the following?

A) call feature

B) call premium

C) coupon rate

D) original issue premium

8) Which of the following determines the dollar amount of interest paid to bondholders?

A) original issue discount

B) call premium

C) coupon rate

D) market rate

9) Bond prices are quoted in terms of which of the following?

A) original issue discount

B) percent of par value

C) coupon rate in dollars

D) market rate in dollars

10) Which of the following are main issues of bonds?

A) U.S. Treasury bonds

B) corporate bonds

C) municipal bonds

D) All of these choices are correct.

11) Which of the following statements is true?

A) Interest payments paid to U.S. Treasury bondholders are not taxed at the federal level.

B) Interest payments paid to corporate bondholders are not taxed at the federal level.

C) Interest payments paid to corporate bondholders are not taxed at the state level.

D) Interest payments paid to municipal bondholders are not taxed at the federal level, or by the state for which the bond is issued.

12) Which of the following issues Treasury Inflation Protected Securities (TIPS)?

A) U.S. Treasury

B) corporations

C) municipalities

D) nonprofits

13) Which of the following is true regarding U.S. Government Agency Securities?

A) They carry the federal government's full faith and credit guarantee.

B) They do not carry the federal government's full faith and credit guarantee.

C) They are insured by the FDIC.

D) They are treated the same as U.S. Treasury bonds with regard to the federal government's full faith and credit guarantee.

14) Which of the following is a debt security whose payments originate from other loans, such as credit card debt, auto loans, and home equity loans?

A) asset-backed securities

B) credit quality securities

C) debentures

D) junk bonds

15) Which of the following statement(s) below is true regarding asset-backed securities?

A) Investors receive interest and principle as borrowers pay off their consumer loans.

B) Give the investors a choice between the par value or a specified number of shares of stock.

C) Is one of the fastest growing areas in the financial services sector.

D) Both a and c are true.

16) Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

A) the amount of uncertainty about whether the company will be able to make all the payments.

B) the term of the loan.

C) the level of interest rates in the overall economy at the time.

D) All of these choices are correct.

17) Which of the following bonds makes no interest payments?

A) a bond whose coupon rate is equal to the market interest rates

B) a bond whose coupon rates are greater than market interest rates

C) a bond whose coupon rates are less than the market interest rates

D) zero-coupon bond

18) Which of the following is a true statement?

A) If interest rates fall, U.S. Treasury bonds will have decreasing values.

B) If interest rates fall, corporate bonds will have decreasing values.

C) If interest rates fall, no bonds will enjoy rising values.

D) If interest rates fall, all bonds will enjoy rising values.

19) Which of the following statements about interest rate risk is NOT true?

A) Long-term bondholders do not experience much interest rate risk.

B) Interest rate risk does not affect all bonds the same.

C) Bondholders can experience distinct gains and losses during periods when interest rates change quickly.

D) None of the above.

20) Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

A) credit quality risk

B) interest rate risk

C) liquidity rate risk

D) reinvestment rate risk

21) Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate?

A) credit quality risk

B) interest rate risk

C) liquidity rate risk

D) reinvestment rate risk

22) Which of the following terms is a comparison of market yields on securities, assuming all characteristics except maturity are the same?

A) credit quality risk

B) interest rate risk

C) liquidity of interest rate risk

D) term structure of interest rates

23) A bond's current yield is defined as

A) the bond's annual coupon rate divided by the bond's par value.

B) the bond's annual coupon rate divided by the market interest rate.

C) the bond's annual coupon rate divided by the bond's current market price.

D) the bond's annual coupon rate divided by the bond's original issue price.

24) Which of the following is an important advantage to the issuer of a bond with a call provision?

A) They are able to avoid interest rate risk.

B) They are able to avoid reinvestment rate risk.

C) They are able to reduce their credit risk.

D) They allow for refinancing opportunities.

25) Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

A) They are able to avoid interest rate risk.

B) They are able to avoid reinvestment rate risk.

C) They are able to offer reduced credit risk as they are backed by the federal government.

D) They are tax exempt—at least at the federal level.

26) Which Standard & Poor's Bond credit rating does the following description belong to?

"Currently highly vulnerable to non-payment."

A) Highly speculative CCC

B) Most speculative CC

C) Imminent default C

D) Default D

27) Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

A) credit quality risk

B) interest rate risk

C) liquidity of interest rate risk

D) term structure of interest rates

28) Which of the following bonds carry significant risk that the issuer will not make current or future payments?

A) credit quality risk bonds

B) interest rate risk bonds

C) liquidity rate risk bonds

D) junk bonds

29) Determine the semi-annual interest payment for the following three bonds: 5.5 percent coupon corporate bond, 6.45 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A) $5.50, $6.45, $0, respectively

B) $27.50, $32.25, $0, respectively

C) $27.50, $32.25, $100, respectively

D) $55.00, $64.50, $0, respectively

30) Determine the semi-annual interest payment for the following three bonds: 2.5 percent coupon corporate bond, 3.15 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A) $2.50, $3.15, $0, respectively

B) $12.50, $15.75, $0, respectively

C) $12.50, $15.75, $100, respectively

D) $25.00, $31.50, $0, respectively

31) Determine the semi-annual interest payment for the following three bonds: 4 percent coupon corporate bond, 4.75 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 15 years. (Assume a $1,000 par value.)

A) $4.00, $4.75, $0, respectively

B) $20.00, $23.75, $0, respectively

C) $20.00, $23.75, $150, respectively

D) $40.00, $47.50, $0, respectively

32) A bond issued by a corporation on June 15, 2007, is scheduled to mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity? (Assume annual interest payments.)

A) 1 year, 6 months

B) 8 years

C) 8 years, 6 months

D) 10 years

33) A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

A) 9 years

B) 10 years

C) 19 years

D) 20 years

34) A bond issued by a corporation on October 1, 2007, is scheduled to mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

A) 2 years

B) 50 years

C) 998 years

D) 100 years

35) A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)

A) $55

B) $220

C) $1,000

D) $1,055

36) A 6 percent corporate coupon bond is callable in 10 years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

A) $60

B) $600

C) $1,000

D) $1,060

37) A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

A) $45

B) $225

C) $1,000

D) $1,045

38) A 2.5 percent TIPS has an original reference CPI of 170.4. If the current CPI is 205.7, what is the current interest payment and par value of the TIPS? (Assume semiannual interest payments and $1,000 par value.)

A) $7.16, $1,000, respectively

B) $15.09, $1,000, respectively

C) $7.16, $1,207.16, respectively

D) $15.09, $1,207.16, respectively

39) A 3.75 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semiannual interest payments and $1,000 par value.)

A) $18.75, $1,000, respectively

B) $37.50, $1,000, respectively

C) $22.15, $1,181.46, respectively

D) $37.50, $1,181.46, respectively

40) Consider the following three bond quotes; a Treasury note quoted at 87.25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

A) $872.50, $1,000, $1,000, respectively

B) $1,000, $1,000, $1,000, respectively

C) $872.50, $1,024.20, $5,072.50, respectively

D) $1,000, $1,024.20, $1,001.45, respectively

41) Consider the following three bond quotes; a Treasury note quoted at 102.30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

A) $1,002.30, $1,000, $1,000, respectively

B) $1,000, $1,000, $5,000, respectively

C) $1,002.30, $994.50, $5,012.25 respectively

D) $1,023.00, $994.50, $5,122.50, respectively

42) Calculate the price of a zero-coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semiannual compounding and $1,000 par value.)

A) $553.68

B) $558.66

C) $940.00

D) $1,000.00

43) Calculate the price of a zero-coupon bond that matures in five years if the market interest rate is 7.50 percent. (Assume semiannual compounding and $1,000 par value.)

A) $692.04

B) $696.57

C) $962.50

D) $1,000.00

44) What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

A) 5.9 percent

B) 6.0 percent

C) 6.1 percent

D) 10.2 percent

45) What's the current yield of a 5.75 percent coupon corporate bond quoted at a price of 103.05?

A) 5.58 percent

B) 5.75 percent

C) 5.93 percent

D) 17.54 percent

46) What's the current yield of an 8.15 percent coupon corporate bond quoted at a price of 94.30?

A) 4.30 percent

B) 8.01 percent

C) 8.15 percent

D) 8.64 percent

47) What's the taxable equivalent yield on a municipal bond with a yield to maturity of 3.9 percent for an investor in the 35 percent marginal tax bracket?

A) 1.09%

B) 3.90%

C) 6.00%

D) 11.14%

48) What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?

A) 1.76 percent

B) 4.50 percent

C) 7.38 percent

D) 11.54 percent

49) Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

A) JM bond, TC bond, B&O bond, IB bond

B) IB bond, B&O bond, TC bond, JM bond

C) TC bond, B&O bond, IB bond, JM bond

D) JM bond, IB bond, B&O bond, TC bond

50) Consider a 2.75 percent TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars this year?

A) $5.10

B) $11.20

C) $16.30

D) $27.69

51) Consider a 3.25 percent TIPS with an issue CPI reference of 186.7. At the beginning of this year, the CPI was 197.5 and was at 202.4 at the end of the year. What was the capital gain of the TIPS in dollars? (Assume semi-annual interest payments and $1,000 par value.)

A) $4.90

B) $10.80

C) $15.70

D) $26.25

52) Consider a 3.75 percent TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semiannual interest payments and $1,000 par value.)

A) 3.75 percent

B) 4.62 percent

C) 7.10 percent

D) 8.80 percent

53) Compute the price of a 4.75 percent coupon bond with 15 years left to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

A) discount

B) premium

54) Compute the price of a 6 percent coupon bond with 10 years left to maturity and a market interest rate of 8.75 percent. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

A) discount

B) premium

55) A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semiannual interest payments and $1,000 par value.)

A) $25.00

B) $21.55

C) $53.48

D) $80.37

56) A 5.5 percent coupon bond with 18 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 5.75 percent. What is the change in price the bond will experience in dollars? (Assume semiannual interest payments and $1,000 par value.)

A) $25.00

B) $26.89

C) $53.48

D) $80.37

57) A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semiannually and par value is $1,000.)

A) 3.00 percent

B) 3.09 percent

C) 5.75 percent

D) 6.00 percent

58) A 4.25 percent coupon bond with eight years left to maturity is offered for sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are paid semiannually and par value is $1,000.)

A) 2.25 percent

B) 2.36 percent

C) 4.25 percent

D) 4.50 percent

59) A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $1,000.)

A) 3.41 percent

B) 3.45 percent

C) 3.51 percent

D) 6.90 percent

60) A 4.75 percent coupon bond with 12 years left to maturity can be called in two years. The call premium is one year of coupon payments. It is offered for sale at $1037.35. What is the yield to call of the bond? (Assume that interest payments are paid semiannually and par value is $1,000.)

A) 4.60 percent

B) 4.68 percent

C) 4.75 percent

D) 5.05 percent

61) A client in the 33 percent marginal tax bracket is comparing a municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that offers a 6.25 percent yield. Which bond will give the client more profit after taxes?

A) the municipal bond.

B) the corporate bond.

C) Both give the client equal profits after taxes.

D) There is not enough information given to determine the answer.

62) A client in the 28 percent marginal tax bracket is comparing a municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?

A) the municipal bond.

B) the corporate bond.

C) Both give the client equal profits after taxes.

D) There is not enough information given to determine the answer.

63) A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity and a similar-risk corporate bond that offers a 5.10 percent yield. Which bond will give the client more profit after taxes?

A) the municipal bond.

B) the corporate bond.

C) Both give the client equal profits after taxes.

D) There is not enough information given to determine answer.

64) Reconsider a 3.25 percent TIPS that was issued with CPI reference of 186.7. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.5. For the interest in the middle of the year, the CPI was 201.1. Now, at the end of the year, the CPI is 202.4 and the interest payment has been made. What is the total return of the TIPS in percentage terms for the year? (Assume semiannual interest payments and $1,000 par value.)

A) 1.6 percent

B) 2.4 percent

C) 5.8 percent

D) 9.1 percent

65) A 6.75 percent coupon bond with 10 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.65 percent. If this occurs, what would be the total return of the bond in percent? (Assume semiannual interest payments and $1,000 par value.)

A) 5.5 percent

B) 5.6 percent

C) 6.6 percent

D) 6.7 percent

66) A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in percent? (Assume semiannual interest payments and $1,000 par value.)

A) 3.5 percent

B) 5.3 percent

C) 7.0 percent

D) 7.15 percent

67) A 3.25 percent coupon municipal bond has 12 years left to maturity and has a price quote of 98.75. The bond can be called in five years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 35 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $5,000.)

A) 3.38 percent

B) 5.00 percent

C) 5.20 percent

D) 10.12 percent

68) A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $5,000.)

A) 4.5 percent

B) 4.78 percent

C) 7.13 percent

D) 14.48 percent

69) A corporate bond with a 5.75 percent coupon has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the bond's price in dollars? (Assume interest payments are paid semiannually and a par value of $1,000.)

A) decrease $22.25

B) increase $22.25

C) decrease $23.72

D) increase $23.72

70) Which of the following was the catalyst for the recent financial crisis?

A) corruption in the investment banking industry

B) widespread layoffs due to illegal alien hiring

C) defaults on subprime mortgages

D) All of these choices are correct.

71) Which of the following is NOT true about EE savings bonds?

A) Interest payments are received annually but are tax deductible.

B) About one in six Americans owns a savings bond.

C) These are tax deferred investments.

D) Paper bonds sell for one-half of their face value.

72) If Zeus Energy bonds are upgraded from BBB− to BBB+, which of the following statements is true?

A) The current bond price will decrease and interest rates on new bonds issued will increase.

B) Interest rates required on new bonds issued will increase.

C) The current bond price will decrease.

D) The current bond price will increase and interest rates on new bonds issued will decrease.

73) A 6.5 percent coupon bond with 12 years left to maturity can be called in four years. The call premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield to call of the bond? (Assume interest payments are paid semiannually and par value is $1,000.)

A) 1.48 percent

B) 2.96 percent

C) 6.5 percent

D) 7.23 percent

74) A 7.5 percent coupon bond with 16 years left to maturity is offered for sale at $834.92. What yield to maturity is the bond offering? (Assume interest payments are paid semiannually and par value is $1,000.)

A) 4.77 percent

B) 7.5 percent

C) 9.54 percent

D) 10.34 percent

75) An 8 percent coupon bond with 15 years to maturity is priced to offer a 9 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.5 percent. What is the change in price the bond will experience in dollars? (Assume annual interest payments and par value is $1,000.)

A) $163.92

B) $176.15

C) $198.45

D) $215.82

76) Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent. (Assume interest payments are semiannual and par value is $1,000.) Is this a discount or premium bond?

A) $982.03; discount

B) $1,010.59; discount

C) $1,220.93; premium

D) $1,315.62; premium

77) Calculate the price of a 6.5 percent coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond?

A) $685.93; discount

B) $791.03; discount

C) $1,051.83; premium

D) $1,176.31; premium

78) Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)

A) $90.29

B) $195.62

C) $1,195.62

D) $995.62

79) What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4 percent for an investor in the 28 percent tax bracket?

A) 2.88 percent

B) 3.87 percent

C) 4.51 percent

D) 5.56 percent

80) Rank from lowest credit risk to highest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 5.55 percent, IBM bond with yield of 7.95 percent, Trump Casino bond with a yield of 9.15 percent and Banc Ono bond with a yield of 6.12 percent.

A) Treasury, Trump Casino, Banc Ono, IBM

B) Trump Casino, IBM, Banc Ono, Treasury

C) Treasury, Banc Ono, IBM, Trump Casino

D) Trump Casino, Banc Ono, IBM, Treasury

81) Consider a 4.5 percent TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS in dollars?

A) $32.73

B) $46.92

C) $62.49

D) $75.85

82) Rank from highest credit risk to lowest credit risk the following bonds, with the same time to maturity, by their yield to maturity: Treasury bond with yield of 6.55 percent, IBM bond with yield of 10.95 percent, Trump Casino bond with a yield of 9.15 percent, and Banc Ono bond with a yield of 9.46 percent.

A) Treasury, Trump Casino, Banc Ono, IBM

B) Banc Ono, Trump Casino, IBM, Treasury

C) Trump Casino, Treasury, Banc Ono, IBM

D) IBM, Banc Ono, Trump Casino, Treasury

83) Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal bond has a par value of $5,000, what is the price of the bond in dollars?

A) $5,089.06

B) $5,050.19

C) $5,062.50

D) $5,109.75

84) A 3.75 percent TIPS has an original reference CPI of 183.9. If the current CPI is 214.7, what is the current interest payment? (Assume semiannual interest payments and a par value of $1,000.)

A) $43.78

B) $37.50

C) $21.89

D) $18.75

85) A 5.125 percent TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is the par value of the TIPS?

A) $981.75

B) $1,018.60

C) $992.75

D) $1,042.95

86) A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity. You believe that in one year, the yield to maturity will be 8 percent. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

A) $97.75

B) $101.50

C) $129.25

D) $137.75

87) A 6.75 percent coupon bond with 13 years left to maturity can be called in two years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semiannually and par value is $1,000.

A) 12.14 percent

B) 7.27 percent

C) 14.54 percent

D) 8.29 percent

88) A 5.5 percent coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in nine years. The call premium is one year of coupon payments. Compute the bond's current yield. Assume interest payments are paid semiannually and a par value of $5,000.

A) 5.94 percent

B) 11.89 percent

C) 12.19 percent

D) 13.14 percent

89) A 5.5 percent coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in nine years. The call premium is one year of coupon payments. Compute the bond's yield to maturity and yield to call. Assume interest payments are paid semiannually and a par value of $5,000.

A) YTM = 6.91 percent; YTC = 7.52 percent

B) YTM = 6.24 percent; YTC = 7.08 percent

C) YTM = 5.78 percent; YTC = 6.61 percent

D) YTM = 5.92 percent; YTC = 6.85 percent

90) An 8 percent coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in six years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semiannually and a par value of $5,000.

A) 4.68 percent; Yes, the bond will be called.

B) 9.36 percent; Yes, the bond will be called.

C) 9.36 percent; No, the bond will not be called.

D) 10.71 percent; No, the bond will not be called.

91) An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 102.0. The bond can be called in 6 years. The call premium is one year of coupon payments. Compute the bond's yield to call and determine if the bond will be called. Assume interest payments are paid semiannually and a par value of $5,000.

A) 4.31%; Yes, the bond will be called.

B) 8.62%; Yes, the bond will be called.

C) 8.62%; No, the bond will not be called.

D) 11.21%; No the bond will not be called.

92) A corporate bond with a 5 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9 percent. What will be the change in the bond's price in dollars? Assume interest payments are paid semiannually and par value is $1,000.

A) −$43.61

B) −$51.07

C) −$62.43

D) −$56.31

93) A corporate bond with an 8.5 percent coupon has 10 years left to maturity. It has had a credit rating of A and a yield to maturity of 10 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BBB. The new appropriate discount rate will be 11.5 percent. What will be the change in the bond's price in dollars? Assume interest payments are paid semiannually and par value is $1,000.

A) −$82.13

B) −$95.19

C) −$101.37

D) −$69.85

94) Junk bonds are those bonds with a credit rating of

A) BB and lower.

B) B and lower.

C) BBB and lower.

D) None of these choices are correct.

95) Which of the following are backed only by the reputation and financial stability of the corporation?

A) debentures

B) unsecured bonds

C) Both debentures and unsecured bonds

D) None of these choices are correct.

96) Investment grade bonds include those bonds with ratings

A) from AAA to BB.

B) from AAA to BBB.

C) from AAA to B.

D) from AAA to A.

97) Which of the following statements is correct?

A) Yield spreads between bonds of different quality remain static over time.

B) Yield spreads are set by the Securities Exchange Commission.

C) Yield spreads between bonds of different quality change over time.

D) None of these choices are correct.

98) Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.25 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent tax bracket, which bond should she select and why?

A) Sally should select Bond A because its interest income is not taxable.

B) Sally should select Bond B because it has lower risk.

C) Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B.

D) Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

99) Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.75 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

A) Sally should select Bond A because its interest income is not taxable.

B) Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.

C) Sally should select Bond A because its TEY is greater than the yield of Bond B.

D) Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B.

100) Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 7.20 percent. Bond B is a corporate bond that yields 10.00 percent. If Sally is in the 28 percent tax bracket, which bond should she select and why?

A) Sally should select Bond A because its interest income is not taxable.

B) Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond A equals the yield of Bond B.

C) Sally should select Bond A because its taxable equivalent yield is greater than the yield of Bond B.

D) Sally should select Bond B because the taxable equivalent yield of Bond A is less than the yield of Bond B.

101) A bond with 14 years to maturity is selling for $1,070 and has a yield to maturity of 10.06 percent. If this bond pays its coupon payments semiannually and par value is $1,000, what is the bond's annual coupon rate?

A) 5.50 percent

B) 8.19 percent

C) 9.57 percent

D) 11.00 percent

102) A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12 percent. If this bond pays its coupon payments semiannually and par value is $1,000, what is the bond's annual coupon rate?

A) 7.45 percent

B) 8.03 percent

C) 9.39 percent

D) 10.82 percent

103) All of the following items would need to be included in the bond's indenture agreement EXCEPT

A) the coupon rate.

B) the call feature.

C) the credit rating.

D) steps that the bondholder can take in the event that the issuer fails to pay the interest or principal.

104) Which of the following is not a correct statement?

A) Treasury inflation-protected securities have fixed coupon rates.

B) The federal government adjusts the par value of Treasury inflation-protected securities at the rate of inflation.

C) At maturity, an investor in Treasury inflation-protected securities receives an inflation-adjusted principal amount.

D) All of these choices are correct.

105) Which of the following would NOT be an example of an agency bond?

A) Federal Home Loan Bank bond

B) Student Loan Marketing Association bond

C) Fannie Mae bond

D) Treasury bills

106) Which of the following statements is correct?

A) Bonds with short-term maturities will have very little interest rate risk.

B) Bonds with lower coupon payments will have very little interest rate risk.

C) Bonds with higher credit ratings will have very little interest rate risk.

D) All of these choices are correct.

107) Which of the following statements is correct?

A) Bonds with lower coupons have lower interest rate risk.

B) Long-term bonds have more interest rate risk than short-term bonds.

C) Short-term bonds with high coupons have high interest rate risk.

D) Zero-coupon bonds do not have interest rate risk.

108) Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1 percent?

A) 2-year, 5 percent coupon bond

B) 30-year, 10 percent coupon bond

C) 10-year, zero-coupon

D) 30-year, zero-coupon

109) Rank the following bonds, from highest to lowest interest rate risk: 2-year 6 percent coupon bond, 2-year 8 percent coupon bond, 30-year 5 percent coupon bond, 30-year, zero-coupon bond.

A) 30-year, zero-coupon bond, 30-year 5 percent coupon bond, 2-year 8 percent coupon bond, 2-year 6 percent coupon bond

B) 2-year 8 percent coupon bond, 2-year 6 percent coupon bond, 30-year 5 percent coupon bond, 30-year zero-coupon bond

C) 30-year, zero-coupon bond, 30-year 5 percent coupon bond, 2-year 6 percent coupon bond, 2-year 8 percent coupon bond

D) 30-year, 5 percent coupon bond, 30-year zero-coupon bond, 2-year 8 percent coupon bond, 2-year 6 percent coupon bond

110) Which of the following statements is correct?

A) All else the same, an investor will require less return to invest in a callable bond than one that is not callable.

B) All else the same, an investor will require more return to invest in a callable bond than one that is not callable.

C) The call feature does not impact the return that investors demand.

D) We would need to know the current level of interest rates to answer this question.

111) Under which conditions will an investor demand a larger return (yield) on a bond?

A) The bond issue is upgraded from A to AA.

B) The bond issue is downgraded from A to BBB.

C) Interest rates decrease due to decline in inflation.

D) None of the conditions will cause an increase in the bond's yield.

112) Which of the following statements is correct?

A) There is an inverse relationship between bond prices and bond yields.

B) There is a positive relationship between bond prices and bond yields.

C) There is no relationship between bond prices and bond yields.

D) The relationship between bond prices and bond yields is dependent on the market interest rate.

113) If a bond is selling at a premium, then

A) its coupon rate must be greater than its yield.

B) its coupon rate must be less than its yield.

C) its coupon rate must be equal to its yield.

D) its coupon rate must be equal to one-half the yield to maturity for a 5-year bond.

114) The bond's annual coupon rate divided by its market price is referred to as the

A) yield to call.

B) yield to maturity.

C) current yield.

D) term structure of interest rates.

115) Possible shapes for the yield curve include all of the following EXCEPT

A) humped.

B) downward-sloping.

C) flat.

D) All of these choices are correct.

116) Possible shapes for the yield curve include all of the following EXCEPT

A) upward-sloping.

B) humped.

C) horizontal line.

D) vertical line.

117) If a bond is selling at a discount, which of the following statements is correct?

A) The yield to maturity must be greater than the coupon rate.

B) The coupon rate must be greater than the yield to maturity.

C) The bond must have a low bond rating.

D) All of these choices are correct.

118) If a bond is selling at par value, which of the following statements is correct?

A) The current yield must equal the coupon rate.

B) The current yield must equal the yield to maturity.

C) Both of these statements are correct.

D) None of these choices are correct.

119) To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued

A) trust securities.

B) mortgage-backed securities.

C) current yield securities.

D) treasury inflation-protected securities.

120) Under what conditions is a bond likely to be called?

A) The firm is in financial duress.

B) The firm is planning a massive expansion and needs to raise a lot of capital.

C) Interest rates have significantly declined.

D) The firm wants to increase its debt ratio.

121) A 30-year bond with an 8 percent coupon has a yield to maturity of 6 percent. The bond could be called in seven years and if called would generate a yield to call of 5.75 percent. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.

A) $219.73

B) $152.64

C) $106.29

D) $301.76

122) A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are made semiannually and par value is $1,000.

A) $19.73

B) $81.87

C) $41.20

D) $66.03

123) A 5 percent coupon bond has 10 years to maturity and could be called in two years. If the bond is called, investors will earn 6.2 percent. The call premium is one year of coupon payments. If coupon payments are made semiannually and par value is $1,000, what is the bond's yield to maturity?

A) 2.36 percent

B) 4.72 percent

C) 5.18 percent

D) 6.49 percent

124) A 7 percent coupon bond has 10 years to maturity and could be called in three years. If the bond is called, investors will earn 5.5 percent. The call premium is one year of coupon payments. If coupon payments are made semiannually and par value is $1,000, what is the bond's yield to maturity?

A) 2.84 percent

B) 3.17 percent

C) 5.38 percent

D) 5.67 percent

125) A 10 percent coupon bond has 15 years to maturity and could be called in two years. If the bond is called, investors will earn 4 percent. The call premium is one year of coupon payments. If coupon payments are made annually and par value is $1,000, what is the bond's yield to maturity?

A) 6.19 percent

B) 6.82 percent

C) 7.65 percent

D) 7.98 percent

126) Which of the following countries became the first to miss an International Monetary Fund loan repayment?

A) Argentina

B) Greece

C) Japan

D) Mexico

127) A 3.25 percent TIPS has an original reference CPI of 194.1. If the current CPI is 210.3, what is the current interest payment? (Assume semiannual interest payments and a par value of $1,000.)

A) $15.00

B) $16.25

C) $17.61

D) $31.54

128) A 2.95 percent TIPS has an original reference CPI of 180.2. If the current CPI is 205.1, what is the current interest payment and par value of the TIPS? (Assume semiannual interest payments and $1,000 par value.)

A) $16.79, $878.60, respectively

B) $29.50, $1,000.00, respectively

C) $16.79, $1,138.18, respectively

D) $29.50, $1,138.18, respectively

129) A 4.15 percent TIPS has an original reference CPI of 182.1. If the current CPI is 188.3, what is the par value of the TIPS?

A) $1,034.05

B) $1,004.75

C) $1,000.00

D) $967.07

130) Reconsider a 2.75 percent TIPS that was issued with CPI reference of 191.7. The bond is purchased at the beginning of the year (after the interest payment), when the CPI was 197.5. For the interest in the middle of the year, the CPI was 205.2. Now, at the end of the year, the CPI is 204.4 and the interest payment has been made. What is the total return of the TIPS in percentage terms for the year? (Assume semiannual interest payments and $1,000 par value.)

A) 2.75 percent

B) 5.60 percent

C) 6.35 percent

D) 6.80 percent

131) Which of the following is another name for junk bonds?

A) high-risk bonds

B) high-price bonds

C) high-yield bonds

D) None of these choices are correct.

132) A 4.25 percent coupon municipal bond has 10 years left to maturity and has a price quote of 108.75. The bond can be called in five years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 28 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $1,000.)

A) 2.24 percent

B) 4.47 percent

C) 5.75 percent

D) 5.90 percent

133) A 3.5 percent coupon municipal bond has 8 years left to maturity and has a price quote of 102.75. The bond can be called in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semiannually and a par value of $1,000.)

A) 2.35 percent

B) 3.50 percent

C) 4.64 percent

D) 9.75 percent

134) Which of the following is used to compute bond cash interest payments?

A) current yield

B) yield to maturity

C) coupon rate

D) None of these choices are correct.

135) Many bonds are not callable, but for those that are, which of following is a common feature?

A) called any time after 2 years of issuance

B) called any time after 2 years from the time an investor buys the bond

C) called any time after 10 years of issuance

D) called any time after 10 years from the time an investor buys the bond