# Ba 540 chapter 07 – valuing bonds

**Chapter 07**

**Valuing Bonds**

BA 540 Chapter 07 – Valuing Bonds

BA/540 Chapter 07 – Valuing Bonds

BA540 Chapter 07 – Valuing Bonds

BA-540 Chapter 07 – Valuing Bonds

BA 540 Chapter 07 – ValuingBonds

**Multiple Choice Questions**

1. Which of these statements is false?

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

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

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

D. Bonds are always less risky than stocks.

2. Bonds are issued by which of the following?

A. corporations

B. federal government or its agencies

C. state and local governments

D. all of these

3. Which of these statements answers why bonds are known as fixed income securities?

A. Many investors on fixed incomes buy them.

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

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

D. All of these

4. Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

A. debenture

B. enforcement codes

C. indenture

D. prospectus

5. Regarding a bond’s characteristics, which of the following is the principal loan amount that the borrower must repay?

A. call premium

B. maturity date

C. par or face value

D. time to maturity value

6. To compensate the bondholders for getting the bond called, the issuer pays which of the following?

A. call feature

B. call premium

C. coupon rate

D. original issue premium

7. This determines the dollar amount of interest paid to bondholders.

A. original issue discount

B. call premium

C. coupon rate

D. market rate

8. Bond prices are quoted in terms of which of the following?

A. original issue discount

B. percent of par value

C. coupon rate in dollars

D. market rate in dollars

9. Which of the following are main issuers of bonds?

A. U.S. Treasury bonds

B. Corporate bonds

C. Municipal bonds

D. All of these

10. Which of the following statements is true?

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

B. Interest payments paid to corporate bond holders are not taxed at the federal level.

C. Interest payments paid to corporate bond holders are not taxed at the state level.

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

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

A. U.S. Treasury

B. Corporations

C. Municipalities

D. Nonprofits

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

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

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

C. They are insured by the FDIC.

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

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

A. asset-backed securities

B. credit quality securities

C. debentures

D. junk bonds

14. Which of the following is NOT a factor that determines the coupon rate of a company’s bonds?

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

B. The term of the loan.

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

D. All of these are factors that determine the coupon rate of a company’s bonds.

15. Which of the following bonds makes no interest payments?

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

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

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

D. zero coupon bond

16. Which of the following is a true statement?

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

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

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

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

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

A. credit quality risk

B. interest rate risk

C. liquidity rate risk

D. reinvestment rate risk

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

A. credit quality risk

B. interest rate risk

C. liquidity rate risk

D. reinvestment rate risk

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

A. credit quality risk

B. interest rate risk

C. liquidity of interest rate risk

D. term structure of interest rates

20. A bond’s current yield is defined as

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

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

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

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

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

A. They are able to avoid interest rate risk.

B. They are able to avoid reinvestment rate risk.

C. They are able to reduce their credit risk.

D. They allow for refinancing opportunities.

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

A. They are able to avoid interest rate risk.

B. They are able to avoid reinvestment rate risk.

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

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

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

A. credit quality risk

B. interest rate risk

C. liquidity of interest rate risk

D. term structure of interest rates

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

A. credit quality risk bonds

B. interest rate risk bonds

C. liquidity rate risk bonds

D. junk bonds

25. **Interest Payments** Determine the interest payment for the following three bonds: 5½ percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A. $5.50, $6.45, $0, respectively

B. $27.50, $32.25, $0, respectively

C. $27.50, $32.25, $100, respectively

D. $55.00, $64.50, $0, respectively

26. **Interest Payments** Determine the interest payment for the following three bonds: 2½ percent coupon corporate bond (paid semi-annually), 3.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

A. $2.50, $3.15, $0, respectively

B. $12.50, $15.75, $0, respectively

C. $12.50, $15.75, $100, respectively

D. $25.00, $31.50, $0, respectively

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

A. $4.00, $4.75, $0, respectively

B. $20.00, $23.75, $0, respectively

C. $20.00, $23.75, $150, respectively

D. $40.00, $47.50, $0, respectively

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

A. 1 year, 6 months

B. 8 years

C. 8 years, 6 months

D. 10 years

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

A. 9 years

B. 10 years

C. 19 years

D. 20 years

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

A. 2 years

B. 50 years

C. 998 years

D. 100 years

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

A. $55

B. $220

C. $1000

D. $1055

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

A. $60

B. $600

C. $1000

D. $1060

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

A. $45

B. $225

C. $1000

D. $1045

34. **TIPS Interest and Par Value** A 2½ percent TIPS has an original reference CPI of 170.4. If the current CPI is 205.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

A. $1000, $7.16, respectively

B. $1000, $15.09, respectively

C. $1207.16, $7.16, respectively

D. $1207.16, $15.09, respectively

35. **TIPS Interest and Par Value** A 3 3/4 percent TIPS has an original reference CPI of 175.8. If the current CPI is 207.7, what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

A. $1000, $18.75, respectively

B. $1000, $37.50, respectively

C. $1181.46, $22.15, respectively

D. $1181.46, $37.50, respectively

36. **Bond Quotes** Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

A. $872.50, $1000, $1000, respectively

B. $1000, $1000, $1000, respectively

C. $877.81, $1024.20, $5072.50, respectively

D. $1000, $1024.20, $1001.45, respectively

37. **Bond Quotes** Consider the following three bond quotes; a Treasury note quoted at 102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

A. $1002.30, $1000, $1000, respectively

B. $1000, $1000, $5000, respectively

C. $1002.30, $994.50, $5012.25 respectively

D. $1029.38, $994.50, $5122.50, respectively

38. **Zero Coupon Bond Price** Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)

A. $553.68

B. $558.66

C. $940.00

D. $1000.00

39. **Zero Coupon Bond Price** Calculate the price of a zero coupon bond that matures in 5 years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and $1,000 par value.)

A. $692.02

B. $696.57

C. $962.50

D. $1000.00

40. **Current Yield** What’s the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

A. 5.9%

B. 6.0%

C. 6.1%

D. 10.2%

41. **Current Yield** What’s the current yield of a 5.75 percent coupon corporate bond quoted at a price of 103.05?

A. 5.58%

B. 5.75%

C. 5.93%

D. 17.54%

42. **Current Yield** What’s the current yield of an 8.15 percent coupon corporate bond quoted at a price of 94.30?

A. 4.30%

B. 8.01%

C. 8.15%

D. 8.64%

43. **Taxable Equivalent Yield** What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 3.9 percent for an investor in the 35 percent marginal tax bracket?

A. 1.09%

B. 3.90%

C. 6.00%

D. 11.14%

44. **Taxable Equivalent Yield** What’s the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39 percent marginal tax bracket?

A. 1.76%

B. 4.50%

C. 7.38%

D. 11.54%

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

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

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

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

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

46. **TIPS Capital Return** Consider a 2.75% TIPS with an issue CPI reference of 184.2. At the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What was the capital gain of the TIPS in dollars?

A. $5.10

B. $11.20

C. $16.30

D. $27.69

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

A. $4.90

B. $10.80

C. $15.70

D. $26.25

48. **TIPS** **Capital Return** Consider a 3.75% TIPS with an issue CPI reference of 183.5. At the beginning of this year, the CPI was 190.6 and was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments and $1,000 par value.)

A. 3.75%

B. 4.62%

C. 7.10%

D. 8.80%

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

A. discount

B. premium

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

A. discount

B. premium

51. **Bond Prices and Interest Rate Changes** A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

A. $19.67

B. $21.55

C. $25.00

D. $41.22

52. **Bond Prices and Interest Rate Changes** A 5.5 percent coupon bond with 18 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe that in one year, the yield to maturity will be 5.75 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

A. $25.00

B. $26.89

C. $53.48

D. $80.37

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

A. 3.00%

B. 3.09%

C. 5.75%

D. 6.00%

54. **Yield to Maturity** A 4.25 percent coupon bond with 8 years left to maturity is offered for sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

A. 2.25%

B. 2.36%

C. 4.25%

D. 4.50%

55. **Yield to Call** A 7.25 percent coupon bond with 25 years left to maturity can be called in 5 years. The call premium is one year of coupon payments. It is offered for sale at $1066.24. What is the yield to call of the bond? (Assume that interest payments are paid semi-annually and par value is $1,000.)

A. 3.41%

B. 3.45%

C. 3.51%

D. 6.90%

56. **Yield to Call** A 4.75 percent coupon bond with 12 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $1037.35. What is the yield to call of the bond? (Assume that interest payments are paid semi-annually and par value is $1,000.)

A. 4.60%

B. 4.68%

C. 4.75%

D. 5.05%

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

A. the municipal bond

B. the corporate bond

C. Both give the client equal profits after taxes.

D. There is not enough information given to determine.

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

A. the municipal bond

B. the corporate bond

C. Both give the client equal profits after taxes.

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

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

A. the municipal bond

B. the corporate bond

C. Both give the client equal profits after taxes.

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

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

A. 1.6%

B. 2.4%

C. 5.8%

D. 9.1%

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

A. 5.5%

B. 5.6%

C. 6.6%

D. 6.7%

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

A. 3.5%

B. 5.3%

C. 7.0%

D. 7.15%

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

A. 3.38%

B. 5.00%

C. 5.20%

D. 10.12%

64. **Yields of a Bond** A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called in 4 years. The call premium is one year of coupon payments. What is the bond’s taxable equivalent yield for an investor in the 33 percent marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of $5,000.)

A. 4.5%

B. 4.78%

C. 7.13%

D. 14.48%

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

A. decrease $22.25

B. increase $22.25

C. decrease $23.72

D. increase $23.72

66. Which of the following was the catalyst for the recent financial crisis?

A. Corruption in the investment banking industry.

B. Widespread layoffs due to illegal alien hiring.

C. Defaults on subprime mortgages.

D. All of these.

67. Which of the following is not true about EE savings bonds?

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

B. About 1 in 6 Americans own a savings bond

C. These are tax deferred investments

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

68. If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true?

A. The current bond price will increase.

B. Interest rates required on new bond issues will increase.

C. The current bond price will decrease.

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

69. A 6.5% coupon bond with 12 years left to maturity can be called in 4 years. The call premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield to call of the bond? (Assume interest payments are paid semi-annually and par value is $1,000.)

A. 1.48%

B. 2.96%

C. 6.5%

D. 7.23%

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

A. 4.77%

B. 7.5%

C. 9.54%

D. 10.34%

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

A. $163.92

B. $176.15

C. $198.45

D. $215.82

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

A. $982.03; discount

B. $1,010.59; discount

C. $1,220.93; premium

D. $1,315.62; premium

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

A. $685.93; discount

B. $791.03; discount

C. $1,051.83; premium

D. $1,176.31; premium

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

A. $90.29

B. $195.62

C. $1,195.62

D. $995.62

75. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4% for an investor in the 28% tax bracket?

A. 2.88%

B. 3.87%

C. 4.51%

D. 5.56%

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

A. Treasury, Trump Casino, Banc Ono, IBM

B. Trump Casino, IBM, Banc Ono, Treasury

C. Treasury, Banc Ono, IBM, Trump Casino

D. Trump Casino, Banc Ono, IBM, Treasury

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

A. $32.73

B. $46.92

C. $62.49

D. $75.85

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

A. Treasury, Trump Casino, Banc Ono, IBM

B. Banc Ono, Trump Casino, IBM, Treasury

C. Trump Casino, Treasury, Banc Ono, IBM

D. IBM, Banc Ono, Trump Casino, Treasury

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

A. $5,089.06

B. $5,050.19

C. $5,062.50

D. $5,109.75

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

A. $43.78

B. $37.50

C. $21.89

D. $18.75

81. A 5 1/8% TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is the par value of the TIPS?

A. $981.75

B. $1,018.60

C. $992.75

D. $1,042.95

82. A 7.5% coupon bond with 9 years left to maturity is priced to offer a 10.4% yield to maturity. You believe that in one year, the yield to maturity will be 8%. What is the change in price the bond will experience in dollars? (Assume interest payments are semiannual and par value is $1,000.)

A. $97.75

B. $101.50

C. $129.25

D. $137.75

83. A 6.75% coupon bond with 13 years left to maturity can be called in 2 years. The call premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.

A. 12.14%

B. 7.27%

C. 14.54%

D. 8.29%

84. A 5.5% coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in 9 years. The call premium is one year of coupon payments. Compute the bond’s current yield. Assume interest payments are paid semi-annually and a par value of $5,000.

A. 5.94%

B. 11.89%

C. 12.19%

D. 13.14%

85. A 5.5% coupon municipal bond has 16 years left to maturity and has a price quote of 92.55. The bond can be called in 9 years. The call premium is one year of coupon payments. Compute the bond’s yield to maturity and yield to call. Assume interest payments are paid semi-annually and a par value of $5,000.

A. YTM = 6.91%; YTC = 7.52%

B. YTM = 6.24%; YTC = 7.08%

C. YTM = 5.78%; YTC = 6.61%

D. YTM = 5.92%; YTC = 6.85%

86. An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in 6 years. The call premium is one year of coupon payments. Compute the bond’s yield to call and determine if the bond will be called. Assume interest payments are paid semi-annually and a par value of $5,000.

A. 4.68%; yes, the bond will be called

B. 9.36%; yes, the bond will be called

C. 9.36%; no, the bond will not be called

D. 10.71%; no, the bond will not be called

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

A. 4.31%; yes, the bond will be called

B. 8.62%; yes, the bond will be called

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

D. 11.21%; no the bond will not be called

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

A. -$43.61

B. -$51.07

C. -$62.43

D. -$56.31

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

A. -$82.13

B. -$95.19

C. -$101.37

D. -$69.85

90. Junk bonds are those bonds with a credit rating of _____________.

A. BB and lower

B. B and lower

C. BBB and lower

D. None of these.

91. Which of following are backed only by the reputation and financial stability of the corporation?

A. Debentures

B. Unsecured bonds

C. Both a and b

D. None of these.

92. Investment grade bonds include those bonds with ratings _____________.

A. From AAA to BB

B. From AAA to BBB

C. From AAA to B

D. From AAA to A

93. Which of the following statements is correct?

A. Michael Milken pioneered an active high-yield bond market in the late 1970s that provided much needed capital to entrepreneurs and financial innovators.

B. Prior to Milken, the only junk bonds were those issued by once financially stable firms that had fallen on hard times.

C. Milken showed investors that, historically, junk bonds rarely defaulted and offered a very high return to those willing to assume the risk of owning them.

D. All of these statements are correct.

94. Which of the following statements is correct?

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

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

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

D. None of these statements is correct.

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

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

B. Sally should select Bond B is better because it has lower risk.

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

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

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

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

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

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

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

97. Sally is choosing between two bonds both of which mature in 15 years and have the same level of risk. Bond A is a municipal bond that yields 5.15%. Bond B is a corporate bond that yields 7.15%. If Sally is in the 28% tax bracket, which bond should she select and why?

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

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

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

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

98. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of 10.06%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond’s annual coupon rate?

A. 5.50%

B. 8.19%

C. 9.57%

D. 11.00%

99. A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond’s annual coupon rate?

A. 7.45%

B. 8.03%

C. 9.39%

D. 10.82%

100. All of the following items would need to be included in the bond’s indenture agreement except _____.

A. The coupon rate

B. The call feature

C. The credit rating

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

101. Which of the following is not a correct statement?

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

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

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

D. All of these statements are correct.

102. Which of the following would NOT be an example of an agency bond?

A. Federal Home Loan Bank bond

B. Student Loan Marketing Association bond

C. Fannie Mae bond

D. Treasury bills

103. Which of the following statements is correct?

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

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

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

D. All of these statements are correct.

104. Which of the following statements is correct?

A. Long-term bonds have more reinvestment rate risk than short-term bonds.

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

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

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

105. Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1%?

A. 2-year, 5% coupon bond

B. 30-year, 10% coupon bond

C. 10-year, zero coupon

D. 30-year, zero coupon

106. Rank the following bonds, from highest to lowest interest rate risk: 2-year zero coupon, 2-year 5% coupon bond, 30-year 5% coupon bond, 30-year, zero coupon bond.

A. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year 5% coupon bond, 2-year zero coupon bond

B. 2-year 5% coupon bond, 2-year zero coupon bond, 30-year 5% coupon bond, 30-year zero coupon bond

C. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond, 2-year 5% coupon bond

D. 30-year, 5% coupon bond, 30-year zero coupon bond, 2-year 5% coupon bond, 2-year zero coupon bond

107. Which of the following statements is correct?

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

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

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

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

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

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

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

C. Interest rates decrease due to decline in inflation.

D. None of these conditions will cause an increase in the bond’s yield.

109. Which of the following statements is correct?

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

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

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

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

110. If a bond is selling at a premium, then ________________________________.

A. its coupon rate must be greater than its yield

B. its coupon rate must be less than its yield

C. its coupon rate must be equal to its yield

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

111. The bond’s annual coupon rate divided by its market price is referred to as the __________.

A. Yield to Call

B. Yield to Maturity

C. Current Yield

D. Term Structure of Interest Rates

112. Possible shapes for the yield include all of the following except ____________.

A. Humped

B. Downward sloping

C. Flat

D. All of these are possible shapes.

113. Possible shapes for the yield curve include all of the following except ___________.

A. Upward sloping

B. Humped

C. Horizontal line

D. Vertical line

114. If a bond is selling at a discount, which of the following statements is correct?

A. The current yield must be greater than the coupon rate.

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

C. The bond must have a low bond rating.

D. All of the statements are correct.

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

A. The current yield must equal the coupon rate.

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

C. Both of these statements are correct.

D. None of these statements is correct.

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

A. Trust securities

B. Mortgage-backed securities

C. Current yield securities

D. Treasury Inflation Protected Securities

117. Under what conditions is a bond likely to be called?

A. The firm is in financial duress.

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

C. Interest rates have significantly declined.

D. The firm wants to increase its debt ratio.

118. A 30-year bond with an 8% coupon has a yield to maturity of 6%. The bond could be called in 7 years and if called would generate a yield to call of 5.75%. What is this bond’s call premium? Assume the coupon payments are made annually and par value is $1,000.

A. $219.73

B. $152.64

C. $106.29

D. $301.76

119. A 15-year bond with a 10% coupon has a yield to maturity of 8%. The bond could be called in 4 years and if called would generate a yield to call of 6%. What is this bond’s call premium? Assume the coupon payments are made semi-annually and par value is $1,000.

A. $19.73

B. $81.87

C. $41.20

D. $66.03

120. A 5% coupon bond has 10 years to maturity and could be called in 2 years. If the bond is called, investors will earn 6.2%. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond’s yield to maturity?

A. 2.36%

B. 4.72%

C. 5.18%

D. 6.49%

121. A 7% coupon bond has 10 years to maturity and could be called in 3 years. If the bond is called, investors will earn 5.5%. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond’s yield to maturity?

A. 2.84%

B. 3.17%

C. 5.38%

D. 5.69%

122. A 10% coupon bond has 15 years to maturity and could be called in 2 years. If the bond is called, investors will earn 4%. The call premium is one year of coupon payments. If coupon payments are made annually and par value is $1,000, what is the bond’s yield to maturity?

A. 6.19%

B. 6.82%

C. 7.65%

D. 7.98%

**Essay Questions**

123. Describe the relationship between interest rate changes and bond

124. Describe reasons that the U.S. Government and corporations would issue

125. Explain why high-income and wealthy people are more likely to buy a municipal bond than a corporate

126. **Yields of a Bond** A 4.75 percent coupon municipal bond has 20 years left to maturity and has a price quote of 98.9. The bond can be called in 5 years. The call premium is one year of coupon payments. Compute and discuss the bond’s current yield, yield to maturity, taxable equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call. (Assume interest payments are paid semi-annually and a par value of $

127. **Bond Ratings and Prices** A corporate bond with a 5.75 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 6.25 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 6.75 percent. What will be the change in the bond’s price in dollars and percentage terms? (Assume interest payments are paid semi-annually and a par value of $

128. What does a call provision allow the issuer to do, and why would they do

129. All else equal, which bond’s price is more affected by a change in interest rates, a bond with a large coupon or a small coupon?

130. Explain how investors can assess bond market

131. What actions taken by the Federal Reserve preceded and possibly helped precipitate the recent financial crisis?

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