Question 1

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

Accepted Answer

A)   increases at an increasing rate.
B)   increases at a decreasing rate.
C)   increases at a constant rate.
D)   decreases at an increasing rate.
E)   decreases at a decreasing rate.F) C) and E)
G) A) and D)

Question 2

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

Accepted Answer

A)   annual percentage rates.
B)   stripped rates.
C)   effective annual rates.
D)   real rates.
E)   nominal rates.F) B) and C)
G) B) and E)

Question 3

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

Accepted Answer

A)   3.5 percent.
B)   greater than 3.5 percent but less than 7 percent.
C)   7 percent.
D)   greater than 7 percent.
E)   less than 3.5 percent.F) B) and E)
G) A) and E)

Question 4

A bond is quoted at a price of $1,011. This price is referred to as the:

Accepted Answer

A)   call price.
B)   face value.
C)   clean price.
D)   dirty price.
E)   maturity price.F) None of the above
G) A) and E)

Question 5

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

Accepted Answer

A)   Real rate risk
B)   Interest rate risk
C)   Default risk
D)   Liquidity risk
E)   Taxability riskF) A) and B)
G) C) and D)

Question 6

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 coupon bond with 9 percent annual interest for $1,000. The bond has 12 years to maturity. Three years from now, the yield to maturity has declined to 7 percent and you decide to sell. What is your holding period yield?

Accepted Answer

A)   8.84 percent
B)   9.49 percent
C)   10.96 percent
D)   13.01 percent
E)   12.83 percentF) A) and D)
G) A) and C)

Question 7

A deferred call provision:

Accepted Answer

A)   requires the bond issuer to pay the current market price, minus any accrued interest, should the bond be called.
B)   allows the bond issuer to delay repaying a bond until after the maturity date should the issuer so opt.
C)   prohibits the issuer from ever redeeming bonds prior to maturity.
D)   prohibits the bond issuer from redeeming callable bonds prior to a specified date.
E)   requires the bond issuer pay a call premium that is equal to or greater than one year's coupon should the bond be called.F) B) and D)
G) None of the above

Question 8

A bond that pays interest annually yielded 7.37 percent last year. The inflation rate for the same period was 2.4 percent. What was the actual real rate of return?

Accepted Answer

A)   4.19 percent
B)   4.25 percent
C)   4.85 percent
D)   4.41 percent
E)   4.49 percentF) A) and E)
G) B) and E)

Question 9

Protective covenants:

Accepted Answer

A)   apply to short-term debt issues but not to long-term debt issues.
B)   only apply to privately issued bonds.
C)   are a feature found only in government-issued bond indentures.
D)   only apply to bonds that have a deferred call provision.
E)   are primarily designed to protect bondholders.F) A) and C)
G) A) and B)

Question 10

You purchased an investment that 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 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars?

Accepted Answer

A)   $20,720
B)   $21,705
C)   $20,447
D)   $18,811
E)   $18,529F) A) and E)
G) A) and C)

Question 11

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:

Accepted Answer

A)   equilibrium.
B)   premium.
C)   discount.
D)   call price.
E)   spread.F) A) and D)
G) C) and D)

Question 12

The current yield is defined as the annual interest on a bond divided by the:

Accepted Answer

A)   coupon rate.
B)   face value.
C)   market price.
D)   call price.
E)   par value.F) A) and B)
G) A) and C)

Question 13

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?

Accepted Answer

A)   6.97 percent
B)   6.92 percent
C)   6.88 percent
D)   7.22 percent
E)   7.43 percentF) A) and E)
G) A) and D)

Question 14

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?

Accepted Answer

A)   Short-term; low coupon
B)   Short-term; high coupon
C)   Long-term; zero coupon
D)   Long-term; low coupon
E)   Long-term; high couponF) C) and D)
G) A) and B)

Question 15

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

Accepted Answer

A)   Call price
B)   Par value
C)   Bid price
D)   Asked price
E)   Bid-ask spreadF) A) and E)
G) A) and C)

Question 16

You are purchasing a 15-year, zero-coupon bond. The yield to maturity is 6.85 percent and the face value is $1,000. What is the current market price? Assume semiannual compounding.

Accepted Answer

A)   $406.67
B)   $408.18
C)   $364.11
D)   $321.50
E)   $358.47F) A) and E)
G) A) and B)

Question 17

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

Accepted Answer

A)   Yield decreases in response to market changes
B)   Lack of coupon payments
C)   Possibility of default
D)   A bond's unfavorable tax status
E)   Decrease in a municipality's credit ratingF) D) and E)
G) A) and E)

Question 18

Dexter Mills issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price?

Accepted Answer

A)   $985.55
B)   $991.90
C)   $1,142.16
D)   $1,190.93
E)   $1,098.00F) A) and B)
G) A) and C)

Question 19

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Accepted Answer

A)   Default risk
B)   Taxability
C)   Liquidity
D)   Inflation
E)   Interest rate riskF) A) and B)
G) A) and C)

Question 20

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

Accepted Answer

A)   3-year; 4 percent coupon
B)   3-year; 6 percent coupon
C)   5-year; 6 percent coupon
D)   7-year; 6 percent coupon
E)   7-year; 4 percent couponF) A) and B)
G) A) and C)

Exam 7: Interest Rates and Bond Valuation

Protective covenants:

Correct Answer
verified

A deferred call provision:

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

Correct Answer
verified

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Correct Answer
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Correct Answer
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Correct Answer
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The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?

Correct Answer
verified

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

Correct Answer
verified

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:

Correct Answer
verified

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

Correct Answer
verified

A bond that pays interest annually yielded 7.37 percent last year. The inflation rate for the same period was 2.4 percent. What was the actual real rate of return?

Correct Answer
verified

Dexter Mills issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price?

Correct Answer
verified

A bond is quoted at a price of $1,011. This price is referred to as the:

Correct Answer
verified

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

Correct Answer
verified

You are purchasing a 15-year, zero-coupon bond. The yield to maturity is 6.85 percent and the face value is $1,000. What is the current market price? Assume semiannual compounding.

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

Correct Answer
verified

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?

Correct Answer
verified

The current yield is defined as the annual interest on a bond divided by the:

Correct Answer
verified

Exam 7: Interest Rates and Bond Valuation

Protective covenants:

Correct AnswerverifiedShow Answer

A deferred call provision:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A bond that pays interest annually yielded 7.37 percent last year. The inflation rate for the same period was 2.4 percent. What was the actual real rate of return?

Correct AnswerverifiedShow Answer

Dexter Mills issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price?

Correct AnswerverifiedShow Answer

A bond is quoted at a price of $1,011. This price is referred to as the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

You are purchasing a 15-year, zero-coupon bond. The yield to maturity is 6.85 percent and the face value is $1,000. What is the current market price? Assume semiannual compounding.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

The current yield is defined as the annual interest on a bond divided by the:

Correct AnswerverifiedShow Answer

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