Question 1

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

Accepted Answer

A)   expectations hypothesis
B)   liquidity preference hypothesis
C)   segmented market hypothesis
D)   preferred habitat hypothesis
E)   hedging pressure hypothesisF) A) and D)
G) B) and D)

Question 2

You purchase an 8 1/2s February $10,000 par Treasury note at 105:16 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 105:16?

Accepted Answer

A)   8.00 percent
B)   8.06 percent
C)   8.22 percent
D)   8.50 percent
E)   8.47 percentF) A) and B)
G) A) and C)

Question 3

The annual interest paid on a bond relative to its prevailing market price is called its ____.

Accepted Answer

A)   promised yield
B)   yield to maturity
C)   coupon rate
D)   effective yield
E)   current yieldF) A) and D)
G) All of the above

Question 4

Consider a 15 percent, 20-year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

Accepted Answer

A)   10.23 percent
B)   18.45 percent
C)   2.31 percent
D)   17.77 percent
E)   9.26 percentF) D) and E)
G) C) and E)

Question 5

A 7.0 percent coupon bond issued by the State of Tennessee sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is in the 29 percent marginal tax bracket?

Accepted Answer

A)   7.59 percent
B)   12.25 percent
C)   9.86 percent
D)   14.63 percent
E)   30.71 percentF) A) and C)
G) A) and B)

Question 6

If the price before yields changed was $925, what is the resulting price?

Accepted Answer

A)   $865.22
B)   $918.66
C)   $889.11
D)   $1000.00
E)   $1012.45F) B) and E)
G) C) and D)

Question 7

At what point would an investor be indifferent between a Bridgford corporate bond yielding 8.0 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

Accepted Answer

A)   5.00 percent
B)   7.10 percent
C)   8.00 percent
D)   9.15 percent
E)   6.00 percentF) B) and E)
G) A) and C)

Question 8

The refunding provision of an indenture allows bonds to be retired EXCEPT if

Accepted Answer

A)   they are replaced with a lower coupon bond issue.
B)   the remaining time to maturity is less than five years.
C)   the remaining time to maturity is greater than five years.
D)   the stated time period in the indenture has not passed.
E)   the stated time period in the indenture has passed.F) C) and E)
G) B) and D)

Question 9

Bond ratings are positively related to

Accepted Answer

A)   leverage.
B)   size.
C)   type of business.
D)   bond maturity.
E)   coupon rate.F) A) and D)
G) None of the above

Question 10

There are four major factors accounting for the existence of yield differentials. Which of the following is NOT a factor?

Accepted Answer

A)   segments
B)   sectors
C)   indentures
D)   coupons
E)   maturitiesF) C) and D)
G) B) and E)

Question 11

A bond's maturity is affected by call features, non-refunding provisions, and sinking fund provisions.

Accepted Answer

A) True 
 B)False

Question 12

The fundamental determinants of interest rates are the real risk-free rate, inflation, and the risk premium.

Accepted Answer

A) True 
 B)False

Question 13

Which bond provision would be considered the riskiest for an investor who is concerned that market interest rates will drop dramatically over the life of the bond?

Accepted Answer

A)   sinking fund
B)   deferred call
C)   freely callable
D)   non-callable
E)   None of these are correct.F) A) and B)
G) B) and E)

Question 14

Public bonds differ from other debt because they are sold to the public rather than to a single investor.

Accepted Answer

A) True 
 B)False

Question 15

If the price before yields changed was $950, what is the resulting price?

Accepted Answer

A)   $922.64
B)   $918.66
C)   $1000.00
D)   $968.50
E)   $1012.45F) B) and E)
G) All of the above

Question 16

The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.

Accepted Answer

A)   low, short
B)   low, long
C)   high, short
D)   high, long
E)   zero, very longF) A) and D)
G) A) and E)

Question 17

What was developed in the early 1980s to offset some of the problems with traditional mortgage pass-throughs?

Accepted Answer

A)   variable rate mortgages
B)   collateralized mortgage obligations (CMOs) 
C)   leveraged buyouts (LBOs) 
D)   deep discount bonds (DDBs) 
E)   high yield bonds.F) C) and D)
G) B) and E)

Question 18

If the coupon payments are not reinvested during the life of the issue then the

Accepted Answer

A)   promised yield is greater than realized yield.
B)   promised yield is less than realized yield.
C)   nominal yield declines.
D)   nominal yield is greater than promised yield.
E)   current yield equals the yield to maturity.F) A) and B)
G) B) and D)

Question 19

Consider a bond portfolio manager who expects interest rates to decline and must choose between the following two bonds. Bond A: 10 years to maturity, 5 percent coupon, 5 percent yield to maturity
Bond B: 10 years to maturity, 3 percent coupon, 4 percent yield to maturity

Accepted Answer

A)   Bond A because it has a higher coupon rate
B)   Bond A because it has a higher yield to maturity
C)   Bond B because it has a lower coupon rate
D)   Bond A or Bond B because the maturities are the same
E)   None of these are correct.F) A) and C)
G) B) and E)

Question 20

Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds in which the bond principal and interest payments are indexed to the consumer price index.

Accepted Answer

A) True 
 B)False

Exam 12: Bond Fundamentals and Valuation

Public bonds differ from other debt because they are sold to the public rather than to a single investor.

Correct AnswerverifiedShow Answer

There are four major factors accounting for the existence of yield differentials. Which of the following is NOT a factor?

Correct AnswerverifiedShow Answer

The annual interest paid on a bond relative to its prevailing market price is called its ____.

Correct AnswerverifiedShow Answer

If the coupon payments are not reinvested during the life of the issue then the

Correct AnswerverifiedShow Answer

Consider a 15 percent, 20-year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

Correct AnswerverifiedShow Answer

A 7.0 percent coupon bond issued by the State of Tennessee sells for $1,000. What coupon rate on a corporate bond selling at $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is in the 29 percent marginal tax bracket?

Correct AnswerverifiedShow Answer

Which bond provision would be considered the riskiest for an investor who is concerned that market interest rates will drop dramatically over the life of the bond?

Correct AnswerverifiedShow Answer

You purchase an 8 1/2s February $10,000 par Treasury note at 105:16 and hold it for exactly one year at which time you sell it. What is your rate of return if your selling price is 105:16?

Correct AnswerverifiedShow Answer

Treasury Inflation-Protected Securities (TIPS) are inflation-indexed bonds in which the bond principal and interest payments are indexed to the consumer price index.

Correct AnswerverifiedShow Answer

The fundamental determinants of interest rates are the real risk-free rate, inflation, and the risk premium.

Correct AnswerverifiedShow Answer

A bond's maturity is affected by call features, non-refunding provisions, and sinking fund provisions.

Correct AnswerverifiedShow Answer

At what point would an investor be indifferent between a Bridgford corporate bond yielding 8.0 percent and a tax-free municipal bond of equal financial strength if the investor's marginal tax rate is 25 percent?

Correct AnswerverifiedShow Answer

What was developed in the early 1980s to offset some of the problems with traditional mortgage pass-throughs?

Correct AnswerverifiedShow Answer

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

Correct AnswerverifiedShow Answer

The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.

Correct AnswerverifiedShow Answer

If the price before yields changed was $950, what is the resulting price?

Correct AnswerverifiedShow Answer

Consider a bond portfolio manager who expects interest rates to decline and must choose between the following two bonds. Bond A: 10 years to maturity, 5 percent coupon, 5 percent yield to maturity Bond B: 10 years to maturity, 3 percent coupon, 4 percent yield to maturity

Correct AnswerverifiedShow Answer

Bond ratings are positively related to

Correct AnswerverifiedShow Answer

The refunding provision of an indenture allows bonds to be retired EXCEPT if

Correct AnswerverifiedShow Answer

If the price before yields changed was $925, what is the resulting price?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The importance of the reinvestment assumption increases with a coupon and a term to maturity.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified