Chapter 14

Bond Prices and Yields

Multiple Choice Questions

1. The current yield on a bond is equal to

A. annual interest payment divided by the current

market price.
B. the yield to
maturity.
C. annual interest divided by the par
value.
D. the internal rate of
return.
E. None of the
options

2. If a 7% coupon bond is trading for $975.00, it has a current yield of

A. 7.00
%.
B. 6.53
%.
C. 7.24
%.
D. 8.53
%.
E. 7.18
%.

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3. If a 7.25% coupon bond is trading for $982.00, it has a current yield of

A. 7.38
%.
B. 6.53
%.
C. 7.25
%.
D. 8.53
%.
E. 7.18
%.

4. If a 6.75% coupon bond is trading for $1,016.00, it has a current yield of

A. 7.38
%.
B. 6.64
%.
C. 7.25
%.
D. 8.53
%.
E. 7.18
%.

5. If a 7.75% coupon bond is trading for $1,019.00, it has a current yield of

A. 7.38
%.
B. 6.64
%.
C. 7.25
%.
D. 7.61
%.
E. 7.18
%.

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6. If a 6% coupon bond is trading for $950.00, it has a current yield of

A. 6.5%
.
B. 6.3%
.
C. 6.1%
.
D. 6.0%
.
E. 6.6%
.

7. If an 8% coupon bond is trading for $1,025.00, it has a current yield of

A. 7.8%
.
B. 8.7%
.
C. 7.6%
.
D. 7.9%
.
E. 8.1%
.

8. If a 7.5% coupon bond is trading for $1,050.00, it has a current yield of

A. 7.0%
.
B. 7.4%
.
C. 7.1%
.
D. 6.9%
.
E. 6.7%
.

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9. A coupon bond pays annual interest, has a par value of $1,000, matures in four
years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current
yield on this bond is

A. 10.65
%.
B. 10.45
%.
C. 10.95
%.
D. 10.52
%.
E. None of the
options

10. A coupon bond pays annual interest, has a par value of $1,000, matures in four
years, has a coupon rate of 8.25%, and has a yield to maturity of 8.64%. The current
yield on this bond is

A. 8.65
%.
B. 8.45
%.
C. 7.95
%.
D. 8.36
%.
E. None of the
options

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11. A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years,
has a coupon rate of 11%, and has a yield to maturity of 12%. The current yield on
this bond is

A. 10.39
%.
B. 10.43
%.
C. 10.58
%.
D. 11.73
%.
E. None of the
options

12. A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years,
has a coupon rate of 8.7%, and has a yield to maturity of 7.9%. The current yield on
this bond is

A. 8.39
%.
B. 8.43
%.
C. 8.83
%.
D. 8.66
%.
E. None of the
options

13. Of the following four investments, ________ is considered the safest.

A. commercial
paper
B. corporate
bonds
C. U.S. agency
issues
D. Treasury
bonds
E. Treasury
bills

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14. Of the following four investments, ________ is considered the least risky.

A. Treasury
bills
B. corporate
bonds
C. U.S. agency
issues
D. Treasury
bonds
E. commercial
paper

15. To earn a high rating from the bond rating agencies, a firm should have

A. a low times interest earned

ratio.
B. a low debt to equity
ratio.
C. a high quick
ratio.
D. a low debt to equity ratio and a high
quick ratio.
E. a low times interest earned ratio and a high
quick ratio.

16. A firm with a low rating from the bond rating agencies would have

A. a low times interest earned

ratio.
B. a low debt to equity
ratio.
C. a low quick
ratio.
D. a low debt to equity ratio and a low
quick ratio.
E. a low times interest earned ratio and a low
quick ratio.

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17. At issue, coupon bonds typically sell

A. above par
value.
B. below
par.
C. at or near par
value.
D. at a value unrelated to
par.
E. None of the
options

18. Accrued interest

A. is quoted in the bond price in the financial

press.
B. must be paid by the buyer of the bond and remitted to the seller
of the bond.
C. must be paid to the broker for the inconvenience of selling bonds between
maturity dates.
D. is quoted in the bond price in the financial press and must be paid by the buyer of
the bond and remitted to the seller of the bond.
E. is quoted in the bond price in the financial press and must be paid to the broker for
the inconvenience of selling bonds between maturity dates.

19. The invoice price of a bond that a buyer would pay is equal to

A. the asked price plus accrued

interest.
B. the asked price less accrued
interest.
C. the bid price plus accrued
interest.
D. the bid price less accrued
interest.
E. the bid
price.

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20. An 8% coupon U.S. Treasury note pays interest on May 30 and November 30 and is
traded for settlement on August 15. The accrued interest on the $100,000 face value
of this note is

A. $491.8
0.
B. $800.0
0.
C. $983.6
1.
D. $1,661.2
0.
E. None of the
options

21. A coupon bond is reported as having an ask price of 108% of the $1,000 par value in
the Wall Street Journal. If the last interest payment was made one month ago and the
coupon rate is 9%, the invoice price of the bond will be

A. $1,087.5
0.
B. $1,110.1
0.
C. $1,150.0
0.
D. $1,160.2
5.
E. None of the
options

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22. A coupon bond is reported as having an ask price of 113% of the $1,000 par value in
the Wall Street Journal. If the last interest payment was made two months ago and
the coupon rate is 12%, the invoice price of the bond will be

A. $1,10
0.
B. $1,11
0.
C. $1,15
0.
D. $1,16
0.
E. None of the
options

23. The bonds of Ford Motor Company have received a rating of "B" by Moody's. The "B"
rating indicates

A. the bonds are

insured.
B. the bonds are junk
bonds.
C. the bonds are referred to as "high-yield"
bonds.
D. the bonds are insured or junk
bonds.
E. the bonds are "high-yield" or junk
bonds.

24. The bond market

A. can be quite
"thin."
B. primarily consists of a network of bond dealers in the over-the-
counter market.
C. consists of many investors on any
given day.
D. can be quite "thin" and primarily consists of a network of bond dealers in the over-
the-counter market.
E. primarily consists of a network of bond dealers in the over-the-counter market and
consists of many investors on any given day.

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25. Ceteris paribus, the price and yield on a bond are

A. positively
related.
B. negatively
related.
C. sometimes positively and sometimes negatively
related.
D. not
related.
E. indefinitely
related.

26. The ______ is a measure of the average rate of return an investor will earn if the
investor buys the bond now and holds until maturity.

A. current
yield
B. dividend
yield
C. P/E
ratio
D. yield to
maturity
E. discount
yield

27. The _________ gives the number of shares for which each convertible bond can be
exchanged.

A. conversion
ratio
B. current
ratio
C. P/E
ratio
D. conversion
premium
E. convertible
floor

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28. A coupon bond is a bond that

A. pays interest on a regular basis (typically every six

months).
B. does not pay interest on a regular basis, but pays a lump sum at
maturity.
C. can always be converted into a specific number of shares of common stock in the
issuing company.
D. always sells at
par.
E. None of the
options

29. A ___________ bond is a bond where the bondholder has the right to cash in the bond
before maturity at a specified price after a specific date.

A. callabl
e
B. coupo
n
C. pu
t
D. Treasur
y
E. zero-
coupon

30. Callable bonds

A. are called when interest rates decline

appreciably.
B. have a call price that declines as time
passes.
C. are called when interest rates increase
appreciably.
D. are called when interest rates decline appreciably and have a call price that
declines as time passes.
E. have a call price that declines as time passes and are called when interest rates
increase appreciably.

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31. A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years
has a yield of 6.2%. A bond issued by Ford Motor Company due in 5 years has a yield
of 7.5%; a bond issued by Shell Oil due in one year has a yield of 6.5%. The default
risk premiums on the bonds issued by Shell and Ford, respectively, are

A. 1.0% and
1.2%.
B. 0.7% and
1.5%.
C. 1.2% and
1.0%.
D. 0.8% and
1.3%.
E. None of the
options

32. A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in five
years has a yield of 5.6%. A bond issued by Lucent Technologies due in five years has
a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%. The
default risk premiums on the bonds issued by Exxon and Lucent Technologies,
respectively, are

A. 1.6% and
3.3%.
B. 0.5% and
0.7%.
C. 3.3% and
1.6%.
D. 0.7% and
0.5%.
E. None of the
options

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33. A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in five
years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of
7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk
premiums on the bonds issued by Exxon and Xerox, respectively, are

A. 1.0% and
1.2%.
B. 0.5%
and .7%.
C. 1.2% and
1.0%.
D. 0.7% and
0.5%.
E. None of the
options

34. A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five
years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of
7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default
risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are

A. 3.33% and
2.10%.
B. 2.57% and
2.86%.
C. 1.2% and
1.0%.
D. 0.76% and
0.47%.
E. None of the
options

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35. Floating-rate bonds are designed to ___________ while convertible bonds are designed
to __________.

A. minimize the holders' interest rate risk; give the investor the ability to share in the
price appreciation of the company's stock
B. maximize the holders' interest rate risk; give the investor the ability to share in the
price appreciation of the company's stock
C. minimize the holders' interest rate risk; give the investor the ability to benefit from
interest rate changes
D. maximize the holders' interest rate risk; give investor the ability to share in the
profits of the issuing company
E. None of the
options

36. A coupon bond that pays interest annually is selling at par value of $1,000, matures
in five years, and has a coupon rate of 9%. The yield to maturity on this bond is

A. 8.0%
.
B. 8.3%
.
C. 9.0%
.
D. 10.0
%.
E. None of the
options

37. A coupon bond that pays interest semi-annually is selling at par value of $1,000,
matures in seven years and has a coupon rate of 8.6%. The yield to maturity on this
bond is

A. 8.0%
.
B. 8.6%
.
C. 9.0%
.
D. 10.0
%.
E. None of the
options

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38. A coupon bond that pays interest annually has a par value of $1,000, matures in five
years, and has a yield to maturity of 10%. The intrinsic value of the bond today will
be ______ if the coupon rate is 7%.

A. $712.9
9
B. $620.9
2
C. $1,123.0
1
D. $886.2
8
E. $1,000.0
0

39. A coupon bond that pays interest annually has a par value of $1,000, matures in
seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond
today will be ______ if the coupon rate is 8.5%.

A. $712.9
9
B. $960.1
4
C. $1,123.0
1
D. $886.2
8
E. $1,000.0
0

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40. A coupon bond that pays interest annually, has a par value of $1,000, matures in five
years, and has a yield to maturity of 10%. The intrinsic value of the bond today will
be _________ if the coupon rate is 12%.

A. $922.7
7
B. $924.1
6
C. $1,075.8
2
D. $1,077.2
0
E. None of the
options

41. A coupon bond that pays interest semi-annually has a par value of $1,000, matures
in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today
will be __________ if the coupon rate is 8%.

A. $922.7
8
B. $924.1
6
C. $1,075.8
0
D. $1,077.2
0
E. None of the
options

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42. A coupon bond that pays interest semi-annually has a par value of $1,000, matures
in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond
today will be ________ if the coupon rate is 9.5%.

A. $922.7
7
B. $1,010.1
2
C. $1,075.8
0
D. $1,077.2
2
E. None of the
options

43. A coupon bond that pays interest semi-annually has a par value of $1,000, matures
in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today
will be ________ if the coupon rate is 12%.

A. $922.7
7
B. $924.1
6
C. $1,075.8
0
D. $1,077.2
2
E. None of the
options

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44. A coupon bond that pays interest of $100 annually has a par value of $1,000,
matures in five years, and is selling today at a $72 discount from par value. The yield
to maturity on this bond is

A. 6.00
%.
B. 8.33
%.
C. 12.00
%.
D. 60.00
%.
E. None of the
options

45. You purchased an annual interest coupon bond one year ago that now has six years
remaining until maturity. The coupon rate of interest was 10% and par value was
$1,000. At the time you purchased the bond, the yield to maturity was 8%. The
amount you paid for this bond one year ago was

A. $1,057.5
0.
B. $1,075.5
0.
C. $1,088.5
0.
D. $1.092.4
6.
E. $1,104.1
3.

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46. You purchased an annual interest coupon bond one year ago that had six years
remaining to maturity at that time. The coupon interest rate was 10% and the par
value was $1,000. At the time you purchased the bond, the yield to maturity was 8%.
If you sold the bond after receiving the first interest payment and the yield to
maturity continued to be 8%, your annual total rate of return on holding the bond for
that year would have been

A. 7.00
%.
B. 7.82
%.
C. 8.00
%.
D. 11.95
%.
E. None of the
options

47. Consider two bonds, A and B. Both bonds presently are selling at their par value of
$1,000. Each pays interest of $120 annually. Bond A will mature in five years, while
bond B will mature in six years. If the yields to maturity on the two bonds change
from 12% to 10%,

A. both bonds will increase in value, but bond A will increase more
than bond B.
B. both bonds will increase in value, but bond B will increase more
than bond A.
C. both bonds will decrease in value, but bond A will decrease more
than bond B.
D. both bonds will decrease in value, but bond B will decrease more
than bond A.
E. None of the
options

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48. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the
bond matures in eight years, the bond should sell for a price of _______ today.

A. 422.4
1
B. $501.8
7
C. $513.1
6
D. $483.4
9
E. None of the
options

49. You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10%
and a par value of $1,000. What would your rate of return at the end of the year be if
you sell the bond? Assume the yield to maturity on the bond is 11% at the time you
sell.

A. 10.00
%
B. 20.42
%
C. 13.8
%
D. 1.4
%
E. None of the
options

50. A Treasury bill with a par value of $100,000 due one month from now is selling today
for $99,010. The effective annual yield is

A. 12.40
%.
B. 12.55
%.
C. 12.62
%.
D. 12.68
%.
E. None of the
options

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51. A Treasury bill with a par value of $100,000 due two months from now is selling
today for $98,039, with an effective annual yield of

A. 12.40
%.
B. 12.55
%.
C. 12.62
%.
D. 12.68
%.
E. None of the
options

52. A Treasury bill with a par value of $100,000 due three months from now is selling
today for $97,087, with an effective annual yield of

A. 12.40
%.
B. 12.55
%.
C. 12.62
%.
D. 12.68
%.
E. None of the
options

53. A coupon bond pays interest semi-annually, matures in five years, has a par value of
$1,000 and a coupon rate of 12%, and an effective annual yield to maturity of
10.25%. The price the bond should sell for today is

A. $922.7
7.
B. $924.1
6.
C. $1,075.8
0.
D. $1,077.2
0.
E. None of the
options

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54. A convertible bond has a par value of $1,000 and a current market price of $850. The
current price of the issuing firm's stock is $29 and the conversion ratio is 30 shares.
The bond's market conversion value is

A. $72
9.
B. $81
0.
C. $87
0.
D. $1,00
0.
E. None of the
options

55. A convertible bond has a par value of $1,000 and a current market value of $850.
The current price of the issuing firm's stock is $27 and the conversion ratio is 30
shares. The bond's conversion premium is

A. $40
.
B. $15
0.
C. $19
0.
D. $20
0.
E. None of the
options

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56. Consider the following $1,000 par value zero-coupon bonds:

The yield to maturity on bond A is

A. 10%
.
B. 11%
.
C. 12%
.
D. 14%
.
E. None of the
options

57. Consider the following $1,000 par value zero-coupon bonds:

The yield to maturity on bond B is

A. 10%
.
B. 11%
.
C. 12%
.
D. 14%
.
E. None of the
options

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58. Consider the following $1,000 par value zero-coupon bonds:

The yield to maturity on bond C is

A. 10%
.
B. 11%
.
C. 12%
.
D. 14%
.
E. None of the
options

59. Consider the following $1,000 par value zero-coupon bonds:

The yield to maturity on bond D is

A. 10%
.
B. 11%
.
C. 12%
.
D. 14%
.
E. None of the
options

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60. A 10% coupon bond, annual payments, 10 years to maturity is callable in three years
at a call price of $1,100. If the bond is selling today for $975, the yield to call is

A. 10.26
%.
B. 10.00
%.
C. 9.25
%.
D. 13.98
%.
E. None of the
options

61. A 12% coupon bond, semi-annual payments, is callable in five years. The call price is
$1,120; if the bond is selling today for $1,110, what is the yield to call?

A. 12.03
%
B. 10.86
%
C. 10.95
%
D. 9.14
%
E. None of the
options

62. A 10% coupon, annual payments, bond maturing in 10 years, is expected to make all
coupon payments, but to pay only 50% of par value at maturity. What is the
expected yield on this bond if the bond is purchased for $975?

A. 10.00
%
B. 6.68
%
C. 11.00
%
D. 8.68
%
E. None of the
options

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63. You purchased an annual interest coupon bond one year ago with six years
remaining to maturity at the time of purchase. The coupon interest rate is 10% and
par value is $1,000. At the time you purchased the bond, the yield to maturity was
8%. If you sold the bond after receiving the first interest payment and the bond's
yield to maturity had changed to 7%, your annual total rate of return on holding the
bond for that year would have been

A. 7.00
%.
B. 8.00
%.
C. 9.95
%.
D. 11.95
%.
E. None of the
options

64. The ________ is used to calculate the present value of a bond.

A. nominal
yield
B. current
yield
C. yield to
maturity
D. yield to
call
E. None of the
options

65. The yield to maturity on a bond is

A. below the coupon rate when the bond sells at a discount and equal to the coupon
rate when the bond sells at a premium.
B. the discount rate that will set the present value of the payments equal to
the bond price.
C. based on the assumption that any payments received are reinvested at the
coupon rate.
D. None of the
options

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66. A bond will sell at a discount when

A. the coupon rate is greater than the current yield and the current yield is greater
than yield to maturity.
B. the coupon rate is greater than yield to
maturity.
C. the coupon rate is less than the current yield and the current yield is greater than
the yield to maturity.
D. the coupon rate is less than the current yield and the current yield is less than
yield to maturity.
E. None of the options is
true.

67. Consider a 5-year bond with a 10% coupon that has a present yield to maturity of
8%. If interest rates remain constant, one year from now the price of this bond will
be

A. highe
r.
B. lowe
r.
C. the
same.
D. Cannot be
determined
E. $1,00
0.

68. A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of
10% with interest paid annually, a current price of $850, and a yield to maturity of
12%. Intuitively and without using calculations, if interest payments are reinvested at
10%, the realized compound yield on this bond must be

A. 10.00
%.
B. 10.9
%.
C. 12.0
%.
D. 12.4
%.
E. None of the
options

14-27
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69. A bond with a 12% coupon, 10 years to maturity and selling at 88:00 has a yield to
maturity of

A. over
14%.
B. between 13% and
14%.
C. between 12% and
13%.
D. between 10% and
12%.
E. less than
12%.

70. Using semi-annual compounding, a 15-year zero-coupon bond that has a par value of
$1,000, and a required return of 8% would be priced at approximately

A. $30
8.
B. $31
5.
C. $46
4.
D. $55
5.
E. None of the
options

71. The yield to maturity of a 20-year zero-coupon bond that is selling for $372.50 with a
value at maturity of $1,000 is

A. 5.1%
.
B. 8.8%
.
C. 10.8
%.
D. 13.4
%.
E. None of the
options

14-28
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72. Which one of the following statements about convertibles is true?

A. The longer the call protection on a convertible, the less the

security is worth.
B. The more volatile the underlying stock, the greater the value of the
conversion feature.
C. The smaller the spread between the dividend yield on the stock and the yield-to-
maturity on the bond, the more the convertible is worth.
D. The collateral that is used to secure a convertible bond is one reason convertibles
are more attractive than the underlying stock.
E. Convertibles are not
callable.

73. Which one of the following statements about convertibles is false?

I) The longer the call protection on a convertible, the less the security is worth.
II) The more volatile the underlying stock, the greater the value of the conversion
feature.
III) The smaller the spread between the dividend yield on the stock and the yield-to-
maturity on the bond, the more the convertible is worth.
IV) The collateral that is used to secure a convertible bond is one reason convertibles
are more attractive than the underlying stock.

A. I
only
B. II
only
C. I and
III
D. IV
only
E. I, III, and
IV

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74. Consider a $1,000 par value 20-year zero-coupon bond issued at a yield to maturity
of 10%. If you buy that bond when it is issued and continue to hold the bond as yields
decline to 9%, the imputed interest income for the first year of that bond is

A. zero
.
B. $14.8
7.
C. $45.8
5.
D. $7.4
4.
E. None of the
options

75. The bond indenture includes

A. the coupon rate of the

bond.
B. the par value of the
bond.
C. the maturity date of the
bond.
D. All of the
options
E. None of the
options

76. A Treasury bond quoted at 107:16 107:18 has a bid price of _______ and an asked
price of _____.

A. $107.16,
$107.18
B. $1,071.60,
$1,071.80
C. $1,075.00,
$1,075.63
D. $1,071.80,
$1,071.60
E. $1,070.50,
$1,070.56

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77. Most corporate bonds are traded

A. on a formal exchange operated by the New York Stock

Exchange.
B. by the issuing
corporation.
C. over the counter by bond dealers linked by a computer
quotation system.
D. on a formal exchange operated by the American Stock
Exchange.
E. on a formal exchange operated by the Philadelphia Stock
Exchange.

78. The process of retiring high-coupon debt and issuing new bonds at a lower coupon to
reduce interest payments is called

A. deferra
l.
B. reissu
e.
C. repurchas
e.
D. refundin
g.
E. None of the
options

79. Convertible bonds

A. give their holders the ability to share in price appreciation of the

underlying stock.
B. offer lower coupon rates than similar
nonconvertible bonds.
C. offer higher coupon rates than similar
nonconvertible bonds.
D. give their holders the ability to share in price appreciation of the underlying stock
and offer lower coupon rates than similar nonconvertible bonds.
E. give their holders the ability to share in price appreciation of the underlying stock
and offer higher coupon rates than similar nonconvertible bonds.

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80. TIPS are

A. securities formed from the coupon payments only of

government bonds.
B. securities formed from the principal payments only of
government bonds.
C. government bonds with par value linked to the general level
of prices.
D. government bonds with coupon rate linked to the general level
of prices.
E. zero-coupon government
bonds.

81. Altman's Z scores are assigned based on a firm's financial characteristics and are
used to predict

A. required coupon rates for new bond

issues.
B. bankruptcy
risk.
C. the likelihood of a firm becoming a takeover
target.
D. the probability of a bond issue being
called.
E. None of the
options

82. When a bond indenture includes a sinking fund provision,

A. firms must establish a cash fund for future bond

redemption.
B. bondholders always benefit because principal repayment on the scheduled
maturity date is guaranteed.
C. bondholders may lose because their bonds can be repurchased by the corporation
at below-market prices.
D. firms must establish a cash fund for future bond redemption and bondholders
always benefit because principal repayment on the scheduled maturity date is
guaranteed.
E. None of the options is
true.

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83. Subordination clauses in bond indentures

A. may restrict the amount of additional borrowing the firm can

undertake.
B. are always bad for
investors.
C. provide higher priority to senior creditors in the event of
bankruptcy.
D. All of the options are
true.
E. may restrict the amount of additional borrowing the firm can undertake and
provide higher priority to senior creditors in the event of bankruptcy.

84. Collateralized bonds

A. rely on the general earning power of the firm for the

bond's safety.
B. are backed by specific assets of the
issuing firm.
C. are considered the safest variety of
bonds.
D. All of the options are
true.
E. are backed by specific assets of the issuing firm and are considered the safest
variety of bonds.

85. Debt securities are often called fixed-income securities because

A. the government fixes the maximum rate that can be paid

on bonds.
B. they are held predominantly by older people who are living on
fixed incomes.
C. they pay a fixed amount at
maturity.
D. they promise either a fixed stream of income or a stream of income determined by
a specific formula.
E. they were the first type of investment offered to the public, which allowed them to
"fix" their income at a higher level by investing in bonds.

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86. A zero-coupon bond is one that

A. effectively has a zero percent

coupon rate.
B. pays interest to the investor based on the general level of interest rates, rather
than at a specified coupon rate.
C. pays interest to the investor without requiring the actual coupon to be mailed to
the corporation.
D. is issued by state governments because they don't have to
pay interest.
E. is analyzed primarily by focusing ("zeroing in") on the
coupon rate.

87. Swingin' Soiree, Inc. is a firm that has its main office on the Right Bank in Paris. The
firm just issued bonds with a final payment amount that depends on whether the
Seine River floods. This type of bond is known as

A. a contingency
bond.
B. a catastrophe
bond.
C. an emergency
bond.
D. an incident
bond.
E. an eventuality
bond.

88. One year ago, you purchased a newly issued TIPS bond that has a 6% coupon rate,
five years to maturity, and a par value of $1,000. The average inflation rate over the
year was 4.2%. What is the amount of the coupon payment you will receive, and
what is the current face value of the bond?

A. $60.00,
$1,000
B. $42.00,
$1,042
C. $60.00,
$1,042
D. $62.52,
$1,042
E. $102.00,
$1,000

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89. Bond analysts might be more interested in a bond's yield to call if

A. the bond's yield to maturity is

insufficient.
B. the firm has called some of its bonds in
the past.
C. the investor only plans to hold the bond until its first
call date.
D. interest rates are expected to
rise.
E. interest rates are expected
to fall.

90. What is the relationship between the price of a straight bond and the price of a
callable bond?

A. The straight bond's price will be higher than the callable bond's price for low
interest rates.
B. The straight bond's price will be lower than the callable bond's price for low
interest rates.
C. The straight bond's price will change as interest rates change, but the callable
bond's price will stay the same.
D. The straight bond and the callable bond will have the
same price.
E. There is no consistent relationship between the two types
of bonds.

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91. Three years ago you purchased a bond for $974.69. The bond had three years to
maturity, a coupon rate of 8%, paid annually, and a face value of $1,000. Each year
you reinvested all coupon interest at the prevailing reinvestment rate shown in the
table below. Today is the bond's maturity date. What is your realized compound yield
on the bond?

A. 6.43
%
B. 7.96
%
C. 8.23
%
D. 8.97
%
E. 9.13
%

92. Which of the following is not a type of international bond?

A. Samurai
bonds
B. Yankee
bonds
C. Bulldog
bonds
D. Elton
bonds
E. All of the options are international
bonds.

14-36
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93. A coupon bond that pays interest annually has a par value of $1,000, matures in six
years, and has a yield to maturity of 11%. The intrinsic value of the bond today will
be ______ if the coupon rate is 7.5%.

A. $712.9
9
B. $851.9
3
C. $1,123.0
1
D. $886.2
8
E. $1,000.0
0

94. A coupon bond that pays interest annually has a par value of $1,000, matures in
eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today
will be ______ if the coupon rate is 6%.

A. $833.9
6
B. $620.9
2
C. $1,123.0
1
D. $886.2
8
E. $1,000.0
0

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95. A coupon bond that pays interest semi-annually has a par value of $1,000, matures
in six years, and has a yield to maturity of 9%. The intrinsic value of the bond today
will be __________ if the coupon rate is 9%.

A. $922.7
8
B. $924.1
6
C. $1,075.8
0
D. $1,000.0
0
E. None of the
options

96. A coupon bond that pays interest semi-annually has a par value of $1,000, matures
in seven years, and has a yield to maturity of 11%. The intrinsic value of the bond
today will be __________ if the coupon rate is 8.8%.

A. $922.7
8
B. $894.5
1
C. $1,075.8
0
D. $1,077.2
0
E. None of the
options

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97. A coupon bond that pays interest of $90 annually has a par value of $1,000, matures
in nine years, and is selling today at a $66 discount from par value. The yield to
maturity on this bond is

A. 9.00
%.
B. 10.15
%.
C. 11.25
%.
D. 12.32
%.
E. None of the
options

98. A coupon bond that pays interest of $40 semi-annually has a par value of $1,000,
matures in four years, and is selling today at a $36 discount from par value. The yield
to maturity on this bond is

A. 8.69
%.
B. 9.09
%.
C. 10.43
%.
D. 9.76
%.
E. None of the
options

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99. You purchased an annual interest coupon bond one year ago that now has 18 years
remaining until maturity. The coupon rate of interest was 11% and par value was
$1,000. At the time you purchased the bond, the yield to maturity was 10%. The
amount you paid for this bond one year ago was

A. $1,057.5
0.
B. $1,075.5
0.
C. $1,083.6
5.
D. $1.092.4
6.
E. $1,104.1
3.

100 You purchased an annual interest coupon bond one year ago that had nine years
. remaining to maturity at that time. The coupon interest rate was 10% and the par
value was $1,000. At the time you purchased the bond, the yield to maturity was 8%.
If you sold the bond after receiving the first interest payment and the yield to
maturity continued to be 8%, your annual total rate of return on holding the bond for
that year would have been

A. 8.00
%.
B. 7.82
%.
C. 7.00
%.
D. 11.95
%.
E. None of the
options

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101 Consider two bonds, F and G. Both bonds presently are selling at their par value of
. $1,000. Each pays interest of $90 annually. Bond F will mature in 15 years while
bond G will mature in 26 years. If the yields to maturity on the two bonds change
from 9% to 10%,

A. both bonds will increase in value, but bond F will increase more
than bond G.
B. both bonds will increase in value, but bond G will increase more
than bond F.
C. both bonds will decrease in value, but bond F will decrease more
than bond G.
D. both bonds will decrease in value, but bond G will decrease more
than bond F.
E. None of the
options

102 A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000. If the
. bond matures in 18 years, the bond should sell for a price of _______ today.

A. 422.4
1
B. $501.8
7
C. $513.1
6
D. $130.0
4

103 A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the
. bond matures in 27 years, the bond should sell for a price of _______ today.

A. $59.7
4
B. $501.8
7
C. $513.1
6
D. $483.4
9

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104 You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9%
. and a par value of $1,000. What would your rate of return at the end of the year be if
you sell the bond? Assume the yield to maturity on the bond is 10% at the time you
sell.

A. 10.00
%
B. 20.42
%
C. -
1.4%
D. 1.4
%

105 You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11%
. and a par value of $1,000. What would your rate of return at the end of the year be if
you sell the bond? Assume the yield to maturity on the bond is 9% at the time you
sell.

A. 10.00
%
B. 23.8
%
C. 13.8
%
D. 1.4
%

106 A convertible bond has a par value of $1,000 and a current market price of $975. The
. current price of the issuing firm's stock is $42 and the conversion ratio is 22 shares.
The bond's market conversion value is

A. $72
9.
B. $92
4.
C. $87
0.
D. $1,00
0.

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107 A convertible bond has a par value of $1,000 and a current market price of $1,105.
. The current price of the issuing firm's stock is $20 and the conversion ratio is 35
shares. The bond's market conversion value is

A. $70
0.
B. $81
0.
C. $87
0.
D. $1,00
0.

108 A convertible bond has a par value of $1,000 and a current market value of $950.
. The current price of the issuing firm's stock is $22 and the conversion ratio is 40
shares. The bond's conversion premium is

A. $40
.
B. $70
.
C. $19
0.
D. $20
0.

109 A convertible bond has a par value of $1,000 and a current market value of $150.
. The current price of the issuing firm's stock is $65 and the conversion ratio is 15
shares. The bond's conversion premium is

A. $40
.
B. $15
0.
C. $17
5.
D. $20
0.

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110 If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago, the
. accrued interest would be

A. 5.67
.
B. 7.35
.
C. 6.35
.
D. 6.15
.
E. 7.12
.

111 If a 7.5% coupon bond that pays interest every 182 days paid interest 62 days ago,
. the accrued interest would be

A. 11.6
7.
B. 12.3
5.
C. 12.7
7.
D. 11.9
8.
E. 12.1
5.

112 If a 9% coupon bond that pays interest every 182 days paid interest 112 days ago,
. the accrued interest would be

A. 27.6
9.
B. 27.3
5.
C. 26.7
7.
D. 27.9
8.
E. 28.1
5.

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113 A 7% coupon bond with an ask price of 100:00 pays interest every 182 days. If the
. bond paid interest 32 days ago, the invoice price of the bond would be

A. 1,005.6
7.
B. 1,007.3
5.
C. 1,006.3
5.
D. 1,006.1
5.
E. 1,007.1
2.

114 A 7.5% coupon bond with an ask price of 100:00 pays interest every 182 days. If the
. bond paid interest 62 days ago, the invoice price of the bond would be

A. 1,011.6
7.
B. 1,012.3
5.
C. 1,012.7
7.
D. 1,011.9
8.
E. 1,012.1
5.

115 A 9% coupon bond with an ask price of 100:00 pays interest every 182 days. If the
. bond paid interest 112 days ago, the invoice price of the bond would be

A. 1,027.6
9.
B. 1,027.3
5.
C. 1,026.7
7.
D. 1,027.9
8.
E. 1,028.1
5.

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116 One year ago, you purchased a newly issued TIPS bond that has a 5% coupon rate,
. five years to maturity, and a par value of $1,000. The average inflation rate over the
year was 3.2%. What is the amount of the coupon payment you will receive and what
is the current face value of the bond?

A. $50.00,
$1,000
B. $32.00,
$1,032
C. $50.00,
$1,032
D. $32.00,
$1,050
E. $51.60,
$1,032

117 One year ago, you purchased a newly issued TIPS bond that has a 4% coupon rate,
. five years to maturity, and a par value of $1,000. The average inflation rate over the
year was 3.6%. What is the amount of the coupon payment you will receive, and
what is the current face value of the bond?

A. $40.00,
$1,000
B. $41.44,
$1,036
C. $40.00,
$1,036
D. $36.00,
$1,040
E. $76.00,
$1,000

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118 A CDO is a
.

A. command duty
officer.
B. collateralized debt
obligation.
C. commercial debt
originator.
D. collateralized debenture
originator.
E. common debt
officer.

119 A CDS is a
.

A. command duty
supervisor.
B. collateralized debt
security.
C. commercial debt
servicer.
D. collateralized debenture
security.
E. credit default
swap.

120 A credit default swap is

.

A. a fancy term for a low-risk

bond.
B. an insurance policy on the default risk of a federal government
bond or loan.
C. an insurance policy on the default risk of a corporate
bond or loan.
D. None of the
options

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121 The compensation from a CDS can come from
.

A. the CDS holder delivering the defaulted bond to the CDS issuer in return for the
bond's par value.
B. the CDS issuer paying the swap holder the difference between the par value of the
bond and the bond's market price.
C. the federal government paying off on the
insurance claim.
D. the CDS holder delivering the defaulted bond to the CDS issuer in return for the
bond's par value and the CDS issuer paying the swap holder the difference
between the par value of the bond and the bond's market price.
E. None of the
options

122 SIVs are

.

A. structured investment
vehicles.
B. structured interest rate
vehicles.
C. semi-annual investment
vehicles.
D. riskless
investments.
E. structured insured variable rate
instruments.

123 SIVs raise funds by ______ and then use the proceeds to ______.
.

A. issuing short-term commercial paper; retire other forms of

their debt
B. issuing short-term commercial paper; buy other forms of debt such as
mortgages
C. issuing long-term bonds; retire other forms of
their debt
D. issuing long-term bonds; buy other forms of debt such as
mortgages

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124 CDOs are divided in tranches
.

A. that provide investors with securities with varying degrees of

credit risk.
B. and each tranch is given a different level of seniority in terms of its claims on the
underlying pool.
C. and none of the tranches is
risky.
D. and equity tranch is very low
risk.
E. that provide investors with securities with varying degrees of credit risk, and each
tranch is given a different level of seniority in terms of its claims on the underlying
pool.

125 Mortgage-backed CDOs were a disaster in 2007 because

.

A. they were formed by pooling high quality fixed-rated loans with low
interest rates.
B. they were formed by pooling subprime
mortgages.
C. home prices
stalled.
D. the mortgages were variable rate loans and interest rates
increased.
E. they were formed by pooling subprime mortgages, home prices stalled, and the
mortgages were variable rate loans and interest rates increased.

Short Answer Questions

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126 If you are buying a coupon bond between interest paying dates, is the amount you
. would pay to your broker for the bond more or less than the amount quoted in the
financial quotation pages? Discuss the differences and how these differences arise.

127 Discuss the taxation ramifications of zero-coupon bonds. How has this taxation
. procedure changed over the years? How has this change affected the demand for
these bonds?

128 Why are many bonds callable? What is the disadvantage to the investor of a callable
. bond? What does the investor receive in exchange for a bond being callable? How
are bond valuation calculations affected if bonds are callable?

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129 You purchased a zero-coupon bond that has a face value of $1,000, five years to
. maturity, and a yield to maturity of 7.3%. It is one year later and similar bonds are
offering a yield to maturity of 8.1%. You will sell the bond now. You have a tax rate of
40% on regular income and 15% on capital gains. Calculate the following for this
bond.

• The purchase price of the bond

• The current price of the bond
• The imputed interest income
• The capital gain (or loss) on the bond
• The before-tax rate of return on this investment
• The after-tax rate of return on this investment

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