Question 1

ABC Corporation has 3-year, 7% annual coupon bonds outstanding. Given an 8.5% yield to maturity, determine the duration of these bonds.

Accepted Answer

A)   2.70
B)   2.80
C)   2.95
D)   3.12
E)   3.25

Question 2

Suppose you purchase a zero coupon bond with face value $1,000, maturing in 20 years, for $214.51. If the yield to maturity on the bond remains unchanged, what will the price of the bond be
ﬁve years from now?

Accepted Answer

A)   $315.20
B)   $387.52
C)   $410.91
D)   $680.58
E)   $1,000.00

Question 3

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the
End of year 25.

Accepted Answer

A)   $94,581,667
B)   $95,500,206
C)   $95,958,151
D)   $97,606,824
E)   $98,287,192

Question 4

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:

Accepted Answer

A)   Clean price.
B)   Muddy price.
C)   Dirty price.
D)   Par value price.
E)   Bid price.

Question 5

Five years ago, Jackson Corporation issued twenty-ﬁve-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen, and the yield to maturity on
The Thompson Tarps bonds is now 12%. Given this information, what is the price of the bonds today?

Accepted Answer

A)   $1,230
B)   $851
C)   $1,218
D)   $880
E)   $1,440

Question 6

Provide four components likely to be included in bond indenture.

Accepted Answer

Four likely components of an i...

Question 7

Provide an appropriate deﬁnition of debenture.

Accepted Answer

Unsecured debt, usua...

Question 8

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 6.8%, what is the present
Value of the bond's face value?

Accepted Answer

A)   $138.95
B)   $241.15
C)   $886.37
D)   $1,000.00
E)   $1,025.32

Question 9

Provide a graphical representation of an upward sloping term structure of interest rates.

Accepted Answer

The answer of Provide a graphical representation of an upward...

Question 10

Duration is a useful measure of interest rate risk because it incorporates a bond's coupon rate.

Accepted Answer

A) True 
 B)False

Question 11

"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 12

Provide an appropriate deﬁnition of maturity date.

Accepted Answer

Speciﬁed date at whi...

Question 13

Which of the following provisions would NOT be listed in the bond indenture?

Accepted Answer

A)   Amount of bonds issued.
B)   Repayment arrangements.
C)   The total amount of bonds issued.
D)   Protective covenants.
E)   Interest rate on similar risk bonds.

Question 14

A callable bond:

Accepted Answer

A)   Can generally be called at any time after the date of issue.
B)   Is generally redeemed at a discount.
C)   Is most apt to be called when market interest rates rise.
D)   Is another name for a zero coupon bond.
E)   Generally has a deferred call period.

Question 15

Curtis bought an 8.5% annual coupon bond at par. One year later, he sold the bond at a quoted price of 98. During the year, market interest rates rose and inﬂation was 3%. What real rate of return
Did Curtis earn on this investment?

Accepted Answer

A)   3.40%
B)   3.50%
C)   6.40%
D)   6.50%
E)   6.70%

Question 16

Which one of the following is the correct bond pricing equation?

Accepted Answer

A)   Bond value = {C}{[1 - 1/(1 + r) ]/rt} + F - 1/(1 + r) t]/r
B)   Bond value = {C}{[1 + 1/(1 + r) t]/r} + F/(1 + r) t
C)   Bond value = {C}{[1 - 1/(1 + r) t]/r} + F/(1 + r) t
D)   Bond value = {C}{[1 + 1/(1 + r) ]/rt} + F/(1 + r) 
E)   Bond value = {C}{[1 + 1/(1 + r) t]/r} + [F - (1 + rt) /r]

Question 17

A "fallen angel" is a bond that:

Accepted Answer

A)   Lowered its annual interest payment.
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)   Has moved from being an investment-grade bond to being a junk bond.
E)   Is rated as BA by one rating agency and rated as BB by another rating agency.

Question 18

You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1% and the face value is $1,000. What is the current market price?

Accepted Answer

A)   $2.20
B)   $69.27
C)   $73.33
D)   $263.20
E)   $270.79

Question 19

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.

Accepted Answer

A)   Zero coupon
B)   Callable
C)   Putable
D)   Convertible
E)   Warrant

Question 20

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 6.8%, what is the total
Present value of the bond's coupon payments?

Accepted Answer

A)   $138.95
B)   $241.15
C)   $886.37
D)   $921.12
E)   $1,025.32

Exam 7: Interest Rates and Bond Valuation

Bastion Corporation issued $100 million bonds that mature in 30 years and have a 5% coupon rate that is paid annually. If the bonds were sold to yield 5.4%, determine the price of the bonds at the End of year 25.

Correct AnswerverifiedShow Answer

Curtis bought an 8.5% annual coupon bond at par. One year later, he sold the bond at a quoted price of 98. During the year, market interest rates rose and inﬂation was 3%. What real rate of return Did Curtis earn on this investment?

Correct AnswerverifiedShow Answer

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 6.8%, what is the present Value of the bond's face value?

Correct AnswerverifiedShow Answer

ABC Corporation has 3-year, 7% annual coupon bonds outstanding. Given an 8.5% yield to maturity, determine the duration of these bonds.

Correct AnswerverifiedShow Answer

Duration is a useful measure of interest rate risk because it incorporates a bond's coupon rate.

Correct AnswerverifiedShow Answer

You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1% and the face value is $1,000. What is the current market price?

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A "fallen angel" is a bond that:

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A callable bond:

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Provide an appropriate deﬁnition of debenture.

Correct AnswerverifiedUnsecured debt, usua...View AnswerShow Answer

Which of the following provisions would NOT be listed in the bond indenture?

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Provide an appropriate deﬁnition of maturity date.

Correct AnswerverifiedSpeciﬁed date at whi...View AnswerShow Answer

Suppose you purchase a zero coupon bond with face value $1,000, maturing in 20 years, for $214.51. If the yield to maturity on the bond remains unchanged, what will the price of the bond be ﬁve years from now?

Correct AnswerverifiedShow Answer

Which one of the following is the correct bond pricing equation?

Correct AnswerverifiedShow Answer

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 7%. If the bond has a life of 30 years, pays annual coupons, and the yield to maturity is 6.8%, what is the total Present value of the bond's coupon payments?

Correct AnswerverifiedShow Answer

"Disaster" bonds are primarily designed to help:

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Provide a graphical representation of an upward sloping term structure of interest rates.

Correct AnswerverifiedShow Answer

Five years ago, Jackson Corporation issued twenty-ﬁve-year 10% annual coupon bonds with a $1,000 face value each. Since then, interest rates in general have risen, and the yield to maturity on The Thompson Tarps bonds is now 12%. Given this information, what is the price of the bonds today?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Provide four components likely to be included in bond indenture.

Correct AnswerverifiedFour likely components of an i...View AnswerShow Answer

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Unsecured debt, usua...
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Speciﬁed date at whi...
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Four likely components of an i...
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