Chapter 6

Question 1

Which of the following statements is false?
A) Bonds are a securities sold by governments and corporations to raise money from investors today in exchange for promised future payments.
B) By convention the coupon rate is expressed as an effective annual rate.
C) Bonds typically make two types of payments to their holders.
D) The time remaining until the repayment date is known as the term of the bond.

Answer 1

B

Question 2

Which of the following statements is false?
A) The principal or face value of a bond is the notional amount we use to compute the interest payments.
B) Payments are made on bonds until a final repayment date, called the term date of the bond.
C) The coupon rate of a bond is set by the issuer and stated on the bond certificate.
D) The promised interest payments of a bond are called coupons.

Answer 2

B

Question 3

Which of the following statements is false?
A) The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.
B) The bond certificate indicates the amounts and dates of all payments to be made.
C) The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.
D) Usually the face value of a bond is repaid at maturity.

Answer 3

C

Question 4

Which of the following statements is false?
A) The amount of each coupon payment is determined by the coupon rate of the bond.
B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
C) The simplest type of bond is a zero-coupon bond.
D) Treasury bills are U.S. government bonds with a maturity of up to one year.

Answer 4

B

Question 5

Which of the following statements is false?
A) Bond traders typically quote bond prices rather than bond yields .
B) Treasury bills are zero-coupon bonds.
C) Zero-coupon bonds always trade at a discount.
D) The yield to maturity is typically stated as an annual rate by multiplying the calculated YTM by the number of coupon payment per year, thereby converting it to an APR.

Answer 5

A

Question 6

Which of the following statements is false?
A) One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond.
B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no simple formula to solve for the yield to maturity directly.
C) Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably.
D) The IRR of an investment in a bond is given a special name, the yield to maturity (YTM).

Answer 6

B

Question 7

Which of the following statements is false?
A) Zero-coupon bonds are also called pure discount bonds.
B) The IRR of an investment opportunity is the discount rate at which the NPV of the investment opportunity is equal to zero.
C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment.
D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1000.

Answer 7

D

Question 8

Which of the following statements is false?
A) If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond.
B) Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par.
C) Coupon bonds always trade for a discount.
D) At any point in time, changes in market interest rates affect a bond’s yield to maturity and its price.

Answer 8

C

Question 9

Which of the following statements is false?
A) When a bond is trading at a discount, the price drop when a coupon is paid will be larger than the price increase between coupons, so the bond’s discount will tend to decline as time passes.
B) When a bond trades at a price equal to its face value, it is said to trade at par.
C) As interest rates and bond yield rise, bond prices will fall.
D) Ultimately, the prices of all bonds approach the bond’s face value when the bonds mature and their last coupon are paid.

Answer 9

A

Question 10

Which of the following statements is false?
A) A bond trades at par when its coupon rate is equal to its yield to maturity.
B) The clean price of a bond is adjusted for accrued interest.
C) The price of the bond will drop by the amount of the coupon immediately after the coupon is paid.
D) If a coupon bond’s yield to maturity exceeds its coupon rate, the present value of its cash flows at the yield to maturity will be greater than its face value.

Answer 10

D

Question 11

Which of the following statements is false?
A) Bond prices converge to the bond’s face value due to the time effect, but simultaneously move up and down due to unpredictable changes in bond yields.
B) As interest rates and bond yields fall, bond prices will rise.
C) Bonds with higher coupon rates are more sensitive to interest rate changes.
D) Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero coupon bonds.

Answer 11

C

Question 12

Which of the following statements is false?
A) If a bond trades at a premium, its yield to maturity will exceed its coupon rate.
B) A bond that trades at a premium is said to trade above par.
C) When a coupon-paying bond is trading at a premium, an investor’s return from the coupons is diminished by receiving a face value less than the price paid for the bond.
D) Holding fixed the bond’s yield to maturity, for a bond not trading at par, the present value of the bond’s remaining cash flows changes as the time to maturity decreases.

Answer 12

A

Question 13

Which of the following statements is false?
A) Prices of bonds with lower durations are more sensitive to interest rate changes.
B) When a bond is trading at a discount, the price increase between coupons will exceed the drop when a coupon is paid, so the bond’s price will rise and its discount will decline as time passes.
C) Coupon bonds may trade at a discount, at a premium, or at par.
D) The sensitivity of a bond’s price changes in interest rates is the bond’s duration.

Answer 13

A

Question 14

If a bond is currently trading at its face (par) value, then it must be the case that
A) the bond’s yield to maturity is less than its coupon rate.
B) the bond’s yield to maturity is equal to its coupon rate.
C) the bond’s yield to maturity is greater than its coupon rate.
D) the bond is a zero-coupon bond.

Answer 14

B

Question 15

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called
A) the current yield.
B) the yield to maturity.
C) the zero coupon yield.
D) the discount yield.

Answer 15

B

Question 16

Which of the following statements is false?
A) Given the spot interest rates, we can determine the price and yield of any other default-free bond.
B) As the coupon increases, earlier cash flows become relatively less important than later cash flows in the calculation of the present value.
C) When the yield curve is flat, all zero-coupon and coupon-paying bonds will have the same yield, independent of their maturities and coupon rates.
D) When U.S. bond traders refer to “the yield curve,” they are often referring to the coupon-paying Treasury yield curve.

Answer 16

B

Question 17

Which of the following statements is false?
A) We can use the law of one price to compute the price of a coupon bond from the prices of zero-coupon bonds.
B) The plot of the yields of coupon bonds of different maturities is called the coupon-paying yield curve.
C) It is possible to replicate the cash flows of a coupon bond using zero-coupon bonds.
D) Because the coupon bond provides cash flows at different points in time, the yield to maturity of a coupon bond is the simple average of the yields of the zero-coupon bonds of equal and shorter maturities.

Answer 17

D

Question 18

Which of the following statements is false?
A) By convention, practitioners always plot the yield of the most senior issued bonds, termed the on-the-run-bonds.
B) We can determine the no-arbitrage price of a coupon bond by discounting its cash flows using the zero-coupon yields.
C) If the zero coupon yield curve is upward sloping, the resulting yield to maturity decreases with the coupon rate of the bond.
D) The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds.

Answer 18

A

Question 19

Which of the following statements is false?
A) The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds.
B) If the zero-coupon yield curve is downward sloping, the yield to maturity will decrease with the coupon rate.
C) The information in the zero-coupon yield curve is sufficient to price all other risk-free bonds.
D) When the yield curve is flat, all zero-coupon and coupon-paying bonds will have the same yield, independent of their maturities and coupon rates.

Answer 19

B

Question 20

A corporate bond which receives a BBB rating from Standard and Poor's is considered
A) a junk bond.
B) an investment grade bond.
C) a defaulted bond.
D) a high-yield bond.

Answer 20

B

Question 21

Which of the following statements is false?
A) Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.
B) The yield to maturity of a defaultable bond is equal to the expected return of investing in the bond.
C) The risk of default, which is known as the credit risk of the bond, means that the bond’s cash flows are not known with certainty.
D) For corporate bonds, the issuer may default—that is, it might not pay back the full amount promised in the bond certificate.

Answer 21

B

Question 22

Which of the following statements is false?
A) Because the cash flows promised by the bond are the most that bondholders can hope to receive, the cash flows that a purchaser of a bond with credit risk expects to receive may be less than that amount.
B) By consulting bond ratings, investors can assess the credit-worthiness of a particular bond issue.
C) Because the yield to maturity for a bond is calculated using the promised cash flows, the yield of bond’s with credit risk will be lower than that of otherwise identical default-free bonds.
D) A higher yield to maturity does not necessarily imply that a bond’s expected return is higher

Answer 22

C

Question 23

Which of the following statements is false?
A) The bond’s expected return, which is equal to the firm’s debt cost of capital, is less than the yield to maturity if there is a risk of default.
B) The two best-known bond-rating companies are Standard & Poor’s and Dow Jones.
C) Bonds in the bottom five categories are often call speculative bonds, junk bonds, or high-yield bonds.
D) Bond ratings encourage widespread investor participation and relatively liquid markets.

Answer 23

B

Question 24

Which of the following statements is false?
A) Bond ratings encourage widespread investor participation and relatively liquid markets.
B) Bonds in the top four categories are often referred to as investment grade bonds.
C) A bond’s rating depends on the risk of bankruptcy as well as the bondholder’s ability to lay claim to the firm’s assets in the event of a bankruptcy.
D) Debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same company that have a higher priority in bankruptcy.

Answer 24

D

Question 25

Which of the following statements is false?
A) Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.
B) Credit spreads fluctuate as perceptions regarding the probability of default change.
C) Credit spreads are high for bonds with high ratings.
D) We refer to the difference between the yields of the corporate bonds and the Treasury yields as the default spread or credit spread.

Answer 25

C

Question 26

Forward interest rates
A) accurately predict future spots rates because of the law of one price.
B) tend not to be good predictors of future spot rates.
C) tend to be biased downward as predictors of future spot rates when the yield curve is upward sloping.
D) tend to be biased upward as predictors of future spot rates when the yield curve is downward sloping.

Answer 26

B

Question 27

Which of the following statements is false?
A) The forward rate for year 1 is the rate on an investment that starts today and is repaid in one year; it is equivalent to an investment in a one-year zero-coupon bond.
B) The forward rate is only a good predictor of spot interest rates in the future when investors are risk adverse.
C) We can use the law of one price to calculate the forward rate from the zero-coupon yield curve.
D) An interest rate forward contract is a contract today that fixes the interest rate for a loan or investment in the future.

Answer 27

B

Question 28

Which of the following statements is false?
A) In general, the expected future spot interest rate will reflect investor’s preferences toward the risk of future interest rate fluctuations.
B) If investors did not care about risk, then they would be indifferent between investing in a two-year bond and investing in a one-year bond and rolling over the money in one-year.
C) When we refer to the one-year forward rate for year 5, we mean the rate available today on a one-year investment that begins four years from today and is repaid five years from today.
D) In general, we can compute the forward rate for year n by comparing an investment in an n-year, zero-coupon bond to an investment in an (n + 1) year, zero-coupon bond, with the interest rate earned in the nth year being guaranteed through an interest rate forward contract.

Answer 28

D

Question 29

Which of the following statements is false?
A) Forward rates tend not to be good predictors of future spot rates.
B) Given the risk associated with interest rate changes, corporate managers require tools to help manage this risk.
C) One of the most important tools to manage the risk of interest rate changes are interest rate forward contracts.
D) A spot rate is an interest rate that we can guarantee today for a loan or investment that will occur in the future.

Answer 29

D