Question 1

Elaborate on what does a B credit rating signifies.

Accepted Answer

B signifies highly speculative...

Question 2

Atlas Movers is issuing $1,000 face value zero-coupon bonds at a quoted price of 38.70. What is the amount you would pay to purchase one of these bonds?

Accepted Answer

A)   $38.70
B)   $387.00
C)   $961.30
D)   $1,000.00
E)   $1,038.70

Question 3

A premium bond is defined as a bond which has a market price:

Accepted Answer

A)   Is less than the face value.
B)   That is equal to $1,000.
C)   That is quoted at par.
D)   Exceeds the face value.
E)   Equal to the face value.

Question 4

The coupon rate will be less than the yield to maturity when a bond sells at a discount.

Accepted Answer

A) True 
 B)False

Question 5

A Treasury bond is quoted at a price of 105:21. What is the market price of this bond if the face value is $1,000?

Accepted Answer

A)   $105.21
B)   $106.56
C)   $1,052.10
D)   $1,056.56
E)   $1,065.60

Question 6

Provide an appropriate definition of interest rate risk premium.

Accepted Answer

The compensation inv...

Question 7

Which of the following is NOT a duty of a trust company appointed when bonds are issued?

Accepted Answer

A)   Make sure terms of the indenture are obeyed.
B)   Manage the sinking fund.
C)   Decide when the bonds should be called.
D)   Monitor the protective covenants for the bondholders.
E)   Represent the bondholders in default.

Question 8

An income bond is a bond which:

Accepted Answer

A)   Is defined as paying semi-annual, fixed rate payments.
B)   Provides semi-annual income for a period of ten years or more.
C)   Pays interest only if the issuer has sufficient income to do so.
D)   Is convertible into shares of common stock but which will continue to provide annual income for a stated period of time.
E)   Pays coupon payments forever but never repays the principal.

Question 9

The bonds of Microhard, Inc. carry a 10% annual coupon, have a $1,000 face value, and mature in four years. Bonds of equivalent risk yield 7%. What is the market value of Microhard's bonds?

Accepted Answer

A)   $1,011.20
B)   $1,087.25
C)   $1,095.66
D)   $1,101.62
E)   $1,160.25

Question 10

Martha owns a 7% coupon bond that has 13 years to maturity. The bond pays interest annually and is currently selling for $1,034.50. What is the yield to maturity on this bond?

Accepted Answer

A)   6.50%
B)   6.60%
C)   6.66%
D)   6.77%
E)   6.88%

Question 11

Barkstone Candies bonds have a face value of $1,000 and a current market price of $1,047.20. The bonds have a 6% coupon rate. What is the current yield on these bonds?

Accepted Answer

A)   2.53%
B)   2.86%
C)   5.73%
D)   6.0%
E)   11.46%

Question 12

Which one of the following statements is correct?

Accepted Answer

A)   A convertible bond can be exchanged for shares of stock.
B)   The issuer can deduct the repayment of the bond principal as a business expense for tax purposes.
C)   A zero-coupon bond is sold at a deep premium.
D)   A "fallen angel" is a coupon bond that has converted to a zero-coupon bond.
E)   Corporate bonds are quoted in 32nds.

Question 13

"Disaster" bonds are primarily designed to help:

Accepted Answer

A)   Cities recover from economic recessions.
B)   Corporations recover from overseas competition.
C)   The federal government cope with huge deficits.
D)   Animal food producers raise capital to compete internationally.
E)   Insurance companies recover from natural disasters.

Question 14

Which of the following would be classified as a positive protective covenant?

Accepted Answer

A)   The firm must furnish audited annual financial statements.
B)   The firm cannot pledge any assets to other lenders.
C)   The firm must not issue additional long-term debt.
D)   The firm cannot merge with another firm.
E)   The firm must limit the amount of dividends it pays according to some formula.

Question 15

What would you pay for a bond that pays an annual coupon of $35, has a face value of $1,000, matures in seven years, and has a yield to maturity of 8%?

Accepted Answer

A)   $765.71
B)   $875.34
C)   $900.18
D)   $910.14
E)   $976.38

Question 16

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

Accepted Answer

A)   A coupon rate that is equal to the yield to maturity.
B)   A market price that is less than par value.
C)   Semi-annual interest payments.
D)   A yield to maturity that is less than the coupon rate.
E)   A coupon rate that is less than the yield to maturity.

Question 17

Ajax Corporation issued 10,000 units of $1,000 face value bonds that mature in 20 years and have a 4% coupon rate that is paid semi-annually. If the bonds were sold at 103.5% of their face value, calculate the yield to maturity at the end of year 8.

Accepted Answer

A)   3.50%
B)   3.58%
C)   3.64%
D)   3.71%
E)   3.75%

Question 18

For two bonds identical but for coupon, the market price of the lower coupon bond will change more (in percentage terms) than that of the higher coupon bond for a given change in market interest rates.

Accepted Answer

A) True 
 B)False

Question 19

The limitations within a bond indenture agreement that prohibit certain actions by a firm are called:

Accepted Answer

A)   Sinking fund provisions.
B)   Negative covenants.
C)   Debenture provisions.
D)   Call provisions.
E)   Seniority requirements.

Question 20

Gabriel Corporation has outstanding $1,000, 8% semi-annual coupon bonds. The bonds have fourteen years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?

Accepted Answer

A)   6.68%
B)   5.67%
C)   6.12%
D)   6.00%
E)   5.85%

Exam 7: Interest Rates and Bond Valuation

Atlas Movers is issuing $1,000 face value zero-coupon bonds at a quoted price of 38.70. What is the amount you would pay to purchase one of these bonds?

Correct AnswerverifiedShow Answer

An income bond is a bond which:

Correct AnswerverifiedShow Answer

Elaborate on what does a B credit rating signifies.

Correct AnswerverifiedB signifies highly speculative...View AnswerShow Answer

A premium bond is defined as a bond which has a market price:

Correct AnswerverifiedShow Answer

"Disaster" bonds are primarily designed to help:

Correct AnswerverifiedShow Answer

The bonds of Microhard, Inc. carry a 10% annual coupon, have a $1,000 face value, and mature in four years. Bonds of equivalent risk yield 7%. What is the market value of Microhard's bonds?

Correct AnswerverifiedShow Answer

A Treasury bond is quoted at a price of 105:21. What is the market price of this bond if the face value is $1,000?

Correct AnswerverifiedShow Answer

The limitations within a bond indenture agreement that prohibit certain actions by a firm are called:

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

Ajax Corporation issued 10,000 units of $1,000 face value bonds that mature in 20 years and have a 4% coupon rate that is paid semi-annually. If the bonds were sold at 103.5% of their face value, calculate the yield to maturity at the end of year 8.

Correct AnswerverifiedShow Answer

Which of the following is NOT a duty of a trust company appointed when bonds are issued?

Correct AnswerverifiedShow Answer

Which of the following would be classified as a positive protective covenant?

Correct AnswerverifiedShow Answer

What would you pay for a bond that pays an annual coupon of $35, has a face value of $1,000, matures in seven years, and has a yield to maturity of 8%?

Correct AnswerverifiedShow Answer

Barkstone Candies bonds have a face value of $1,000 and a current market price of $1,047.20. The bonds have a 6% coupon rate. What is the current yield on these bonds?

Correct AnswerverifiedShow Answer

Provide an appropriate definition of interest rate risk premium.

Correct AnswerverifiedThe compensation inv...View AnswerShow Answer

Gabriel Corporation has outstanding $1,000, 8% semi-annual coupon bonds. The bonds have fourteen years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?

Correct AnswerverifiedShow Answer

The coupon rate will be less than the yield to maturity when a bond sells at a discount.

Correct AnswerverifiedShow Answer

Martha owns a 7% coupon bond that has 13 years to maturity. The bond pays interest annually and is currently selling for $1,034.50. What is the yield to maturity on this bond?

Correct AnswerverifiedShow Answer

For two bonds identical but for coupon, the market price of the lower coupon bond will change more (in percentage terms) than that of the higher coupon bond for a given change in market interest rates.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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The compensation inv...
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