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Investments > Chapter 14 > Flashcards

Chapter 14 Flashcards

1
Q

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

A

A. annual interest payment divided by the current market price

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2
Q

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

A

B. 7.18%

70 / 975 = 7.18

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3
Q

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

A

7.38%

72.50/982 = 7.38

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4
Q

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

A

6.64%

67.50 / 1016

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5
Q

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

A

7.61%

77.50 / 1019

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6
Q

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

A

6.3%

60 / 950

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7
Q

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

A

7.8%

80 / 1025

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8
Q

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

A

7.1%

75 / 1050

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9
Q

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%

FV = 1,000, n = 4, PMT = 100, i = 12, PV = 939.25; $100/$939.25 = 10.65%.

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10
Q

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

8.36%

FV = 1,000, n = 4, PMT = 82.50, i = 8.64, PV = 987.26; $82.50/$987.26 = 8.36%.

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11
Q

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

11.73%

FV = 1,000, n = 12, PMT = 110, i = 12, PV = 938.06; $110/$938.06 = 11.73%.

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12
Q

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

A

E. None of the options

FV = 1,000, n = 12, PMT = 87, i = 7.9, PV = 1,060.60; $87/$1,060.60 = 8.20%.

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13
Q

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

A

E. treasury bills

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14
Q

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

A

A. treasury bills

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15
Q

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.

A

D. a low debt to equity ratio and a high quick ratio

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16
Q

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.

A

E. a low times interest earned ratio and a low quick ratio

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17
Q

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

A

C. at or near par value

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18
Q

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.

A

B. must be paid by the buyer of the bond and remitted to the seller of the bond

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19
Q

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.

A

A. the asked price plus accrued interest

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20
Q

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. $491.80.

B. $800.00.

C. $983.61.

D. $1,661.20.

E. None of the options

A

D. $1,661.20

76/183($4,000) = $1,661.20. Approximation: .08/12 × 100,000 = 666.67 per month. 666.67/month × 2.5 months = 1.666.67.

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21
Q

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

$1,087.50

$1,080 + $7.5 (accrued interest) = $1,087.50.

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22
Q

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

$1,150

$1,130 + $20 (accrued interest) = $1,150.

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23
Q

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.

A

E. the bonds are “high-yield” or junk bonds

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24
Q

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.

A

D. can be quite “thin” and primarily consists of a network of bond dealers in the over-the-counter market.

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25
Q

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

A

D. yield to maturity

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26
Q

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

A

A. conversion ratio

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27
Q

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

A

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

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28
Q

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. callable

B. coupon

C. put

D. Treasury

E. zero-coupon

A

C. put

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29
Q

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.

A

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

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30
Q

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

0.8% and 1.3%

Shell: 6.5% - 5.7% = .8%; Ford: 7.5% - 6.2% = 1.3%.

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31
Q

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

A. 1.6% and 3.3%

Exxon: 6.2% - 4.6% = 1.6%; Lucent Technologies: 8.9% - 5.6% = 3.3%.

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32
Q

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%

Exxon: 7.2% - 6.2% = 1.0%; Xerox: 7. 9% - 6.7% = 1.2%.

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33
Q

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

2.57% and 2.86%

Boeing: 7.63% - 5.06% = 2.57%; Caterpillar: 7.16% - 4.30% = 2.86%.

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34
Q

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

A

A. minimize the holders’ interest rate risk; give the investor the ability to share in the price appreciation of the company’s stock

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35
Q

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

A

9.0%

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36
Q

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

8.6%

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37
Q

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

$886.28

FV = 1,000, PMT = 70, n = 5, i = 10, PV = 886.28

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38
Q

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

$960.14

FV = 1,000, PMT = 85, n = 7, i = 9.3, PV = 960.138.

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39
Q

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

$1,075.82

FV = 1000, PMT = 120, n = 5, i = 10, PV = 1075.82.

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40
Q

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

$992.78

FV = 1000, PMT = 40, n = 10, i = 5, PV = 922.78

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41
Q

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

$1,010.12

FV = 1,000, PMT = 47.50, n = 14, i = 4.65, PV = 1,010.12

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42
Q

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

$1,077.22

FV = 1000, PMT = 60, n = 10, i = 5, PV = 1077.22

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43
Q

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

C. 12.00%

FV = 1,000, PMT = 100, n = 5, PV = -928, i = 11.997%.

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44
Q

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

$1,104.13

FV = 1,000, PMT = 100, n = 7, i = 8, PV = 1,104.13.

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45
Q

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

8.00%

FV = 1,000, PMT = 100, n = 6, i = 8, PV = 1,092.46; FV = 1000, PMT = 100, n = 5, i = 8, PV = 1,079.85; HPR = (1,079.85 - 1,092.46 + 100)/1,092.46 = 8%.

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46
Q

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

A

B. both bonds will increase in value, but bond B will increase more than bond A

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47
Q

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

$501.87

$1,000/(1.09)^8 = $501.87

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48
Q

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

1.4%

$1,000/(1.10)10 = $385.54; $1,000/(1.11)9 = $390.92; ($390.92 - $385.54)/$385.54 = 1.4%.

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49
Q

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

D. 12.68%

$990/$99,010 = 0.01; (1.01)^12 - 1.0 = 12.68%.

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50
Q

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

12.62%

$1,961/$98,039 = 0.02; (1.02)^6 - 1 = 12.62%.

51
Q

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

12.55%

$2,913/$97,087 = 0.03; (1.03)4 - 1.00 = 12.55%.

52
Q

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

$1,077.20

(1.1025)^1/2 - 1 = 5%, N = 10, I/Y = 10%, PMT = 60, FV = 1000, Þ PV = 1,077.22.

53
Q

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

$870

30 shares × $29/share = $870.

54
Q

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

$850 - $810 = $40.

55
Q

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

Bond - Years to Maturity - Price
A - 1 - $909.09
B - 2 - $811.62
C - 3 - $711.78
D - 4 - $635.52

The yield to maturity on bond A is

A

10%

(1000-909.09)/909.09 = 10%

56
Q

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

Bond - Years to Maturity - Price
A - 1 - $909.09
B - 2 - $811.62
C - 3 - $711.78
D - 4 - $635.52

The yield to maturity on bond B is

A

11%

(1000-811.62)/811.62 = 0.2321;
(1.2321)^0.5 - 1.0 = 11%

57
Q

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

Bond - Years to Maturity - Price
A - 1 - $909.09
B - 2 - $811.62
C - 3 - $711.78
D - 4 - $635.52

The yield to maturity on bond C is

A

12%

($1,000 - $711.78)/$711.78 = 0.404928; (1.404928)^1/3 - 1.0 = 12%.

58
Q

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

Bond - Years to Maturity - Price
A - 1 - $909.09
B - 2 - $811.62
C - 3 - $711.78
D - 4 - $635.52

The yield to maturity on bond D is

A

12%

($1,000 - $635.52)/$635.52 = 0.573515; (1.573515)1/4 - 1.0 = 12%.

59
Q

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

13.98%

FV = 1100, n = 3, PMT = 100, PV = -975, i = 13.98%.

60
Q

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

10.95%

YTC = FV = 1120, n = 10, PMT = 60, PV = -1,110m Þ i = 5.48%, 5.48 × 2 = 10.95

61
Q

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

6.68%

FV = 500, PMT = 100, n = 10, PV = -975, i = 6.68%.

62
Q

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

11.95%

FV = 1000, PMT = 100, n = 6, i = 8, PV = 1092.46; FV = 1,000, PMT = 100, n = 5, i = 7, PV = 1,123.01; HPR = (1,123.01 - 1,092.46 + 100)/1,092.46 = 11.95%.

63
Q

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

A

C. yield to maturity

64
Q

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

A

B. the discount rate that will set the present value of the payments equal to the bond price

65
Q

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.

A

D. the coupon rate is less than the current yield and the current yield is less than yield to maturity

66
Q

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. higher.

B. lower.

C. the same.

D. Cannot be determined

E. $1,000.

A

B. lower

67
Q

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

A

B. 10.9%

68
Q

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%.

A

A. over 14%

YTM = 14.33%

69
Q

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

$308

FV = 1000, n = 30, I = 4, PV = 308.32

70
Q

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%

[$1,000/($372.50]^1/20 - 1 = 5.1%.

71
Q

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.

A

B. The more volatile the underlying stock, the greater the value of the conversion feature.

72
Q

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

A

E. I, III, and IV

73
Q

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

$14.87

$1,000/(1.10)^20 = $148.64; $1,000/(1.10)^19 = $163.51; $163.51- $148.64 = $14.87.

74
Q

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

A

D. All of the options

75
Q

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

A

C. $1,075.00, $1,075.63

76
Q

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.

A

C. over the counter by bond dealers linked by a computer quotation system

77
Q

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

A. deferral.

B. reissue.

C. repurchase.

D. refunding.

E. None of the options

A

D. refunding

78
Q

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.

A

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

79
Q

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.

A

C. government bonds with par value linked to the general level of prices.

80
Q

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

A

B. bankruptcy risk

81
Q

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.

A

C. bondholders may lose because their bonds can be repurchased by the corporation at below-market prices

82
Q

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.

A

E. may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

83
Q

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.

A

E. are backed by specific assets of the issuing firm and are considered the safest variety of bonds.

84
Q

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.

A

D. they promise either a fixed stream of income or a stream of income determined by a specific formula.

85
Q

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.

A

A. effectively has a zero percent coupon rate

86
Q

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.

A

B. a catastrophe bond

87
Q

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

$62.52, $1042

The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.042 = $1,042. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,042 × .06 = $62.52.

88
Q

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.

A

E. interest rates are expected to fall

89
Q

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.

A

A. the straight bond’s price will be higher than the callable bond’s price for low interest rates

90
Q

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?

Time - Prevailing Reinvestment Rate
0 (purchase date0 - 6.0%
1 - 7.2%
2 - 9.4%
3 (maturity date) - 8.2%

A

8.97%

The investment grows to a total future value of $80 × (1.072) × (1.094) + $80 × (1.094) + $1,080 = $1,261.34 over the three-year period. The realized compound yield is the yield that will compound the original investment to yield the same future value: $974.69 × (1 + rcy)^3 = $1,261.34, (1 + rcy)^3 = 1.29409, 1 + rcy = 1.0897, rcy = 8.97%.

91
Q

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.

A

D. Elton bonds

92
Q

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

$851.93

FV = 1,000, PMT = 75, n = 6, i = 11, PV = 851.93

93
Q

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

$833.96

FV = 1,000, PMT = 60, n = 8, i = 9, PV = 833.96

94
Q

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

$1,000.00

FV = 1,000, PMT = 45, n = 12, i = 4.5, PV = 1,000.00

95
Q

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

$894.51

FV = 1,000, PMT = 44, n = 14, i = 5.5, PV = 894.51

96
Q

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

10.15%

FV = 1,000, PMT = 90, n = 9, PV = -934, i = 10.15%.

97
Q

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

9.09%

FV = 1,000, PMT = 40, n = 8, PV = -964, i = 9.09%.

98
Q

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

$1,083.65

FV = 1,000, PMT = 110, n = 19, i = 10, PV = 1,083.65

99
Q

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%

FV = 1,000, PMT = 100, n = 9, i = 8, PV = 1,124.94; FV = 1000, PMT = 100, n = 8, i = 8, PV = 1,114.93; HPR = (1,114.93 - 1,124.94 + 100)/1,124.94 = 8%.

100
Q

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

A

D. both bonds will decrease in value, but bond G will decrease more than bond F

101
Q

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

$130.04

$1,000/(1.12)^18 = $130.04.

102
Q

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

$59.74

$1,000/(1.11)^27 = $59.74.

103
Q

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

-1.4%

$1,000/(1.09)^12 = $355.53; $1,000/(1.10)^11 = $350.49; ($350.49 - $355.53)/$355.53 = -1.4%.

104
Q

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

23.8%

$1,000/(1.11)^7 = $481.66; $1,000/(1.09)^6 = $596.27; ($596.27 - $481.66)/$481.66 = 23.8%.

105
Q

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

$924

22 shares * $42/share

106
Q

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

$700

35 shares x $20/share

107
Q

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

$70

950 - 880

108
Q

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

$175

1150-975

109
Q

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

A

6.15

35 x (32/182)

110
Q

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

A

12.77

$37.5 × (62/182) = $12.77.

111
Q

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

A

27.69

$45 × (112/182) = $27.69

112
Q

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

1,006.15

$1,000 + [35 × (32/182)] = $1,006.15.

113
Q

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

1,012.77

$1,000 + [37.5 × (62/182)] = $1,012.77.

114
Q

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

1,027.69

$1,000 + [45 × (112/182)] = $1,027.69.

115
Q

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

$51.60, $1,032

The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.032 = $1,032. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,032 × .05 = $51.60.

116
Q

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

$41.44, $1,036

The bond price, which is indexed to the inflation rate, becomes $1,000 × 1.036 = $1,036. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,036 × .04 = $41.44.

117
Q

A CDO is a

A. command duty officer.

B. collateralized debt obligation.

C. commercial debt originator.

D. collateralized debenture originator.

E. common debt officer.

A

B. collateralised debt obligation

118
Q

A CDS is a

A. command duty supervisor.

B. collateralized debt security.

C. commercial debt servicer.

D. collateralized debenture security.

E. credit default swap.

A

E. credit default swap

119
Q

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

A

C. an insurance policy on the default risk of a corporate bond or loan

120
Q

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

A

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

121
Q

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.

A

A. structured investment vehicles

122
Q

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

A

B. issuing short-term commercial paper; buy other forms of debt such as mortgages

123
Q

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.

A

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.

124
Q

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.

A

E. they were formed by pooling subprime mortgages, home prices stalled, and the mortgages were variable rate loans and interest rates increased.

Investments (14 decks)

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