Debt Market

Question 1

Which of the following statements regarding municipal bonds is false?

A. Their interest income is exempt from federal income taxation.

B. Their interest income is exempt from state and local taxation in the issuing state.

C. Investors can expect lower yields on these securities.

D. Capital gains have a tax-exempt status.

Answer 1

D

Question 2

How do you call a bond that can be exchanged for a common stock of the firm? A. Debenture. B. Convertible bond. C. Secured bond. D. Puttable bond.

Answer 2

B

Question 3

Consider a bond that pays a semiannual coupon of $65, a yield to maturity of 10% and face value of $1,000 which will be paid four years from now. What is the present value of this bond?

Answer 3

$1,096.94

Question 4

Which of the following statements regarding bond prices and interest rates is true?

A. At higher interest rates, the present value of the payments to be received by the bondholder is higher.

B. Bond prices will increase as market interest rates rise.

C. As the market interest rate goes down, the price of the bond goes down.

D. There is an inverse relationship between bond prices and interest rates.

Answer 4

D

Question 5

Consider a zero-coupon bond with 30 years to maturity and a face value of $1,000. Calculate the price of the bond if the interest rate is 10%.

Answer 5

57.31

Question 6

Suppose that we were to graph the price of a 30-year, 7% coupon bond for a range of interest rates. What would be the shape of the bond price curve?

A. It would be a curve with a negative slope that gets progressively flatter at higher interest rates.

B. It would be a curve with a negative slope that gets progressively steeper at higher interest rates.

C. It would be a curve with a positive slope that gets progressively flatter at higher interest rates.

D. It would be a curve with positive slope that gets progressively steeper at higher interest rates.

Answer 6

A