Valuing Bonds Ch.3 Exam Questions

Principles of Corporate Finance, 13e (Brealey)

Chapter 3 Valuing Bonds

1) The following entities issue bonds to engage in long-term borrowing EXCEPT:

A) the federal government.

B) state and local governments.

C) corporations.

D) individuals.

2) The type of bonds where the identities of bond owners are recorded and the coupon interest payments are sent automatically are called

A) bearer bonds.

B) government bonds.

C) registered bonds.

D) recorded bonds.

3) A government bond issued in France has a coupon rate of 5 percent, a face value of 100 euros, and matures in five years. The bond pays annual interest payments. Calculate the price of the bond (in euros) if the yield to maturity is 3.5 percent.

A) 100.00

B) 106.77

C) 106.33

D) 105.00

4) Generally, a bond can be valued as a package of

A) annuity and perpetuity only.

B) perpetuity and single payment only.

C) annuity and single payment only.

D) annuity, perpetuity, and single payment.

5) A government bond issued in France has a coupon rate of 5 percent, a face value of 100.00 euros, and matures in five years. The bond pays annual interest payments. Calculate the yield to maturity of the bond (in euros) if the price of the bond is 106.00 euros.

A) 5.00%

B) 3.80%

C) 3.66%

D) 6.00%

6) You buy a 12-year 10 percent annual coupon bond at par value, $1,000. You sell the bond three years later for $1,100. What is your rate of return over this three-year period?

A) 40 percent

B) 10 percent

C) 20 percent

D) 30 percent

7) If a bond pays interest semiannually, then it pays interest

A) once per year.

B) every six months.

C) every three months.

D) every two years.

8) A three-year bond with 10 percent coupon rate and $1,000 face value yields 8 percent. Assuming annual coupon payments, calculate the price of the bond.

A) $857.96

B) $951.96

C) $1,000.00

D) $1,051.54

9) A five-year treasury bond with a coupon rate of 8 percent has a face value of $1,000. What is the semiannual interest payment?

A) $80

B) $40

C) $100

D) $50

10) A three-year bond has an 8.0 percent coupon rate and a $1,000 face value. If the yield to maturity on the bond is 10 percent, calculate the price of the bond assuming that the bond makes semiannual coupon payments.

A) $857.96

B) $949.24

C) $1,057.54

D) $1,000.00

11) A four-year bond has an 8 percent coupon rate and a face value of $1,000. If the current price of the bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest payments).

A) 8 percent

B) 10 percent

C) 12 percent

D) 6 percent

12) A five-year bond with a 10 percent coupon rate and $1,000 face value is selling for $1,123. Calculate the yield to maturity on the bond assuming annual interest payments.

A) 10.0 percent

B) 8.9 percent

C) 7.0 percent

D) 5.0 percent

13) Which of the following statements about the relationship between interest rates and bond prices is true?

A) There is an inverse relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).

B) There is an inverse relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).

C) There is a direct relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).

D) There is a direct relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).

14) Consider a bond with a face value of $1,000, an annual coupon rate of 6 percent, a yield to maturity of 8 percent, and 10 years to maturity. This bond's duration is

A) 8.7 years.

B) 7.6 years.

C) 10.0 years.

D) 6.5 years.

15) A bond has a face value of $1,000, an annual coupon rate of 7 percent, yield to maturity of 10 percent, and 20 years to maturity. The bond's duration is

A) 10.0 years.

B) 7.4 years.

C) 20.0 years.

D) 12.6 years.

16) A bond has a face value of $1,000, a coupon rate of 0 percent, yield to maturity of 9 percent, and 10 years to maturity. This bond's duration is

A) 6.7 years.

B) 7.5 years.

C) 9.6 years.

D) 10.0 years.

17) A bond with duration of 10 years has a yield to maturity of 10 percent. This bond's volatility (modified duration) is

A) 9.09 percent.

B) 6.80 percent.

C) 14.6 percent.

D) 10.00 percent.

18) A bond with duration of 5.7 years has a yield to maturity of 9 percent. The bond's volatility (modified duration) is

A) 1.9 percent.

B) 5.2 percent.

C) 5.7 percent.

D) 9.0 percent.

19) If a bond's volatility is 10.00 percent and the interest rate goes down by 0.75 percent (points), then the price of the bond 

A) decreases by 10.00 percent.

B) decreases by 7.50 percent.

C) increases by 7.50 percent.

D) increases by 0.75 percent.

20) If a bond's volatility is 5.0 percent and its yield to maturity changes by 0.5 percent (points), then the price of the bond 

A) changes by 5.0 percent.

B) changes by 2.5 percent.

C) changes by 7.5 percent.

D) will not change.

21) The volatility of a bond is given by

A) duration/(1 + yield) only.

B) slope of the curve relating the bond price to the interest rate only.

C) yield to maturity only.

D) duration/(1 + yield) and slope of the curve relating the bond price to the interest rate only.

22) One can best describe the term structure of interest rates as the relationship between

A) spot interest rates and bond prices.

B) spot interest rates and stock prices.

C) spot interest rates and time.

D) yields of coupon bonds and their maturity.

23) The interest rate represented by "r2" is the

A) spot rate on a one-year investment.

B) spot rate on a two-year investment.

C) expected spot rate two years from today.

D) expected spot rate one year from today.

24) If the nominal interest rate per year is 10 percent and the inflation rate is 4 percent, what is the real rate of interest?

A) 10.0 percent

B) 4.1 percent

C) 5.8 percent

D) 14.0 percent

25) Mr. X invests $1,000 at a 10 percent nominal rate for one year. If the inflation rate is 4 percent, what is the real value of the investment at the end of one year?

A) $1,100

B) $1,000

C) $1,058

D) $1,040

26) Which bond is more sensitive to an interest rate change of 0.75 percent?

Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000.

Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000.

A) Bond A

B) Bond B

C) Both are equally sensitive.

D) Cannot be determined

27) As CFO of your corporation, you would prefer (all else equal) to see the price of your corporation's bonds

A) increase, indicating that bond investors view your firm as less risky.

B) decrease, indicating that bond investors view your firm as less risky.

C) increase, indicating that bond investors view your firm as more willing to take risks.

D) decrease, indicating that bond investors view your firm as more willing to take risks.

28) Which of the following bonds has the longest duration?

A) 5-year coupon bond

B) 5-year, zero-coupon bond

C) 10-year coupon bond

D) 10-year, zero-coupon bond

29) Which of the following bonds has the greatest volatility?

A) 5-year coupon bond

B) 5-year, zero-coupon bond

C) 10-year coupon bond

D) 10-year, zero-coupon bond

30) The yield to maturity on a bond is really its internal rate of return.

31) In the United States, most bonds make coupon payments annually.

32) The duration of any bond is the same as its maturity.

33) The duration of a zero-coupon bond is the same as its maturity.

34) The longer a bond's duration, the greater its volatility.

35) The term structure of interest rates determines the relationship between yield to maturity and maturity.

36) If the term structure of interest rates is flat, then the 9-year spot interest rate equals the 10-year spot interest rate.

37) Short-term and long-term interest rates always move in parallel.

38) The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall.

39) (1 + rnominal) = (1 + rreal)(1 + inflation rate).

40) U.S. Treasury bonds have almost zero default risk but are subject to inflation risk. 

41) Inflation-indexed bonds were almost unknown in the United States before 1997.

42) The U.S. Treasury issues inflation-indexed bonds known as TIPS.

43) Long-term spot rates are usually higher than short-term spot rates.

44) Once a bond defaults, bondholders can no longer receive any residual payment from the bond.

45) Corporate bond yields are generally higher than government bond yields for bonds having the same coupon rate and maturity.

46) The spread of junk bond yields, over that of United States Treasuries, is generally lower than the spread of investment-grade bonds.

47) Consider the impact of inflation risk on the term structure of interest rates. If investors become more wary of inflation, one would expect to observe a steeper, more upwards sloping, term structure of interest rates.

48) For many years, real rates of interest tended to fluctuate more wildly than nominal rates of interest.

49) Two bonds have the same maturity, risk rating, and face value, but have different coupon rates. The bond with a lower coupon rate will have a longer duration.

50) A United States Treasury "strip" is a zero-coupon bond.

51) The law of one price states that the same commodity must sell at the same price in a well-functioning market.

52) From the investor's perspective, briefly describe the cash flows associated with a bond.

53) Briefly explain the term yield to maturity.

54) What is the relationship between interest rates and bond prices?

55) Discuss the concept of duration.

56) Briefly discuss the concept of volatility.

57) Briefly explain what is meant by the term structure of interest rates.

58) Briefly explain the expectations theory.

59) What is the relationship between real and nominal rates of interest?

60) Define the term real interest rate.

61) What are TIPs? Briefly explain.

62) Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.