Question 1

The bonds offered by Leo's Pumps are callable in 4 years at a quoted price of 102.What is the amount of the call premium on a $1,000 par value bond?

Accepted Answer

A)  $2.00
B)  $8.00
C)  $20.00
D)  $23.33
E)  $43.49F) A) and E)
G) A) and B)

Question 2

A corporate bond is quoted at a current price of 101.352.What is the market price of a bond with a $1,000 face value?

Accepted Answer

A)  $1,001.35
B)  $1,013.52
C)  $1,000.14
D)  $1,135.20
E)  $1,100.35F) All of the above
G) B) and D)

Question 3

The part of an indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called:

Accepted Answer

A)  deferred call provisions.
B)  sinking funds provisions.
C)  protective covenants.
D)  trustee relationships.
E)  bond ratings.F) A) and D)
G) B) and E)

Question 4

A bond that pays interest annually yields a rate of return of 7.25 percent.The inflation rate for the same period is 2.31 percent.What is the actual real rate of return on this bond?

Accepted Answer

A)  4.79%
B)  4.87%
C)  4.83%
D)  4.94%
E)  4.91%F) A) and E)
G) C) and E)

Question 5

Which one of these is most apt to be repaid first if a firm encounters financial distress and goes out of business?

Accepted Answer

A)  Junior debt
B)  Unsecured debt
C)  Blanket mortgage
D)  Subordinated debenture
E)  Subordinated debtF) A) and D)
G) All of the above

Question 6

A "make-whole" call provision on a bond provides for:

Accepted Answer

A)  call prices that vary with the funds available in a sinking fund.
B)  a call price equal to the bond's approximate market value at the time of call.
C)  decreasing call prices as interest rates decrease.
D)  a call price equal to the face value plus all accrued interest to date.
E)  a call price equal to the face value.F) B) and C)
G) A) and B)

Question 7

Which one of the following statements concerning bonds is correct?

Accepted Answer

A)  Bondholders are generally granted voting rights.
B)  Zero coupon bonds are sold at par.
C)  The repayment of bond principal is tax-deductible.
D)  A "bellwether" bond is the yield on the shortest outstanding Treasury security.
E)  Both corporate and Treasury bonds are quoted as a percentage of par.F) C) and D)
G) A) and D)

Question 8

Eastern Sports bonds have a face value of $1,000,mature in 7 years,pay interest semiannually,and have a coupon rate of 7.25 percent.The next interest payment will be paid two months from today.What is the dirty price of this bond if the market rate of return is 7.5 percent?

Accepted Answer

A)  $986.58
B)  $998.66
C)  $1,003.45
D)  $1,010.75
E)  $1,071.16 F) D) and E)
G) All of the above

Question 9

A $1,000 face value corporate bond matures in 28 years,pays interest semiannually,and has a market quote of 98.625.The coupon rate is 7.25 percent,the current yield is ___ percent,and the yield to maturity is ____ percent.

Accepted Answer

A)  7.16;7.12
B)  7.16;7.09
C)  7.25;7.22
D)  7.35;7.37
E)  7.35;7.41 F) B) and C)
G) C) and E)

Question 10

A zero coupon bond has a yield to maturity of 7.48 percent,semiannual compounding,a $1,000 face value,and a market price of $386.48.How many years is it until this bond matures?

Accepted Answer

A)  11.58 years
B)  13.18 years
C)  12.95 years
D)  23.16 years
E)  25.89 years F) A) and B)
G) C) and E)

Question 11

Toy World bonds have a face value of $1,000,mature in13 years,pay interest semiannually,and have a coupon rate of 6.5 percent.The next interest payment will be paid four months from today.What is the dirty price of this bond if the market rate of return is 6.3 percent?

Accepted Answer

A)  $1,028.40
B)  $1,021.18
C)  $1,017.57
D)  $1,027.76
E)  $1,039.24 F) A) and E)
G) A) and C)

Question 12

Interest rate risk increases with:

Accepted Answer

A)  both increases in time to maturity and coupon rates.
B)  increases in time to maturity and decreases in coupon rates.
C)  increases in coupon rates and decreases in market rates.
D)  decreases in market rates and increases in time to maturity.
E)  both decreases in coupon rates and market rates.F) A) and C)
G) B) and E)

Question 13

For tax purposes,the implicit annual interest for any one year on a zero coupon bond is equal to:

Accepted Answer

A)  zero.
B)  the annual change in the bond's value as determined by amortizing the loan.
C)  the current yield.
D)  the face value divided by the number of years to maturity.
E)  the face value minus the current market value.F) D) and E)
G) B) and D)

Question 14

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

Accepted Answer

A)  Moody's is the sole provider of bond ratings.
B)  Bond ratings only assess the possibility of default.
C)  Investment grade bonds include only those bonds receiving an A or higher rating.
D)  Bond ratings consider the potential price volatility of a bond.
E)  A "fallen angel" is a bond that fell from an A rating or above to a BBB rating.F) C) and D)
G) A) and E)

Question 15

A 15-year,4 percent coupon bond with a face value of $1,000 pays interest semiannually.Assume the bond currently sells at par.What will the percentage change in the price of this bond be if market rates increase by 10 percent?

Accepted Answer

A)  1.32%
B)  -1.32%
C)  1.96%
D)  -1.96%
E)  -1.13% F) B) and D)
G) D) and E)

Question 16

Which one of the following statements is correct concerning interest rate risk as it relates to bonds,all else equal?

Accepted Answer

A)  The shorter the time to maturity,the greater the interest rate risk.
B)  The higher the coupon,the greater the interest rate risk.
C)  For a bond selling at par,there is no interest rate risk.
D)  The greater the number of semiannual interest payments,the greater the interest rate risk.
E)  The lower the amount of each interest payment,the lower the interest rate risk.F) A) and B)
G) C) and D)

Question 17

Assume a firm borrows $20 million by issuing bonds.Explain how a sinking fund requirement added to the bond's indenture can lessen the potential for default on the bond issue.

Accepted Answer

A sinking fund is an account established...

Question 18

All else constant,a coupon bond that is selling at a premium,must have:

Accepted Answer

A)  a yield to maturity that is less than the coupon rate.
B)  a coupon rate that is equal to the yield to maturity.
C)  a market price that is less than par value.
D)  semiannual interest payments.
E)  a coupon rate that is less than the yield to maturity.F) B) and E)
G) B) and D)

Question 19

Assume you are the manager of a multi-million dollar portfolio of corporate bonds and you believe interest rates will rise in the near future.Other investors have not yet accepted your belief but you want to act based on your personal beliefs.What adjustments should you make to the portfolio?

Accepted Answer

Interest rate risk refers to the inverse...

Question 20

What does the spread between the bid and asked bond prices represent?

Accepted Answer

A)  Difference between the coupon rate and the current yield
B)  Difference between the current yield and the yield to maturity
C)  Accrued interest
D)  Dealer's profit
E)  Bondholder's profitF) B) and C)
G) None of the above

Exam 5: Interest Rates and Bond Valuation

The bonds offered by Leo's Pumps are callable in 4 years at a quoted price of 102.What is the amount of the call premium on a $1,000 par value bond?

Correct AnswerverifiedShow Answer

Toy World bonds have a face value of $1,000,mature in13 years,pay interest semiannually,and have a coupon rate of 6.5 percent.The next interest payment will be paid four months from today.What is the dirty price of this bond if the market rate of return is 6.3 percent?

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A corporate bond is quoted at a current price of 101.352.What is the market price of a bond with a $1,000 face value?

Correct AnswerverifiedShow Answer

Which one of the following statements concerning bonds is correct?

Correct AnswerverifiedShow Answer

What does the spread between the bid and asked bond prices represent?

Correct AnswerverifiedShow Answer

A "make-whole" call provision on a bond provides for:

Correct AnswerverifiedShow Answer

Interest rate risk increases with:

Correct AnswerverifiedShow Answer

For tax purposes,the implicit annual interest for any one year on a zero coupon bond is equal to:

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Which one of these is most apt to be repaid first if a firm encounters financial distress and goes out of business?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct concerning interest rate risk as it relates to bonds,all else equal?

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Assume a firm borrows $20 million by issuing bonds.Explain how a sinking fund requirement added to the bond's indenture can lessen the potential for default on the bond issue.

Correct AnswerverifiedA sinking fund is an account established...View AnswerShow Answer

All else constant,a coupon bond that is selling at a premium,must have:

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A zero coupon bond has a yield to maturity of 7.48 percent,semiannual compounding,a $1,000 face value,and a market price of $386.48.How many years is it until this bond matures?

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Eastern Sports bonds have a face value of $1,000,mature in 7 years,pay interest semiannually,and have a coupon rate of 7.25 percent.The next interest payment will be paid two months from today.What is the dirty price of this bond if the market rate of return is 7.5 percent?

Correct AnswerverifiedShow Answer

The part of an indenture that protect the interests of the lender by limiting certain actions that a company might take during the term of the loan are called:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A 15-year,4 percent coupon bond with a face value of $1,000 pays interest semiannually.Assume the bond currently sells at par.What will the percentage change in the price of this bond be if market rates increase by 10 percent?

Correct AnswerverifiedShow Answer

A $1,000 face value corporate bond matures in 28 years,pays interest semiannually,and has a market quote of 98.625.The coupon rate is 7.25 percent,the current yield is ___ percent,and the yield to maturity is ____ percent.

Correct AnswerverifiedShow Answer

A bond that pays interest annually yields a rate of return of 7.25 percent.The inflation rate for the same period is 2.31 percent.What is the actual real rate of return on this bond?

Correct AnswerverifiedShow Answer

Assume you are the manager of a multi-million dollar portfolio of corporate bonds and you believe interest rates will rise in the near future.Other investors have not yet accepted your belief but you want to act based on your personal beliefs.What adjustments should you make to the portfolio?

Correct AnswerverifiedInterest rate risk refers to the inverse...View AnswerShow Answer

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A sinking fund is an account established...
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A $1,000 face value corporate bond matures in 28 years,pays interest semiannually,and has a market quote of 98.625.The coupon rate is 7.25 percent,the current yield is _ percent,and the yield to maturity is __ percent.

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Interest rate risk refers to the inverse...
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