Chap 005

Chapter 05 - Interest Rate and Bond Valuation
Chapter 05
Interest Rate and Bond Valuation
Multiple Choice Questions
1. The stated interest payment, in dollars, made on a bond each period is called the bond's:
A. coupon.
B. face value.
C. maturity.
D. yield to maturity.
E. coupon rate.
2. The principal amount of a bond that is repaid at the end of the loan term is called the
bond's:
A. coupon rate.
B. yield to maturity.
C. maturity.
D. face value.
E. coupon.
3. The specified date on which the principal amount of a bond is repaid is called the bond's:
A. coupon rate.
B. face value.
C. yield to maturity.
D. maturity.
E. coupon.
4. The rate of return required by investors in the market for owning a bond is called the:
A. coupon.
B. face value.
C. maturity.
E. coupon rate.
5-1
5. The annual coupon of a bond divided by its face value is called the bond's:
A. coupon.
B. face value.
C. maturity.
E. coupon rate.
6. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____
bond.
A. zero coupon
B. premium
C. discount
D. par value
E. floating rate
7. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a
_____ bond.
A. par
B. discount
C. premium
D. zero coupon
E. floating rate
8. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a
_____ bond.
A. par
B. premium
C. discount
D. zero coupon
E. floating rate
5-2
9. The unfunded debt of a firm is generally understood to mean the firm's:

A. preferred stock.
B. debts that mature in more than one year.
C. debentures.
D. debts that mature in less than one year.
E. secured debt.
10. The written, legally binding agreement between the corporate borrower and the lender
detailing the terms of a bond issue is called the:
A. covenant.
B. indenture.
C. terms of trade.
D. form 5140.
E. call provision.
11. The form of bond issue in which the registrar of the company records ownership of each
bond, with relevant payments made directly to the owner of record, is called the _____ form.
A. new-issue
B. registered
C. bearer
D. debenture
E. collateral
12. The form of bond issue in which the bond is issued without record of the owner's name,
with relevant payments made directly to whoever physically holds the bond, is called the
_____ form.
A. new-issue
B. registered
C. collateral
D. debenture
E. bearer
5-3
13. The unsecured debts of a firm with maturities greater than 10 years are most literally
called:
A. unfunded liabilities.
B. debentures.
C. notes.
D. bonds.
E. sinking funds.
14. The unsecured debts of a firm with maturities less than 10 years are most literally called:
B. sinking funds.
C. bonds.
D. notes.
E. debentures.
15. An account managed by the bond trustee for early bond redemption payments is called a:
A. sinking fund.
B. collateral payment account.
C. deed in trust account.
D. call provision.
E. par value fund.
16. An agreement giving the bond issuer the option to repurchase the bond at a specified price
prior to maturity is the _____ provision.
A. sinking fund
B. call
C. seniority
D. collateral
E. trustee
5-4
17. The amount by which the call price exceeds the bond's par value is the:
A. coupon rate.
B. redemption value.
C. call rate.
D. original-issue discount.
E. call premium.
18. In the event of default, _____ debt holders must give preference to more _____ debt
holders in the priority of repayment distributions.
A. subordinated; senior
B. long-term; short-term
C. senior; junior
D. senior; subordinated
E. short-term; long-term
19. A deferred call provision refers to the:

A. open market price of a callable bond on a certain date.
B. prohibition of a company from redeeming callable bonds prior to a certain date.
C. prohibition of a company from ever redeeming callable bonds.
D. seniority of callable bonds to noncallable bonds in the event of corporate default.
E. amount by which the call price for a callable bond exceeds its par value.
20. The long-term bonds issued by the United States government are called _____ bonds.
A. Treasury
B. municipal
C. floating-rate
D. junk
E. zero coupon
5-5
21. The long-term bonds issued by state and local governments in the United States are called
_____ bonds.
A. Treasury
B. municipal
C. floating-rate
D. junk
E. zero coupon
22. A bond that makes no coupon payments and is initially priced at a deep discount is called
a _____ bond.
A. Treasury
B. municipal
C. floating-rate
D. zero coupon
E. junk
23. A bond that pays a variable amount of coupon interest over time is called a _____ bond.
A. Treasury
B. municipal
C. junk
D. floating-rate
E. zero coupon
24. Parts of the 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:
A. deferred call provisions.
B. sinking funds provisions.
C. protective covenants.
D. trustee relationships
E. bond ratings.
5-6
25. A bond which, at the election of the holder, can be swapped for a fixed number of shares
of common stock at any time prior to the bond's maturity is called a _____ bond.
A. zero coupon
B. callable
C. putable
D. convertible
E. warrant
26. A financial market is _____ if it is possible to easily observe its prices and trading
volume.
A. open
B. transparent
C. chaotic
D. in equilibrium
E. ordered
27. The annual coupon payment of a bond divided by its market price is called the:
A. coupon rate.
B. bid-ask spread.
C. capital gains yield.
D. current yield.
E. yield to maturity.
28. A TIPS bond's interest rate is linked to:

A. income.
B. inflation.
C. liquidity.
D. maturity of the 30 year government bond.
E. corporate tax rates.
5-7
29. A bond that allows the holder to force the issuer to buy back bonds at a stated rate is called
a:
A. put bond.
B. call bond.
C. guaranteed bond.
D. TIPS bond.
E. none of the above.
30. Interest rates or rates of return on investments that have not been adjusted for the effects
of inflation are called _____ rates.
A. coupon
B. stripped
C. effective
D. real
E. nominal
31. Interest rates or rates of return on investments that have been adjusted for the effects of
inflation are called _____ rates.
A. real
B. nominal
C. effective
D. stripped
E. coupon
32. The relationship between nominal rates, real rates, and inflation is known as the:
A. Miller and Modigliani theorem.
B. Gordon growth model.
C. Fisher effect.
D. interest rate risk premium.
E. term structure of interest rates.
5-8
33. The relationship between nominal interest rates on default-free, pure discount securities
and the time to maturity is called the:
A. liquidity effect.
B. Fisher effect.
C. term structure of interest rates.
D. inflation premium.
E. interest rate risk premium.
34. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for expected future overall price appreciation.
A. liquidity
B. taxability
C. default risk
D. interest rate risk
E. inflation
compensation for the possibility of nonpayment by the bond issuer.
A. default risk
B. taxability
C. liquidity
D. inflation
E. interest rate risk
36. A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a
market price of _____ and interest payments in the amount of _____ each.
A. $1,007; $70
B. $1,070; $35
C. $1,070; $70
D. $1,000; $35
E. $1,000; $70
5-9
37. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon
rate.
A. a discount; higher than
B. a premium; equal to
C. at par; higher than
D. at par; less than
E. a premium; higher than
38. All else constant, a coupon bond that is selling at a premium, must have:
A. a market price that is less than par value.
B. a coupon rate that is equal to the yield to maturity.
C. a yield to maturity that is less than the coupon rate.
D. semi-annual interest payments.
E. a coupon rate that is less than the yield to maturity.
39. The market price of a bond is equal to the present value of the:
A. face value minus the present value of the annuity payments.
B. face value plus the present value of the annuity payments.
C. annuity payments plus the future value of the face amount.
D. face value plus the future value of the annuity payments.
E. annuity payments minus the face value of the bond.
40. As the yield to maturity increases, the:

A. higher the price the investor offers to buy a bond.
B. longer the time to maturity.
C. lower the rate of return desired by the investor.
D. amount the investor is willing to pay to buy a bond decreases.
E. lower the coupon rate desired by that investor.
5-10
41. American Fortunes is preparing a bond offering with an 8% coupon rate. The bonds will
be repaid in 10 years. The company plans to issue the bonds at par value and pay interest
semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of
compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8%.
A. I and II only
B. II and III only
C. II, III, and IV only
D. I, II, and III only
E. I, III, and IV only
42. The newly issued bonds of the Wynslow Corp. offer a 8% coupon with semiannual
interest payments. The bonds are currently priced at par value. The effective annual rate
provided by these bonds must be:
A. equal to 3%.
B. greater than 3 % but less than 4%.
C. equal to 8%.
D. greater than 8 % but less than 9%.
E. equal to 12%.
43. Which one of the following statements is correct concerning interest rate risk as it relates
to bonds, all else equal?
A. The shorter the time to maturity, the greater the interest rate risk.
B. The higher the coupon rate, the greater the interest rate risk.
C. For a bond selling at par value, 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.
5-11
44. Which one of the following bonds has the greatest interest rate risk?
A. 5-year; 9% coupon
B. 5-year; 7% coupon
C. 7-year; 7% coupon
D. 9-year; 9% coupon
E. 9-year; 7% coupon
45. Interest rate risk _____ as the time to maturity increases.

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
46. You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond
at par value when it was originally issued. If the current market rate for this.type and quality
of bond is 7.5%, then you would expect:
A. the bond issuer to increase the amount of each interest payment on these bonds.
B. the yield to maturity to remain constant due to the fixed coupon rate.
C. to realize a capital loss if you sold the bond at the market price today.
D. today's market price to exceed the face value of the bond.
E. the current yield today to be less than 7%.
47. A bond with semi-annual interest payments, all else equal, would be priced _________
than one with annual interest payments.
A. higher
B. lower
C. the same
D. it is impossible to tell
E. either higher or the same
5-12
48. All else constant, as the market price of a bond increases the current yield _____ and
the yield to maturity _____
A. increases; increases.
B. increases; decreases.
C. decreases; decreases.
D. decreases; increases.
E. remains constant; increases.
49. Which of the following statements concerning bond features is (are) correct?
I. Bondholders generally have voting power in a corporation.
II. Bond interest is tax-deductible as a business expense.
III. The repayment of the bond principal is tax-deductible.
IV. Failure to pay either the interest payments or the bond principle as agreed can cause a firm
to go into bankruptcy.
A. II only
B. I and II only
C. III and IV only
D. II and IV only
E. II, III, and IV only
50. Which of the following items are generally included in a bond indenture?
I. call provisions
II. security description
III. current yield
IV. protective covenants
A. I and II only
B. II and IV only
D. I, II, and IV only
E. I, II, III, and IV
5-13
51. Which one of the following statements is correct concerning bond classifications?
A. A mortgage security is a bond issued solely by a home builder.
B. A debenture is a long-term bond secured by the fixed assets of a firm.
C. A note is a bond which has an original maturity date longer than 10 years.
D. A callable bond can be repurchased by the issuer prior to the initial maturity date.
E. A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.
52. Callable bonds generally:

A. allow the bondholder to decide when the bond is to be called.
B. are associated with sinking funds.
C. permit the issuer to repurchase the bonds at a discount.
D. are called within the first couple of years after issuance.
E. are required to have a deferred call provision if they have a "make-whole" call provision.
53. Which of the following is a (are) positive covenant(s) that might be found in a bond
indenture?
I. The company shall maintain a current ratio of 1.5 or better.
II. The company must limit the amount of dividends it pays according to the stated formula.
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.
A. I only
B. I and II only
C. I and IV only
D. II and IV only
E. I, II, and IV only
54. Protective covenants:

A. are primarily designed to protect bondholders from future actions of the bond issuer.
B. only apply to bonds that have a deferred call provision.
C. are limited to stating actions which a firm must take.
D. are consistent for all bonds issued by a corporation within the United States.
E. are primarily designed to protect the issuing corporation from unreasonable demands of
bondholders.
5-14
55. Which one of the following statements concerning bond ratings is correct?
A. Standard and Poor's and Value Line are the primary bond rating agencies.
B. Bond ratings are solely an assessment of the creditworthiness of the bond issuer.
C. Investment grade bonds include only those bonds receiving one of the highest three bond
ratings.
D. Bond ratings evaluate the expected price volatility of a bond issue.
E. All bonds receive the same rating classification from all rating agencies.
56. A "fallen angel" is a bond that:

A. has moved from being an investment-grade bond to being a junk bond.
B. has moved from being a long-term obligation to being a short-term obligation.
C. has moved from having a yield to maturity in excess of the coupon rate to having a yield to
maturity that is less than the coupon rate.
D. lowered its annual interest payment.
E. is rated as Ba by one rating agency and rated as BB by another rating agency.
57. Bonds issued by the U.S. government:

I. are considered to be free of default risk.
II. are considered to be free of interest rate risk.
III. provide totally tax-free income.
IV. pay interest that is exempt from federal income taxes.
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
58. Treasury bonds are:

A. generally issued as coupon bonds.
B. totally risk-free.
C. preferred by high-income individuals because they offer the best tax benefits.
D. those bonds issued by any governmental agency in the U.S.
E. issued only on the first day of each fiscal year by the U.S. Department of Treasury.
5-15
59. Municipal bonds:

A. offer income tax advantages to individuals.
B. generally pay a higher rate of return than corporate bonds.
C. are those bonds issued only by local municipalities, such as a city or a borough.
D. are rarely callable.
E. pay interest that is always exempt from both federal and state income taxes.
60. The break-even tax rate between a taxable corporate bond yielding 7% and a comparable
nontaxable municipal bond yielding 5% can be expressed as:
A. .07 (1 - t*) = .05.
B. .07 (1 - t*) = .07.
C. .07 + (1 - t*) = .05.
D. .07 (1 - t*) = .05.
E. .05 (1 - t*) = .07.
61. A zero coupon bond:

A. is sold at a large premium.
B. has implicit interest which is calculated by amortizing the loan.
C. has less interest rate risk than a comparable coupon bond.
D. can only be issued by the U.S. Treasury.
E. has a price equal to the future value of the face amount given a specified rate of return.
62. The total interest paid on a zero-coupon bond is equal to:

A. zero.
B. $1,000 minus the par value.
C. $1,000 minus the face value.
D. the face value minus the market price on the maturity date.
E. the face value minus the issue price.
5-16
63. The collar of a floating-rate bond refers to the minimum and maximum:
A. call periods.
B. maturity dates.
C. coupon rates.
D. market prices.
E. yields to maturity.
64. Which of the following are common characteristics of floating-rate bonds?

I. adjustable coupon rates
II. adjustable maturity dates
III. put provision
IV. coupon cap
A. I and II only
B. II and III only
C. I, II, and IV only
D. I, III, and IV only
65. A corporation is more prone to issue floating-rate bonds when it expects future interest
rates to _____ over the life of the bond.
A. remain constant
B. continually decline
C. increase briefly and then decline slightly
D. decline briefly and then increase significantly
E. continually increase
66. The yield to maturity is:

A. the rate that equates the price of the bond with the discounted cash flows.
B. the expected rate to be earned if held to maturity.
C. the rate that is used to determine the market price of the bond.
D. equal to the current yield for bonds priced at par.
E. All of the above.
5-17
67. Investors generally tend to buy:

A. Treasury bonds for their high yields.
B. municipal bonds for their high yields.
C. corporate bonds for their guaranteed liquidity.
D. Treasury bonds for their preferential tax treatment.
E. convertible bonds for their potential price appreciation.
68. A convertible bond is a bond that can be:

A. exchanged for cash at prescribed points in time.
B. submitted to the issuer for redemption at the discretion of the bondholder.
C. submitted for payment any time the economy converts into a recessionary period.
D. exchanged for a stated number of shares of common stock of the bond issuer.
E. modified from a fixed coupon bond into a floating coupon bond at prescribed points in
time.
69. A put provision in a bond indenture allows:

A. a bond issuer to recall the bond after a specified period of time at a price that exceeds the
face amount.
B. the bondholder to force the issuer to buy back the bond at a specified price prior to
maturity.
C. a bondholder to force the issuer to increase the coupon rate if inflation increases by more
than a specified amount.
D. the issuer to convert a coupon bond into a zero coupon bond at their discretion.
E. the issuer to suspend interest payments for any year in which the interest expense exceeds
the net income of the firm.
70. Face value is

A. always higher than current price.
B. always lower than current price.
C. the same as the current price.
D. same as par value.
E. the coupon amount.
5-18
71. One basis point is equal to:

A. .01%.
B. .10%.
C. 1.0%.
D. 10%.
E. 100%.
72. The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds
represents the estimated:
A. yield to maturity.
B. difference between the current yield and the yield to maturity.
C. difference between the yield to call and the yield to maturity.
D. range of yields to maturity provided by the bond over its life to date.
E. difference between the bond's yield and the yield of a particular Treasury issue.
73. A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009. This bond pays
A. $127.50 in July and January.
B. $63.75 in July and January.
C. $127.50 in July.
D. $63.75 in July.
E. None of the above.
74. If its yield to maturity is less than its coupon rate, a bond will sell at a ____, and increases
in market interest rates will ____.
A. discount; increase this discount
B. discount; decrease this discount
C. premium; increase this premium
D. premium; decrease this premium
E. None of the above
5-19
75. Today, August 13, you want to buy a bond with a quoted price of 101.5. The bond pays
interest on February 1 and August 1. The price you will pay to purchase this
bond is equal to the:
A. clean price.
B. muddy price.
C. dirty price.
D. par value price.
E. bid price.
76. The increase you realize in buying power as a result of owning a bond is referred to as the
_____ rate of return.
A. real
B. realized
C. nominal
D. inflated
E. risk-free
77. The Fisher formula is expressed as _____ where R is the nominal rate, r is the real rate,
and h is the inflation rate.
A. 1 + R = (1 + r) (1 + h)
B. 1 + r = (1 + R) (1 + h)
C. 1 + h = (1 + r) (1 + R)
D. 1 + R = (1 + r) (1 + h)
E. 1 + r = (1 + R) (1 + h)
78. The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of
return.
A. default
B. market
C. interest rate
D. inflation
E. maturity
5-20
79. The term structure of interest rates reflects the:

A. pure time value of money for various lengths of time.
B. actual risk premium being paid for corporate bonds of varying maturities.
C. pure inflation adjustment applied to bonds of various maturities.
D. interest rate risk premium applicable to bonds of varying maturities.
E. nominal interest rates applicable to coupon bonds of varying maturities.
80. The market price of _____ maturity bonds fluctuates _____ compared with _____
maturity bonds as interest rates change.
A. shorter; more; longer
B. longer; less; shorter
C. shorter; less; longer
D. Both b. and c.
81. Two of the primary differences between a corporate bond and a Treasury bond with
identical maturity dates are related to:
A. interest rate risk and time value of money.
B. time value of money and inflation.
C. taxes and potential default.
D. taxes and inflation.
E. inflation and interest rate risk.
82. Consider a bond which pays 7% semiannually and has 8 years to maturity. The market
requires an interest rate of 8% on bonds of this risk. What is this bond's price?
A. $942.50
B. $911.52
C. $941.74
D. $1,064.81
5-21
83. The value of a 20 year zero-coupon bond with a $1,000 face value when the market
required rate of return of 8% (semiannual) is ___.
A. $171.93
B. $178.43
C. $208.29
D. $414.64
84. The bonds issued by Jensen & Son bear a 5 % coupon, payable semiannually. The bond
matures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is the
yield to maturity?
A. 4.87%
B. 4.97%
C. 5.00%
D. 5.09%
E. 5.17%
85. A General Co. bond has an 8 % coupon and pays interest annually. The face value is
$1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the
yield to maturity?
A. 7.79%
B. 7.82%
C. 8.00%
D. 8.04%
E. 8.12%
86. Winston Enterprises has a 15-year bond issue outstanding that pays a 9 % coupon. The
bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid
semiannually. What is the yield to maturity?
A. 8.67%
B. 10.13%
C. 10.16%
D. 10.40%
E. 10.45%
5-22
87. Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to
maturity of 7.73%. The bonds mature in 10 years. What is the market price of a $1,000 face
value bond?
A. $943.28
B. $949.80
C. $1,108.16
D. $1,401.26
E. $1,401.86
88. Party Time, Inc. has a 6% coupon bond that matures in 11 years. The bond pays interest
semiannually. What is the market price of a $1,000 face value bond if the yield to maturity is
12.9%?
A. $434.59
B. $580.86
C. $600.34
D. $605.92
E. $947.87
89. Gugenheim, Inc. offers a 7% coupon bond with annual payments. The yield to maturity is
5.85% and the maturity date is 9 years. What is the market price of a $1,000 face value bond?
A. $742.66
B. $868.67
C. $869.67
D. $1,078.73
E. $1,079.59
90. The Lo Sun Corporation offers a 6% bond with a current market price of $875.05. The
yield to maturity is 7.34%. The face value is $1,000. Interest is paid semiannually. How many
years is it until this bond matures?
A. 16 years
B. 18 years
C. 24 years
D. 30 years
E. 36 years
5-23
91. High Noon Sun, Inc. has a 5%, semiannual coupon bond with a current market price of
$988.52. The bond has a par value of $1,000 and a yield to maturity of 5.29%. How many
A. 4.0 years
B. 4.5 years
C. 6.5 years
D. 8.0 years
E. 9.0 years
92. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8% (annual).
What is the current market price of a $1,000 face value bond?
A. $430.24
B. $473.26
C. $835.56
D. $919.12
E. $1,088.00
93. Ted's Co. offers a zero coupon bond with an 11.3% (annual) yield to maturity. The bond
matures in 16 years. What is the current price of a $1,000 face value bond?
A. $178.78
B. $180.33
C. $188.36
D. $190.09
E. $192.18
94. The zero coupon bonds of Markco, Inc. have a market price of $370.67, a face value of
$1,000, and a yield to maturity of 6.84% (annual). How many years is it until this bond
matures?
A. 7 years
B. 10 years
C. 15 years
D. 18 years
E. 20 years
5-24
95. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000.
What is the change in the price of this bond if the market yield rises to 6% from the current
yield of 4.5%?
A. 11.11 % decrease
B. 12.38 % decrease
C. 12.38 % increase
D. 14.13 % decrease
E. 14.13 % increase
96. Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls
Enterprises has a 12-year, 8% annual coupon bond with a $1,000 par value. Both bonds
currently have a yield to maturity of 6%. Which of the following statements are correct if the
market yield increases to 7%?
A. Both bonds would decrease in value by 4.61%.
B. The Earls bond will increase in value by $88.25.
C. The Jackson bond will increase in value by 4.61%.
D. The Earls bond will decrease in value by 7.56%.
E. The Earls bond will decrease in value by $50.68.
97. D'Angelo's bonds have a face value of $1,000 and a current market price of $1065. The
bonds have a 7% coupon rate. What is the current yield on these bonds?
A. 6.43%
B. 6.57%
C. 6.84%
D. 7.03%
E. 7.07%
98. Mitzi's, II. bonds offer a 5% coupon at a current market price of $989. The bonds have a
face value of $1,000 and a call price of $1,025. What is the current yield on these bonds?
A. 4.88%
B. 4.97%
C. 6.00%
D. 5.06%
E. 5.12%
5-25
99. The bonds offered by Leo's Pumps are callable in 3 years at a quoted price of 101. What is
the amount of the call premium on a $1,000 par value bond?
A. $3.33
B. $5.00
C. $10.00
D. $13.33
E. $100.00
100. A corporate bond is quoted at a current price of 102.767. What is the market price of a
bond with a $1,000 face value?
A. $1,000.28
B. $1,002.77
C. $1,027.67
D. $1,102.77
E. $1,276.70
101. A $1,000 face value zero coupon bond is quoted at a price of 53.60. What is the amount
you would pay to purchase this bond?
A. $5.36
B. $53.60
C. $536.00
D. $946.40
E. $1,053.60
102. A Treasury bond is quoted at a price of 106:13. What is the market price of this bond if
the face value is $1,000?
A. $106.13
B. $1,064.06
C. $1,106.13
D. $1,106.41
E. $1,142.64
5-26
103. A Treasury bond is quoted at a price of 101:00 with a current yield of 5.94%. What is the
coupon rate?
A. 5.88%
B. 5.94%
C. 6.00%
D. 6.06%
E. 6.88%
104. A corporate bond is quoted at a price of 98.625 with a 7.500 coupon. The bond pays
interest semiannually. What is the current yield on one of these bonds?
A. 7.50%
B. 7.60%
C. 7.88%
D. 7.97%
E. 7.98%
105. A Treasury bond is quoted at a price of 103:23 with a 3.625 coupon. The bond pays
A. 3.46%
B. 3.50%
C. 3.63%
D. 3.68%
E. 3.74%
106. A Treasury bond is quoted as 101:18 asked and 101:16 bid. What is the bid-ask spread in
dollars on a $1,000 face value bond?
A. $.02
B. $.20
C. $.625
D. $2.00
E. $6.25
5-27
107. The semiannual, ten-year bonds of Adep, Inc. are selling at par and have an effective
annual yield of 4.295%. What is the amount of each interest payment on a $1,000 Adep
bond?
A. $21.25
B. $21.48
C. $21.50
D. $42.50
E. $42.95
108. A bond that pays interest annually yields a 7.25% rate of return. The inflation rate for the
same period is 3.5%. What is the real rate of return on this bond?
A. 3.50%
B. 3.57%
C. 3.62%
D. 3.72%
E. 3.75%
109. The bonds of Frank's Welding, Inc. pay an 8% coupon, have a 7.98% yield to maturity
and have a face value of $1,000. The current rate of inflation is 2.5%. What is the real rate of
return on these bonds?
A. 5.32%
B. 5.35%
C. 5.37%
D. 5.42%
E. 5.48%
110. The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.6%. The
current rate of inflation is 2.5%. What is the nominal rate of return on these bonds?
A. 6.10%
B. 6.13%
C. 6.16%
D. 6.19%
E. 6.22%
5-28
111. The nominal rate of return on the bonds of Stu's Boats is 9.75%. The real rate of return is
3.5%. What is the rate of inflation?
A. 5.97%
B. 6.04%
C. 6.21%
D. 6.43%
E. 6.49%
112. A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34.
The bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the
bond's life?
A. $9.08
B. $12.56
C. $14.48
D. $21.47
E. $31.25
113. The MerryWeather Firm wants to raise $10 million to expand their business. To
accomplish this, the company plans to sell 30-year, $1,000 face value zero-coupon bonds. The
bonds will be priced to yield 5.5%. What is the minimum number of bonds the company must
sell to raise the $10 million they need?
A. 49,841
B. 52,667
C. 57,435
D. 60,000
E. 117,435
114. If a taxable bond yields 10% and a municipal bond of comparable risk and maturity
yields 8%, at what tax rate is the investor indifferent to either bond?
A. 20%
B. 25%
C. 28%
D. 30%
E. 35%
5-29
115. Which of the following amounts is closest to the value of a bond described in The Wall
Street Journal as 10s 2017? It is January 1, 2009 and the appropriate interest rate is 11%.
Assume that the bond matures in the same month as when the quote is given, that interest
payments are made twice a year, and that an interest payment has just been made.
A. $718.28
B. $874.17
C. $895.38
D. $947.69
E. $1,000.00
116. Which of the following amounts is closest to the value of a bond that pays $55
semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000
and the bond matures in 3 years. There are exactly six months before the first interest
payment.
A. $888
B. $1,000
C. $1,014
D. $1,025
E. $1,055
117. Zeta Corporation has issued a $1,000 face value zero-coupon bond. Which of the
following values is closest to the correct price for the bond if the appropriate discount rate is
5% and the bond matures in 8 years?
A. $630.69
B. $676.84
C. $1,000.00
D. $1,050.00
E. This problem cannot be worked without the annual interest payments provided.
5-30
118. A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon
paid at the end of each year. The current price of the bond is $932. What is the yield to
maturity for this bond?
A. 5.05%
B. 6.48%
C. 8.58%
D. 10.15%
E. 11.92%
Street Journal as 7s 2019? It is exactly ten years until maturity and the appropriate interest
rate is 13%. Assume that the bond matures in the same month as when the quote is given, that
interest payments are made twice a year, and that an interest payment has just been made.
A. $626.28
B. $669.44
C. $701.05
D. $754.50
E. $1,000.00
payment.
A. $859
B. $1,000
C. $1,044
D. $1,139
E. $1,464
5-31
7% compounded annually and the bond matures in 5 years?
A. $712.99
B. $747.26
C. $1,000.00
D. $1,058.10
122. A corporate bond with a face value of $1,000 matures in 5 years and has a 6% coupon
paid at the end of each year. The current price of the bond is $1,105. What is the yield to
A. 2.60%
B. 3.66%
C. 3.86%
D. 4.20%
E. 4.95%
Essay Questions
123. Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity, a 10%
annual coupon rate, and a return of $1,000 at maturity.
5-32
124. Given the opportunity to invest in one of the three bonds listed below, which would you
purchase? Assume an interest rate of 7%.
125. Draw a graph of a typical Treasury yield curve and discuss why it usually takes that
shape.
126. Explain why some bond investors are subject to liquidity risk, default risk, and/or
taxability risk. How do each of these risks affect the yield of a bond?
5-33
127. Define what is meant by interest rate risk. Assume you are the manager of a $100 million
portfolio of corporate bonds and you believe interest rates will fall. What adjustments should
you make to your portfolio based on your beliefs?
128. Why do corporations issue 100-year bonds, knowing that interest rate risk is highest for
very long-term bonds? How does the interest rate risk affect the issuer?
129. In the early 1980s, the Treasury yield curve had a severe downward slope with shortterm yields near 20% and long-term yields below 15%. Explain how such a pattern might
occur.
130. Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest
rate risk and how it is related to the movements of a teeter-totter.
5-34
131. The discussion of asset pricing in the text suggests that an investor will be indifferent
between two bonds which have equal yields to maturity as long as they have equivalent
default risk. Can you think of any real-world factors which might make a given investor
prefer one of these bonds over the other?
132. Sometimes it is not clear if a particular security is debt or equity. Explain the basic
difference between debt and equity?
5-35
Chapter 05 Interest Rate and Bond Valuation Answer Key
Multiple Choice Questions
1. The stated interest payment, in dollars, made on a bond each period is called the bond's:
A. coupon.
B. face value.
C. maturity.
E. coupon rate.
Difficulty level: Easy

Topic: Coupon
2. The principal amount of a bond that is repaid at the end of the loan term is called the
bond's:
A. coupon rate.
B. yield to maturity.
C. maturity.
D. face value.
E. coupon.

Topic: Face Value
3. The specified date on which the principal amount of a bond is repaid is called the bond's:
A. coupon rate.
B. face value.
C. yield to maturity.
D. maturity.
E. coupon.

Topic: Maturity
5-36
4. The rate of return required by investors in the market for owning a bond is called the:
A. coupon.
B. face value.
C. maturity.
E. coupon rate.

Topic: Yield to Maturity
5. The annual coupon of a bond divided by its face value is called the bond's:
A. coupon.
B. face value.
C. maturity.
E. coupon rate.

Topic: Coupon Rate
6. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____
bond.
A. zero coupon
B. premium
C. discount
D. par value
E. floating rate

Topic: Par Bonds
5-37
7. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a
_____ bond.
A. par
B. discount
C. premium
D. zero coupon
E. floating rate

Topic: Discount Bonds
8. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a
_____ bond.
A. par
B. premium
C. discount
D. zero coupon
E. floating rate

Topic: Premium Bonds
9. The unfunded debt of a firm is generally understood to mean the firm's:

A. preferred stock.
B. debts that mature in more than one year.
C. debentures.
D. debts that mature in less than one year.
E. secured debt.

Topic: Unfunded Debt
5-38
10. The written, legally binding agreement between the corporate borrower and the lender
detailing the terms of a bond issue is called the:
A. covenant.
B. indenture.
C. terms of trade.
D. form 5140.
E. call provision.

Topic: Indenture
11. The form of bond issue in which the registrar of the company records ownership of each
bond, with relevant payments made directly to the owner of record, is called the _____ form.
A. new-issue
B. registered
C. bearer
D. debenture
E. collateral
Difficulty level: Medium

Topic: Registered Bonds
12. The form of bond issue in which the bond is issued without record of the owner's name,
with relevant payments made directly to whoever physically holds the bond, is called the
_____ form.
A. new-issue
B. registered
C. collateral
D. debenture
E. bearer

Topic: Bearer Bonds
5-39
13. The unsecured debts of a firm with maturities greater than 10 years are most literally
called:
B. debentures.
C. notes.
D. bonds.
E. sinking funds.

Topic: Debentures
14. The unsecured debts of a firm with maturities less than 10 years are most literally called:
B. sinking funds.
C. bonds.
D. notes.
E. debentures.

Topic: Notes
15. An account managed by the bond trustee for early bond redemption payments is called a:
A. sinking fund.
B. collateral payment account.
C. deed in trust account.
D. call provision.
E. par value fund.

Topic: Sinking Fund
5-40
16. An agreement giving the bond issuer the option to repurchase the bond at a specified price
prior to maturity is the _____ provision.
A. sinking fund
B. call
C. seniority
D. collateral
E. trustee

Topic: Call Provision
17. The amount by which the call price exceeds the bond's par value is the:
A. coupon rate.
B. redemption value.
C. call rate.
D. original-issue discount.
E. call premium.

Topic: Call Premium
18. In the event of default, _____ debt holders must give preference to more _____ debt
holders in the priority of repayment distributions.
A. subordinated; senior
B. long-term; short-term
C. senior; junior
D. senior; subordinated
E. short-term; long-term

Topic: Seniority
5-41
19. A deferred call provision refers to the:

A. open market price of a callable bond on a certain date.
B. prohibition of a company from redeeming callable bonds prior to a certain date.
C. prohibition of a company from ever redeeming callable bonds.
D. seniority of callable bonds to noncallable bonds in the event of corporate default.
E. amount by which the call price for a callable bond exceeds its par value.

Topic: Deferred Call Provision
20. The long-term bonds issued by the United States government are called _____ bonds.
A. Treasury
B. municipal
C. floating-rate
D. junk
E. zero coupon

Topic: Treasury Bonds
21. The long-term bonds issued by state and local governments in the United States are called
_____ bonds.
A. Treasury
B. municipal
C. floating-rate
D. junk
E. zero coupon

Topic: Municipal Bonds
5-42
22. A bond that makes no coupon payments and is initially priced at a deep discount is called
a _____ bond.
A. Treasury
B. municipal
C. floating-rate
D. zero coupon
E. junk

Topic: Zero Coupon Bond
23. A bond that pays a variable amount of coupon interest over time is called a _____ bond.
A. Treasury
B. municipal
C. junk
D. floating-rate
E. zero coupon

Topic: Floating-Rate Bonds
24. Parts of the 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:
A. deferred call provisions.
B. sinking funds provisions.
C. protective covenants.
D. trustee relationships
E. bond ratings.

Topic: Protective Covenant
5-43
25. A bond which, at the election of the holder, can be swapped for a fixed number of shares
of common stock at any time prior to the bond's maturity is called a _____ bond.
A. zero coupon
B. callable
C. putable
D. convertible
E. warrant

Topic: Convertible Bonds
26. A financial market is _____ if it is possible to easily observe its prices and trading
volume.
A. open
B. transparent
C. chaotic
D. in equilibrium
E. ordered

Topic: Price Transparency
27. The annual coupon payment of a bond divided by its market price is called the:
A. coupon rate.
B. bid-ask spread.
C. capital gains yield.
D. current yield.
E. yield to maturity.

Topic: Current Yield
5-44
28. A TIPS bond's interest rate is linked to:

A. income.
B. inflation.
C. liquidity.
D. maturity of the 30 year government bond.
E. corporate tax rates.

Topic: Tips Bonds
29. A bond that allows the holder to force the issuer to buy back bonds at a stated rate is called
a:
A. put bond.
B. call bond.
C. guaranteed bond.
D. TIPS bond.
E. none of the above.

Topic: Put Bond
30. Interest rates or rates of return on investments that have not been adjusted for the effects
of inflation are called _____ rates.
A. coupon
B. stripped
C. effective
D. real
E. nominal

Topic: Nominal Rates
5-45
31. Interest rates or rates of return on investments that have been adjusted for the effects of
inflation are called _____ rates.
A. real
B. nominal
C. effective
D. stripped
E. coupon

Topic: Real Rates
32. The relationship between nominal rates, real rates, and inflation is known as the:
A. Miller and Modigliani theorem.
B. Gordon growth model.
C. Fisher effect.
D. interest rate risk premium.
E. term structure of interest rates.

Topic: Fisher Effect
33. The relationship between nominal interest rates on default-free, pure discount securities
and the time to maturity is called the:
A. liquidity effect.
B. Fisher effect.
C. term structure of interest rates.
D. inflation premium.
E. interest rate risk premium.

Topic: Term Structure Of Interest Rates
5-46
compensation for expected future overall price appreciation.
A. liquidity
B. taxability
C. default risk
D. interest rate risk
E. inflation

Topic: Inflation Premium
compensation for the possibility of nonpayment by the bond issuer.
A. default risk
B. taxability
C. liquidity
D. inflation
E. interest rate risk

Topic: Default Risk Premium
36. A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a
market price of _____ and interest payments in the amount of _____ each.
A. $1,007; $70
B. $1,070; $35
C. $1,070; $70
D. $1,000; $35
E. $1,000; $70

Topic: Bond Features
5-47
37. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon
rate.
A. a discount; higher than
B. a premium; equal to
C. at par; higher than
D. at par; less than
E. a premium; higher than

Topic: Bond Prices and Yields
38. All else constant, a coupon bond that is selling at a premium, must have:
A. a market price that is less than par value.
B. a coupon rate that is equal to the yield to maturity.
C. a yield to maturity that is less than the coupon rate.
D. semi-annual interest payments.
E. a coupon rate that is less than the yield to maturity.

Topic: Bond Prices and Yields
39. The market price of a bond is equal to the present value of the:
A. face value minus the present value of the annuity payments.
B. face value plus the present value of the annuity payments.
C. annuity payments plus the future value of the face amount.
D. face value plus the future value of the annuity payments.
E. annuity payments minus the face value of the bond.

Topic: Bond Prices
5-48
40. As the yield to maturity increases, the:

A. higher the price the investor offers to buy a bond.
B. longer the time to maturity.
C. lower the rate of return desired by the investor.
D. amount the investor is willing to pay to buy a bond decreases.
E. lower the coupon rate desired by that investor.

Topic: Bond Prices
41. American Fortunes is preparing a bond offering with an 8% coupon rate. The bonds will
be repaid in 10 years. The company plans to issue the bonds at par value and pay interest
semiannually. Given this, which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of
compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8%.
A. I and II only
B. II and III only
D. I, II, and III only
E. I, III, and IV only

Topic: Semiannual Bonds
42. The newly issued bonds of the Wynslow Corp. offer a 8% coupon with semiannual
interest payments. The bonds are currently priced at par value. The effective annual rate
provided by these bonds must be:
A. equal to 3%.
B. greater than 3 % but less than 4%.
C. equal to 8%.
D. greater than 8 % but less than 9%.
E. equal to 12%.

Topic: Semiannual Bonds And Effective Annual Rate
5-49
43. Which one of the following statements is correct concerning interest rate risk as it relates
to bonds, all else equal?
A. The shorter the time to maturity, the greater the interest rate risk.
B. The higher the coupon rate, the greater the interest rate risk.
C. For a bond selling at par value, 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.

Topic: Interest Rate Risk
44. Which one of the following bonds has the greatest interest rate risk?
A. 5-year; 9% coupon
B. 5-year; 7% coupon
C. 7-year; 7% coupon
D. 9-year; 9% coupon
E. 9-year; 7% coupon

45. Interest rate risk _____ as the time to maturity increases.

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

5-50
46. You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond
at par value when it was originally issued. If the current market rate for this.type and quality
of bond is 7.5%, then you would expect:
A. the bond issuer to increase the amount of each interest payment on these bonds.
B. the yield to maturity to remain constant due to the fixed coupon rate.
C. to realize a capital loss if you sold the bond at the market price today.
D. today's market price to exceed the face value of the bond.
E. the current yield today to be less than 7%.

47. A bond with semi-annual interest payments, all else equal, would be priced _________
than one with annual interest payments.
A. higher
B. lower
C. the same
D. it is impossible to tell
E. either higher or the same

48. All else constant, as the market price of a bond increases the current yield _____ and
the yield to maturity _____
A. increases; increases.
B. increases; decreases.
C. decreases; decreases.
D. decreases; increases.
E. remains constant; increases.

Topic: Yield to Maturity and Current Yield
5-51
49. Which of the following statements concerning bond features is (are) correct?
I. Bondholders generally have voting power in a corporation.
II. Bond interest is tax-deductible as a business expense.
III. The repayment of the bond principal is tax-deductible.
IV. Failure to pay either the interest payments or the bond principle as agreed can cause a firm
to go into bankruptcy.
A. II only
B. I and II only
C. III and IV only
D. II and IV only
E. II, III, and IV only

Topic: Bond Features
50. Which of the following items are generally included in a bond indenture?
I. call provisions
II. security description
III. current yield
IV. protective covenants
A. I and II only
B. II and IV only
D. I, II, and IV only

Topic: Bond Indenture
51. Which one of the following statements is correct concerning bond classifications?
A. A mortgage security is a bond issued solely by a home builder.
B. A debenture is a long-term bond secured by the fixed assets of a firm.
C. A note is a bond which has an original maturity date longer than 10 years.
D. A callable bond can be repurchased by the issuer prior to the initial maturity date.
E. A subordinated bond receives preferential treatment over all other bonds in a bankruptcy.

Topic: Bond Classifications
5-52
52. Callable bonds generally:

A. allow the bondholder to decide when the bond is to be called.
B. are associated with sinking funds.
C. permit the issuer to repurchase the bonds at a discount.
D. are called within the first couple of years after issuance.
E. are required to have a deferred call provision if they have a "make-whole" call provision.

Topic: Callable Bonds
53. Which of the following is a (are) positive covenant(s) that might be found in a bond
indenture?
I. The company shall maintain a current ratio of 1.5 or better.
II. The company must limit the amount of dividends it pays according to the stated formula.
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.
A. I only
B. I and II only
C. I and IV only
D. II and IV only
E. I, II, and IV only
Difficulty level: Challenge

54. Protective covenants:

A. are primarily designed to protect bondholders from future actions of the bond issuer.
B. only apply to bonds that have a deferred call provision.
C. are limited to stating actions which a firm must take.
D. are consistent for all bonds issued by a corporation within the United States.
E. are primarily designed to protect the issuing corporation from unreasonable demands of
bondholders.

5-53
55. Which one of the following statements concerning bond ratings is correct?
A. Standard and Poor's and Value Line are the primary bond rating agencies.
B. Bond ratings are solely an assessment of the creditworthiness of the bond issuer.
C. Investment grade bonds include only those bonds receiving one of the highest three bond
ratings.
D. Bond ratings evaluate the expected price volatility of a bond issue.
E. All bonds receive the same rating classification from all rating agencies.

Topic: Bond Ratings
56. A "fallen angel" is a bond that:

A. has moved from being an investment-grade bond to being a junk bond.
B. has moved from being a long-term obligation to being a short-term obligation.
C. has moved from having a yield to maturity in excess of the coupon rate to having a yield to
maturity that is less than the coupon rate.
D. lowered its annual interest payment.
E. is rated as Ba by one rating agency and rated as BB by another rating agency.

Topic: Bond Ratings
57. Bonds issued by the U.S. government:

I. are considered to be free of default risk.
II. are considered to be free of interest rate risk.
III. provide totally tax-free income.
IV. pay interest that is exempt from federal income taxes.
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

5-54
58. Treasury bonds are:

A. generally issued as coupon bonds.
B. totally risk-free.
C. preferred by high-income individuals because they offer the best tax benefits.
D. those bonds issued by any governmental agency in the U.S.
E. issued only on the first day of each fiscal year by the U.S. Department of Treasury.

59. Municipal bonds:

A. offer income tax advantages to individuals.
B. generally pay a higher rate of return than corporate bonds.
C. are those bonds issued only by local municipalities, such as a city or a borough.
D. are rarely callable.
E. pay interest that is always exempt from both federal and state income taxes.

60. The break-even tax rate between a taxable corporate bond yielding 7% and a comparable
nontaxable municipal bond yielding 5% can be expressed as:
A. .07 (1 - t*) = .05.
B. .07 (1 - t*) = .07.
C. .07 + (1 - t*) = .05.
D. .07 (1 - t*) = .05.
E. .05 (1 - t*) = .07.

Topic: Taxable versus Municipal Bonds
5-55
61. A zero coupon bond:

A. is sold at a large premium.
B. has implicit interest which is calculated by amortizing the loan.
C. has less interest rate risk than a comparable coupon bond.
D. can only be issued by the U.S. Treasury.
E. has a price equal to the future value of the face amount given a specified rate of return.

62. The total interest paid on a zero-coupon bond is equal to:

A. zero.
B. $1,000 minus the par value.
C. $1,000 minus the face value.
D. the face value minus the market price on the maturity date.
E. the face value minus the issue price.

63. The collar of a floating-rate bond refers to the minimum and maximum:
A. call periods.
B. maturity dates.
C. coupon rates.
D. market prices.
E. yields to maturity.

5-56
64. Which of the following are common characteristics of floating-rate bonds?

I. adjustable coupon rates
II. adjustable maturity dates
III. put provision
IV. coupon cap
A. I and II only
B. II and III only
C. I, II, and IV only
D. I, III, and IV only

65. A corporation is more prone to issue floating-rate bonds when it expects future interest
rates to _____ over the life of the bond.
A. remain constant
B. continually decline
C. increase briefly and then decline slightly
D. decline briefly and then increase significantly
E. continually increase

66. The yield to maturity is:

A. the rate that equates the price of the bond with the discounted cash flows.
B. the expected rate to be earned if held to maturity.
C. the rate that is used to determine the market price of the bond.
D. equal to the current yield for bonds priced at par.
E. All of the above.

5-57
67. Investors generally tend to buy:

A. Treasury bonds for their high yields.
B. municipal bonds for their high yields.
C. corporate bonds for their guaranteed liquidity.
D. Treasury bonds for their preferential tax treatment.
E. convertible bonds for their potential price appreciation.

Topic: Types of Bonds And Investor Preferences
68. A convertible bond is a bond that can be:

A. exchanged for cash at prescribed points in time.
B. submitted to the issuer for redemption at the discretion of the bondholder.
C. submitted for payment any time the economy converts into a recessionary period.
D. exchanged for a stated number of shares of common stock of the bond issuer.
E. modified from a fixed coupon bond into a floating coupon bond at prescribed points in
time.

Topic: Types of Bonds
69. A put provision in a bond indenture allows:

A. a bond issuer to recall the bond after a specified period of time at a price that exceeds the
face amount.
B. the bondholder to force the issuer to buy back the bond at a specified price prior to
maturity.
C. a bondholder to force the issuer to increase the coupon rate if inflation increases by more
than a specified amount.
D. the issuer to convert a coupon bond into a zero coupon bond at their discretion.
E. the issuer to suspend interest payments for any year in which the interest expense exceeds
the net income of the firm.

Topic: Put Provision
5-58
70. Face value is

A. always higher than current price.
B. always lower than current price.
C. the same as the current price.
D. same as par value.
E. the coupon amount.

Topic: Face Value
71. One basis point is equal to:

A. .01%.
B. .10%.
C. 1.0%.
D. 10%.
E. 100%.

Topic: Basis Point
72. The "EST SPREAD" shown in The Wall Street Journal listing of corporate bonds
represents the estimated:
A. yield to maturity.
B. difference between the current yield and the yield to maturity.
C. difference between the yield to call and the yield to maturity.
D. range of yields to maturity provided by the bond over its life to date.
E. difference between the bond's yield and the yield of a particular Treasury issue.

Topic: Corporate Bond Quote
5-59
73. A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009. This bond pays
A. $127.50 in July and January.
B. $63.75 in July and January.
C. $127.50 in July.
D. $63.75 in July.

Topic: Coupon Payment
74. If its yield to maturity is less than its coupon rate, a bond will sell at a ____, and increases
in market interest rates will ____.
A. discount; increase this discount
B. discount; decrease this discount
C. premium; increase this premium
D. premium; decrease this premium
E. None of the above

75. Today, August 13, you want to buy a bond with a quoted price of 101.5. The bond pays
interest on February 1 and August 1. The price you will pay to purchase this
bond is equal to the:
A. clean price.
B. muddy price.
C. dirty price.
D. par value price.
E. bid price.

Topic: Clean Versus Dirty Prices
5-60
76. The increase you realize in buying power as a result of owning a bond is referred to as the
_____ rate of return.
A. real
B. realized
C. nominal
D. inflated
E. risk-free

Topic: Real Rate of Return
77. The Fisher formula is expressed as _____ where R is the nominal rate, r is the real rate,
and h is the inflation rate.
A. 1 + R = (1 + r) (1 + h)
B. 1 + r = (1 + R) (1 + h)
C. 1 + h = (1 + r) (1 + R)
D. 1 + R = (1 + r) (1 + h)
E. 1 + r = (1 + R) (1 + h)

78. The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of
return.
A. default
B. market
C. interest rate
D. inflation
E. maturity

5-61
79. The term structure of interest rates reflects the:

A. pure time value of money for various lengths of time.
B. actual risk premium being paid for corporate bonds of varying maturities.
C. pure inflation adjustment applied to bonds of various maturities.
D. interest rate risk premium applicable to bonds of varying maturities.
E. nominal interest rates applicable to coupon bonds of varying maturities.

Topic: Term Structure Of Interest Rates
80. The market price of _____ maturity bonds fluctuates _____ compared with _____
maturity bonds as interest rates change.
A. shorter; more; longer
B. longer; less; shorter
C. shorter; less; longer
D. Both b. and c.

Topic: Bond Values
81. Two of the primary differences between a corporate bond and a Treasury bond with
identical maturity dates are related to:
A. interest rate risk and time value of money.
B. time value of money and inflation.
C. taxes and potential default.
D. taxes and inflation.
E. inflation and interest rate risk.

Topic: Corporate Versus Treasury Bonds
5-62
82. Consider a bond which pays 7% semiannually and has 8 years to maturity. The market
requires an interest rate of 8% on bonds of this risk. What is this bond's price?
A. $942.50
B. $911.52
C. $941.74
D. $1,064.81
N=16 I/Y=4 PMT=35 FV=$1000 PV=?=$941.74

Topic: Bond Valuation
83. The value of a 20 year zero-coupon bond with a $1,000 face value when the market
required rate of return of 8% (semiannual) is ___.
A. $171.93
B. $178.43
C. $208.29
D. $414.64
$1,000/(1.040)40 = $208.29

5-63
84. The bonds issued by Jensen & Son bear a 5 % coupon, payable semiannually. The bond
matures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is the
yield to maturity?
A. 4.87%
B. 4.97%
C. 5.00%
D. 5.09%
E. 5.17%
(No Math Needed)

85. A General Co. bond has an 8 % coupon and pays interest annually. The face value is
$1,000 and the current market price is $1,020.50. The bond matures in 20 years. What is the
yield to maturity?
A. 7.79%
B. 7.82%
C. 8.00%
D. 8.04%
E. 8.12%
; This can not be solved directly, so

it's easiest to just use the calculator method to get an answer. You can then use the calculator
answer as the rate in the formula just to verify that your answer is correct.

5-64
86. Winston Enterprises has a 15-year bond issue outstanding that pays a 9 % coupon. The
bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid
semiannually. What is the yield to maturity?
A. 8.67%
B. 10.13%
C. 10.16%
D. 10.40%
E. 10.45%
; This can not be solved directly,

so it's easiest to just use the calculator method to get an answer. You can then use the
calculator answer as the rate in the formula just to verify that your answer is correct.

5-65
87. Wine and Roses, Inc. offers a 7% coupon bond with semiannual payments and a yield to
maturity of 7.73%. The bonds mature in 10 years. What is the market price of a $1,000 face
value bond?
A. $943.28
B. $949.80
C. $1,108.16
D. $1,401.26
E. $1,401.86
; P = $481.40 + $468.40 =
$949.80

Topic: Price of Coupon Bond
5-66
88. Party Time, Inc. has a 6% coupon bond that matures in 11 years. The bond pays interest
semiannually. What is the market price of a $1,000 face value bond if the yield to maturity is
12.9%?
A. $434.59
B. $580.86
C. $600.34
D. $605.92
E. $947.87
; P = $347.53 + $252.81 = $600.34

89. Gugenheim, Inc. offers a 7% coupon bond with annual payments. The yield to maturity is
5.85% and the maturity date is 9 years. What is the market price of a $1,000 face value bond?
A. $742.66
B. $868.67
C. $869.67
D. $1,078.73
E. $1,079.59
; P = $479.24 + $599.49 = $1,078.73

5-67
90. The Lo Sun Corporation offers a 6% bond with a current market price of $875.05. The
yield to maturity is 7.34%. The face value is $1,000. Interest is paid semiannually. How many
A. 16 years
B. 18 years
C. 24 years
D. 30 years
E. 36 years
The easiest way to solve this problem is using a financial calculator. You can then use the
calculator answer as the time period in the formula just to verify that your answer is correct.

Topic: Time to Maturity of Coupon Bond
5-68
91. High Noon Sun, Inc. has a 5%, semiannual coupon bond with a current market price of
$988.52. The bond has a par value of $1,000 and a yield to maturity of 5.29%. How many
A. 4.0 years
B. 4.5 years
C. 6.5 years
D. 8.0 years
E. 9.0 years
; The easiest way to solve

this problem is using a financial calculator. You can then use the calculator answer as the time
period in the formula just to verify that your answer is correct.

Topic: Time to Maturity of Coupon Bond
5-69
92. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8% (annual).
What is the current market price of a $1,000 face value bond?
A. $430.24
B. $473.26
C. $835.56
D. $919.12
E. $1,088.00
; P = $430.24

Topic: Price f Zero Coupon Bond
93. Ted's Co. offers a zero coupon bond with an 11.3% (annual) yield to maturity. The bond
matures in 16 years. What is the current price of a $1,000 face value bond?
A. $178.78
B. $180.33
C. $188.36
D. $190.09
E. $192.18
; P = $180.33

Topic: Price of Zero Coupon Bond
5-70
94. The zero coupon bonds of Markco, Inc. have a market price of $370.67, a face value of
$1,000, and a yield to maturity of 6.84% (annual). How many years is it until this bond
matures?
A. 7 years
B. 10 years
C. 15 years
D. 18 years
E. 20 years
t ln1.0684 = ln2.69782; t = 15.00

Topic: Time to Maturity Of Zero Coupon Bond
5-71
95. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000.
What is the change in the price of this bond if the market yield rises to 6% from the current
yield of 4.5%?
A. 11.11 % decrease
B. 12.38 % decrease
C. 12.38 % increase
D. 14.13 % decrease
E. 14.13 % increase
; P = $455.93 + $589.66 = $1,045.59
; P = $419.19 + $496.97 = $916.16
Change in price =
% (decrease)

96. Jackson Central has a 6-year, 8% annual coupon bond with a $1,000 par value. Earls
Enterprises has a 12-year, 8% annual coupon bond with a $1,000 par value. Both bonds
currently have a yield to maturity of 6%. Which of the following statements are correct if the
market yield increases to 7%?
A. Both bonds would decrease in value by 4.61%.
B. The Earls bond will increase in value by $88.25.
C. The Jackson bond will increase in value by 4.61%.
D. The Earls bond will decrease in value by 7.56%.
E. The Earls bond will decrease in value by $50.68.
5-72
; P = $393.39 + $704.96 = $1,098.35
; P = $381.323 + $666.342 =
$1,047.665 = $1,047.67 (rounded)
Difference in Jackson's prices = $1,047.67 - $1,098.35 = -$50.68 (decrease)
percentage difference in Jackson's prices =

(decrease)
; P = $670.71 + $496.97 = $1,167.68
; P = $635.415 + $444.012 =
$1,079.427 = $1,079.43 (rounded)
Difference in Earls' prices = $1,079.43 - $1,167.68 = -$88.25 (decrease)

percentage difference in Earls' prices =
(decrease)
The correct answer states that the Earls' bond will decrease in value by 7.56 %.
Difficulty level: Challenge
5-73
97. D'Angelo's bonds have a face value of $1,000 and a current market price of $1065. The
bonds have a 7% coupon rate. What is the current yield on these bonds?
A. 6.43%
B. 6.57%
C. 6.84%
D. 7.03%
E. 7.07%
Current yield =

98. Mitzi's, II. bonds offer a 5% coupon at a current market price of $989. The bonds have a
face value of $1,000 and a call price of $1,025. What is the current yield on these bonds?
A. 4.88%
B. 4.97%
C. 6.00%
D. 5.06%
E. 5.12%
Current yield =
% (rounded)

5-74
99. The bonds offered by Leo's Pumps are callable in 3 years at a quoted price of 101. What is
the amount of the call premium on a $1,000 par value bond?
A. $3.33
B. $5.00
C. $10.00
D. $13.33
E. $100.00
Call premium =

Topic: Call Premium
100. A corporate bond is quoted at a current price of 102.767. What is the market price of a
bond with a $1,000 face value?
A. $1,000.28
B. $1,002.77
C. $1,027.67
D. $1,102.77
E. $1,276.70
Market price = 102.767 10 = $1,027.67

Topic: Corporate Bond Quote
5-75
101. A $1,000 face value zero coupon bond is quoted at a price of 53.60. What is the amount
you would pay to purchase this bond?
A. $5.36
B. $53.60
C. $536.00
D. $946.40
E. $1,053.60
Market price = 53.60 10 = $536.00

Topic: Zero Coupon Bond Quote
102. A Treasury bond is quoted at a price of 106:13. What is the market price of this bond if
the face value is $1,000?
A. $106.13
B. $1,064.06
C. $1,106.13
D. $1,106.41
E. $1,142.64
106:13 = 106 and 13/32% = 1.0640625; Market price = 1.0640625 $1,000 = $1,064.06
(rounded)

Topic: Treasury Bond Quote
5-76
103. A Treasury bond is quoted at a price of 101:00 with a current yield of 5.94%. What is the
coupon rate?
A. 5.88%
B. 5.94%
C. 6.00%
D. 6.06%
E. 6.88%
.0594 = Annual dividend (1.01 $1,000); Annual dividend = $59.994; Coupon rate =
$59.994 / $1,000 = 6.00 %

Topic: Treasury Bond Quote and Coupon Rate
104. A corporate bond is quoted at a price of 98.625 with a 7.500 coupon. The bond pays
A. 7.50%
B. 7.60%
C. 7.88%
D. 7.97%
E. 7.98%
Current yield = (.07500 $1,000) (.98625 $1,000) = 7.60 %

Topic: Corporate Quote and Current Yield
5-77
105. A Treasury bond is quoted at a price of 103:23 with a 3.625 coupon. The bond pays
A. 3.46%
B. 3.50%
C. 3.63%
D. 3.68%
E. 3.74%
Current yield = (.03625 $1,000) (103 and 23/32 % of $1,000) = $36.25 / $1,037.19 = 3.50
%

Topic: Treasury Quote and Current Yield
106. A Treasury bond is quoted as 101:18 asked and 101:16 bid. What is the bid-ask spread in
dollars on a $1,000 face value bond?
A. $.02
B. $.20
C. $.625
D. $2.00
E. $6.25
Bid-ask spread = 101:18 - 101:16 = 2/32 of 1% of $1,000 = .000625 $1,000 = $.625

Topic: Bid-Ask Spread
5-78
107. The semiannual, ten-year bonds of Adep, Inc. are selling at par and have an effective
annual yield of 4.295%. What is the amount of each interest payment on a $1,000 Adep
bond?
A. $21.25
B. $21.48
C. $21.50
D. $42.50
E. $42.95
-1; r = .0425; Because the bond is selling at par, the APR and the coupon
rate are equal. Thus, the semiannual interest payment =
payment = $21.25.
; Semiannual interest

Topic: Effective Annual Rates and Interest Payments
108. A bond that pays interest annually yields a 7.25% rate of return. The inflation rate for the
same period is 3.5%. What is the real rate of return on this bond?
A. 3.50%
B. 3.57%
C. 3.62%
D. 3.72%
E. 3.75%
(1 + .0725) = (1 + r) (1 + .035); r = 3.62 %

5-79
109. The bonds of Frank's Welding, Inc. pay an 8% coupon, have a 7.98% yield to maturity
and have a face value of $1,000. The current rate of inflation is 2.5%. What is the real rate of
return on these bonds?
A. 5.32%
B. 5.35%
C. 5.37%
D. 5.42%
E. 5.48%
(1 + .0798) = (1 + r) (1 + .025); r = 5.35 %

110. The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.6%. The
current rate of inflation is 2.5%. What is the nominal rate of return on these bonds?
A. 6.10%
B. 6.13%
C. 6.16%
D. 6.19%
E. 6.22%
(1 + .036) (1 + .025) -1 = .0619 = 6.19 %

5-80
111. The nominal rate of return on the bonds of Stu's Boats is 9.75%. The real rate of return is
3.5%. What is the rate of inflation?
A. 5.97%
B. 6.04%
C. 6.21%
D. 6.43%
E. 6.49%
(1 + .0975) = (1 + .035) (1 + h); h = 6.04 %

112. A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34.
The bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the
bond's life?
A. $9.08
B. $12.56
C. $14.48
D. $21.47
E. $31.25
; r = 3.125 %; PV =
= $477.82; Implicit interest = $477.82
- $463.34 = $14.48

Topic: Zero Coupon Bond and Implicit Interest
5-81
113. The MerryWeather Firm wants to raise $10 million to expand their business. To
accomplish this, the company plans to sell 30-year, $1,000 face value zero-coupon bonds. The
bonds will be priced to yield 5.5%. What is the minimum number of bonds the company must
sell to raise the $10 million they need?
A. 49,841
B. 52,667
C. 57,435
D. 60,000
E. 117,435
PV =
= $200.64;
(rounded)

Topic: Zero Coupon Bond Pricing
114. If a taxable bond yields 10% and a municipal bond of comparable risk and maturity
yields 8%, at what tax rate is the investor indifferent to either bond?
A. 20%
B. 25%
C. 28%
D. 30%
E. 35%
.10 (1 - t*) = .08 = (1 - t*) = .80 = t = .20 or 20 %

5-82
Street Journal as 10s 2017? It is January 1, 2009 and the appropriate interest rate is 11%.
Assume that the bond matures in the same month as when the quote is given, that interest
payments are made twice a year, and that an interest payment has just been made.
A. $718.28
B. $874.17
C. $895.38
D. $947.69
E. $1,000.00
Coupon rate = 9%; Face value = 1000; Coupon = $50
Value of Bond = S.A.Coupon(PVIFA 5.5%,16 )+ Face Value(PVIF5.5%,16)
Or PMT= 50 N=16 I/YR=5.5 FV=$1,000 PV=?=$947.69

payment.
A. $888
B. $1,000
C. $1,014
D. $1,025
E. $1,055
Value = $55(PVIFA5%,6) + $1,000(PVIF5%,6) = $279.16 + $746.22 = $1,025.38

5-83
5% and the bond matures in 8 years?
A. $630.69
B. $676.84
C. $1,000.00
D. $1,050.00
Current Price = Face Value/(1+r)n = 1000/(1+0.05)8 = $676.84

118. A corporate bond with a face value of $1,000 matures in 4 years and has an 8% coupon
paid at the end of each year. The current price of the bond is $932. What is the yield to
A. 5.05%
B. 6.48%
C. 8.58%
D. 10.15%
E. 11.92%
Current Price = Int(PVIFAr,4) + Face value(PVIFr,4)
$932 = $60[1-1/(1+r)4]/r + $1000/(1+r)4
r = 8.056

5-84
Street Journal as 7s 2019? It is exactly ten years until maturity and the appropriate interest
rate is 13%. Assume that the bond matures in the same month as when the quote is given, that
interest payments are made twice a year, and that an interest payment has just been made.
A. $626.28
B. $669.44
C. $701.05
D. $754.50
E. $1,000.00
Coupon rate = 7%; Face value = 1000 Coupon = $35
Value of Bond = S.A.Coupon(PVIFA 6.5%,20 )+ Face Value(PVIF6.5%,20)
Or PMT= 35 N=20 I/YR=6.5 FV=$1,000 PV=? = $669.44

payment.
A. $859
B. $1,000
C. $1,044
D. $1,139
E. $1,464
Value = $75(PVIFA7%,14) + $1,000(PVIF7%,14) = $1,043.73

5-85
7% compounded annually and the bond matures in 5 years?
A. $712.99
B. $747.26
C. $1,000.00
D. $1,058.10
Current Price = Face Value/(1+r)n = 1000/(1+0.07)5 = $712.99

122. A corporate bond with a face value of $1,000 matures in 5 years and has a 6% coupon
paid at the end of each year. The current price of the bond is $1,105. What is the yield to
A. 2.60%
B. 3.66%
C. 3.86%
D. 4.20%
E. 4.95%
Current Price = Int(PVIFAr,4) + Face value(PVIFr,4)
$1,105 = $60[1-1/(1+r)5]/r + $1000/(1+r)5
r = 3.6637%

5-86

Essay Questions
123. Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity, a 10%
annual coupon rate, and a return of $1,000 at maturity.
$1,036 = $100/(1+YTM)1+ $1,100/(1+YTM)2? YTM = 8%.
CALC: N=2; PV=$1,036; PMT=$-100; FV=$-1000 I/YR=?=7.98%
Difficulty level: Difficult

124. Given the opportunity to invest in one of the three bonds listed below, which would you
purchase? Assume an interest rate of 7%.
PV of Bond A = $971.96 < Price Do not buy YTM ( 5.05)

PV of Bond B = $1,048.82 > Price Buy YTM ( 7.61)
PV of Bond C = $1,174.80 > Price Buy YTM ( 8.6)
Bonds B and C are underpriced.

125. Draw a graph of a typical Treasury yield curve and discuss why it usually takes that
shape.
The student should draw a graph similar to the Treasury yield curve found in the text. Factors
impacting the shape of the yield curve are the risk free rate, the inflation premium and the
interest rate risk premium.

Topic: Treasury Yield Curve
5-87
126. Explain why some bond investors are subject to liquidity risk, default risk, and/or
taxability risk. How do each of these risks affect the yield of a bond?
Liquidity problems exist in thinly traded bonds making some bonds difficult to sell at their
actual value. Default risk is the likelihood the corporation will default on its bond obligations.
Taxability risk reflects the fact that some bonds are taxed disadvantageously compared to
others. If any of these risks exist, investors will require compensation by demanding a high
yield.

Topic: Bond Yield Premiums
127. Define what is meant by interest rate risk. Assume you are the manager of a $100 million
portfolio of corporate bonds and you believe interest rates will fall. What adjustments should
you make to your portfolio based on your beliefs?
Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. All else
the same, if interest rates are expected to fall you should purchase long-term bonds and/or low
coupon bonds, and sell shorter-term, higher-coupon bonds.

128. Why do corporations issue 100-year bonds, knowing that interest rate risk is highest for
very long-term bonds? How does the interest rate risk affect the issuer?
Essentially, the issuer takes the opposite side of the interest rate risk position. By issuing longterm bonds, the corporation is essentially betting that rates won't fall significantly. If they do,
the corporation will incur a loss due to borrowing at rates higher than the going market rates.
On the other hand, if rates rise, the corporation benefits by having locked in its borrowing rate
for up to 100 years. In addition, these bonds are a source of long-term financing where the
cost, i.e. the interest, is tax deductible. If the firm should issue stocks, the cost, i.e. the
dividends, are not tax deductible. This is why the IRS frowns on 100 year bonds.

Topic: Interest Rate Risk and the Issuer
5-88
129. In the early 1980s, the Treasury yield curve had a severe downward slope with shortterm yields near 20% and long-term yields below 15%. Explain how such a pattern might
occur.
The downward slope occurs because the expected inflation premium is declining. The decline
in the inflation premium is significant enough to overcome the interest rate risk premium.

Topic: Yield Curve
130. Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest
rate risk and how it is related to the movements of a teeter-totter.
Interest rates sit on one end of the teeter-totter while bond prices sit on the other end. As
interest rates move up, bond prices move down as seen by the movements of a teeter-totter.
Movement in the opposite direction also applies. In addition, short-term bonds are located a
short distance from the fulcrum while long-term bonds are situated towards the end of the
teeter-totter, illustrating that long-term bonds move further in reaction to a change in interest
rates than do short-term bonds.

Topic: Bond Ratings
131. The discussion of asset pricing in the text suggests that an investor will be indifferent
between two bonds which have equal yields to maturity as long as they have equivalent
default risk. Can you think of any real-world factors which might make a given investor
prefer one of these bonds over the other?
Note that the question only implies the bonds have the same yields and bond ratings. There
are the additional issues of taxability, liquidity and interest rate risk. Students should be able
to recap the discussion on the determinants of bond yields found in section 5.7of the text.

5-89
132. Sometimes it is not clear if a particular security is debt or equity. Explain the basic
difference between debt and equity?
This can boil down to a legal and semantic issue with hybrid securities, but at this stage, it is
expected the student recognizes that equity represents an ownership interest and it is a
residual claim in the firm. This means that equity holders are paid after debt holders which
increases the risk of equity ownership over debt ownership. We will soon see this increased
risk is rewarded by a higher required rate of return. Debt holders, on the other hand, have an
upper limit on their wealth, that being the payment of periodic interest and the repayment of
principal.

Topic: Debt or Equity
5-90

Chap 005

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 005

Uploaded by

Copyright:

Available Formats

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

9. The unfunded debt of a firm is generally understood to mean the firm's:

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

19. A deferred call provision refers to the:

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

28. A TIPS bond's interest rate is linked to:

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

40. As the yield to maturity increases, the:

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

45. Interest rate risk _____ as the time to maturity increases.

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

52. Callable bonds generally:

54. Protective covenants:

Chapter 05 - Interest Rate and Bond Valuation

56. A "fallen angel" is a bond that:

57. Bonds issued by the U.S. government:

58. Treasury bonds are:

Chapter 05 - Interest Rate and Bond Valuation

59. Municipal bonds:

61. A zero coupon bond:

62. The total interest paid on a zero-coupon bond is equal to:

Chapter 05 - Interest Rate and Bond Valuation

64. Which of the following are common characteristics of floating-rate bonds?

66. The yield to maturity is:

Chapter 05 - Interest Rate and Bond Valuation

67. Investors generally tend to buy:

68. A convertible bond is a bond that can be:

69. A put provision in a bond indenture allows:

70. Face value is

Chapter 05 - Interest Rate and Bond Valuation

71. One basis point is equal to:

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

79. The term structure of interest rates reflects the:

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 - Interest Rate and Bond Valuation

Chapter 05 Interest Rate and Bond Valuation Answer Key

Multiple Choice Questions

Difficulty level: Easy

Difficulty level: Easy

Difficulty level: Easy

Chapter 05 - Interest Rate and Bond Valuation