Question 1

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% of the bond's total price is represented by the present value of the coupons?

Accepted Answer

A)   85.7%
B)   86.1%
C)   86.4%
D)   93.0%
E)   100.0%F) B) and D)
G) B) and C)

Question 2

The form of bond issue in which the bond is issued without record of the owner's name, with relevant payments made directly to whomever physically holds the bond, is called:

Accepted Answer

A)   New-issue form.
B)   Registered form.
C)   Bearer form.
D)   Debenture form.
E)   Collateral form.F) B) and E)
G) None of the above

Question 3

Alpha Manufacturing offers a zero-coupon bond with a 12.25% yield to maturity. The bond matures in 13 years. What is the current price if the face value is $1,000?

Accepted Answer

A)   $222.63
B)   $234.18
C)   $241.41
D)   $243.06
E)   $244.09F) A) and E)
G) All of the above

Question 4

A bond with face value $1,000 that sells for $1,000 in the market is called a ___________ bond.

Accepted Answer

A)   Par.
B)   Discount.
C)   Premium.
D)   Zero-coupon.
E)   Floating rate.F) A) and D)
G) A) and B)

Question 5

You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices. To realize your maximum gain, all else constant, you should purchase _____ bonds.

Accepted Answer

A)   Short-term; low coupon.
B)   Short-term; high coupon.
C)   Long-term; zero-coupon.
D)   Long-term; low coupon.
E)   Long-term; high coupon.F) A) and B)
G) A) and E)

Question 6

The purpose of a sinking fund is to:

Accepted Answer

A)   Distribute the proceeds received from a bond issue over a period of time.
B)   Gather funds so that sufficient money is available when the bond issue matures to pay off the debt.
C)   Distribute the interest payments to the individual bondholders.
D)   Retire part or all of a bond issue prior to maturity.
E)   Retain the interest that accrues on zero-coupon bonds.F) All of the above
G) B) and E)

Question 7

The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

Accepted Answer

A)   Coupon.
B)   Face value.
C)   Maturity.
D)   Yield to maturity.
E)   Coupon rate.F) A) and B)
G) A) and C)

Question 8

XYZ Co. zero-coupon bonds have a face value of $1,000 and mature in 18 years. They currently sell for $179.86 today. By what percentage will the market price rise if the market's required return falls by half?

Accepted Answer

A)   99%
B)   131%
C)   137%
D)   175%
E)   231%F) A) and D)
G) B) and D)

Question 9

This morning Tim purchased a 15-year, $1,000 face value zero-coupon bond for $394.34. Assume the yield-to-maturity remains constant over the life of the bond. What price should Tim receive for his bond if he wants to sell it 4 years from today?

Accepted Answer

A)   $505.40
B)   $515.60
C)   $544.44
D)   $555.85
E)   $561.33F) A) and E)
G) A) and B)

Question 10

Identify and discuss the various components of a nominal interest rate.

Accepted Answer

At a minimum, students should identify t...

Question 11

The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

Accepted Answer

A)   Default.
B)   Market.
C)   Interest rate.
D)   Inflation.
E)   Maturity.F) None of the above
G) A) and C)

Question 12

______ is the highest rating given by DBRS that is NOT considered investment grade.

Accepted Answer

A)   A
B)   BBB
C)   BB
D)   B
E)   CF) A) and E)
G) C) and D)

Question 13

Suppose you are trying to price a bond. Which of the following is false?

Accepted Answer

A)   The lower the discount rate, the more valuable the coupon payments are today.
B)   Bonds with high coupon payments are generally (all else the same)  more sensitive to changes in interest rates than bonds with lower coupon payments.
C)   When market interest rates rise, bond prices will fall, all else the same.
D)   Bonds with long maturities are generally (all else the same)  more sensitive to changes in interest rates than bonds with shorter maturities.
E)   All else the same, bonds with larger coupon payments will have a higher price today.F) C) and D)
G) A) and B)

Question 14

A stripped bond:

Accepted Answer

A)   Pays coupons at regular intervals until maturity.
B)   Typically sells at a premium from its face value.
C)   Increases in value when interest rates increase.
D)   Pays no coupons, thus it sells at a deep discount from face value.
E)   Decreases in value when interest rates decrease.F) A) and B)
G) C) and E)

Question 15

The rate of return required by investors in the market for owning a bond is called the:

Accepted Answer

A)   Coupon.
B)   Face value.
C)   Maturity.
D)   Yield to maturity.
E)   Coupon rate.F) A) and C)
G) A) and D)

Question 16

A(n)  _______ bond is issued without record of the purchaser's name.

Accepted Answer

A)   Straight
B)   Unfunded
C)   Registered
D)   Bearer
E)   IncomeF) A) and D)
G) All of the above

Question 17

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)   $1,000.00F) B) and D)
G) A) and B)

Question 18

If the nominal rate is 5.5%, and the real rate is 1.5%, determine the inflation rate.

Accepted Answer

A)   4.85%
B)   3.94%
C)   4.03%
D)   5.12%
E)   6.21%F) D) and E)
G) A) and B)

Question 19

All else the same, if interest rates fall, the percentage price change for long-term bonds will be greater than for short-term bonds.

Accepted Answer

A) True 
 B)False

Question 20

Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid semi-annually. What is the yield to maturity?

Accepted Answer

A)   8.67%
B)   10.13%
C)   10.16%
D)   10.40%
E)   10.45%F) A) and B)
G) C) and D)

Exam 7: Interest Rates and Bond Valuation

A stripped bond:

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Alpha Manufacturing offers a zero-coupon bond with a 12.25% yield to maturity. The bond matures in 13 years. What is the current price if the face value is $1,000?

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XYZ Co. zero-coupon bonds have a face value of $1,000 and mature in 18 years. They currently sell for $179.86 today. By what percentage will the market price rise if the market's required return falls by half?

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The Fisher Effect primarily emphasizes the effects of _____ risk on an investor's rate of return.

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Identify and discuss the various components of a nominal interest rate.

Correct AnswerverifiedAt a minimum, students should identify t...View AnswerShow Answer

The purpose of a sinking fund is to:

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If the nominal rate is 5.5%, and the real rate is 1.5%, determine the inflation rate.

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A(n) _______ bond is issued without record of the purchaser's name.

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A bond with face value $1,000 that sells for $1,000 in the market is called a ___________ bond.

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______ is the highest rating given by DBRS that is NOT considered investment grade.

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You expect interest rates to decline and wish to capitalize on the anticipated changes in bond prices. To realize your maximum gain, all else constant, you should purchase _____ bonds.

Correct AnswerverifiedShow Answer

All else the same, if interest rates fall, the percentage price change for long-term bonds will be greater than for short-term bonds.

Correct AnswerverifiedShow Answer

The form of bond issue in which the bond is issued without record of the owner's name, with relevant payments made directly to whomever physically holds the bond, is called:

Correct AnswerverifiedShow Answer

Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid semi-annually. What is the yield to maturity?

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The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

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The rate of return required by investors in the market for owning a bond is called the:

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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% of the bond's total price is represented by the present value of the coupons?

Correct AnswerverifiedShow Answer

This morning Tim purchased a 15-year, $1,000 face value zero-coupon bond for $394.34. Assume the yield-to-maturity remains constant over the life of the bond. What price should Tim receive for his bond if he wants to sell it 4 years from today?

Correct AnswerverifiedShow 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

Suppose you are trying to price a bond. Which of the following is false?

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