Topic 5

Question 1

T/F

Bond’s principal amount is repaid at maturity

Answer 1

True

Question 2

What are the bond’s features? (3 choices)
(A) securities that generally make fixed interest payments for a fixed number of time periods
(B) Bonds are not generally negotiable
(C) The principal amount is repaid at maturity
(D) Bonds give no ownership rights to their owners
(E) Bond’s contract is called debenture

Answer 2

(A) securities that generally make fixed interest payments for a fixed number of time periods
(C) The principal amount is repaid at maturity
(D) Bonds give no ownership rights to their owners

Question 3

Match those following concepts about interest rates:

The term interest rate is usually applied to

Answer 3

debt instruments such as banks loans or bound; the compensation paid by the borrower of funds to the lender; from the borrowers point of view, the cost of borrowing funds

Question 4

Match those following concepts about interest rates:

The term required return is usually applied to

Answer 4

equity instruments such as common stock; the cost of funds obtained by selling an ownership interests

Question 5

Match those following concepts about interest rates:

The real risk-free rate of interest is

Answer 5

the rate that creates equilibrium between the supply of savings and the demand for investment funds in a perfect world, without inflation

Question 6

Match those following concepts about interest rates:

Inflation

Answer 6

measures the growth rate in the prices of most goods and services over some period of time (monthly, quarterly, annually or longer)

Question 7

Match those following concepts about interest rates:

Real interest rate

Answer 7

when an interest rate is adjusted for inflation

Question 8

Calculate real rate if you have nominal rate is 12% and inflation rate is 7%

Answer 8

((1+nominal rate)/(1+inflation rate))-1
(1+0.12)/(1+.07)-1
4.67

Question 9

The nominal rate differs from the real rate of interest, r* as a result of two factors: (2 answers)

(A) interest rate applied to debt instruments such as bank loans or bonds
(B) Inflationary expectations reflected in an inflation premium (IP)
(C) Issuer and issue characteristics such as default risks and contractual provisions as reflected in a risk premium (RP)
(D) required return applied to equity instruments such as common stock

Answer 9

(B) Inflationary expectations reflected in an inflation premium (IP)

(C) Issuer and issue characteristics such as default risks and contractual provisions as reflected in a risk premium (RP)

Question 10

T/F

The risk of default for bond means the bond buyer fails to make interest or principal payments

Answer 10

F

Question 11

Match those 3 theories that explain the general shape of the yield curve

Expectations theory

Answer 11

theory that the yield curve investor expectations about the future interest rates

Question 12

Match those 3 theories that explain the general shape of the yield curve

Liquidity preference theory

Answer 12

long-term rates are generally higher than short-term rates because investors perceive short-term investments to be more liquid and less risky than long-term investments

Question 13

Match those 3 theories that explain the general shape of the yield curve

Market segmentation theory

Answer 13

market for loans is segmented on the basis of maturity and that the supply of and demand for loans within each segment determine is prevailing interest rate

Question 14

Match those concepts for bond’s characteristics

Maturity date

Answer 14

the date on which the principal amount of a bond becomes due. on this date, which is generally printed on the certificate of the instrument in question, the principal investment is repaid

Question 15

Match those concepts for bond’s characteristics

Coupon rate

Answer 15

the interest payments based on face value

Question 16

Match those concepts for bond’s characteristics

Face Value

Answer 16

par value, or the principal amount to be paid at maturity

Question 17

A bond has a coupon rate of 8% and matures in 10 years. What are its expected cash flows if this bonds have a principal amount of $1000 and pay interest semi-annually

Answer 17

1000(.08)= 80 
semi = 80/2 = 40 
1000+40 = 1040

Question 18

T/F
the yield is what we would consider to be the interest rate if we take the price as the present value, the coupon payments as the payments and the face value as the future value

Answer 18

T

Question 19

Calculate bond price if the coupon payment is 7%, yield for the bond is 6%, bond’s face value is 1,000 and matures in 14, if paid semi-annually

Answer 19

FV=1000
N= 14*2=28
PMT= 7/2 = 3.5% > 3.5%*1000 =35
I/Y= 6/2 = 3
CPT > PV = 1093.82

Question 20

Calculate the annual coupon payment if the semi-annual coupon paying bond price is $734, the yield for the bond is 6%, the bond’s face value is $1,000 and matures in 7 years.

Answer 20

FV=1,000
N=14
I/Y=3
PV=-734
CPT > PMT> 6.45*2 =12.90

Question 21

Assume that there is a bond on the market priced at $850 and that the bond comes with a face value of $1,000.

The coupon rate for the bond is 15% and the bond will reach maturity in 7 years.

Answer 21

19.05%

Question 22

If the yield is 10%, the coupon rate is 7%, and the price is $750 then how many years are there until maturity?

(a) 18.53%
(b) 113.95
(c) 19.05%

Answer 22

(c) 18.80

Question 23

If the yield is 10%, the coupon rate is 7%, and the price is $750 then how many years are there until maturity?

(a) 18.80
(b) 3.29
(c) 6.79
(d) 1.67

Answer 23

(a) 18.80

Question 24

match those following concepts

discount bond

Answer 24

bond that is issued for less that it’s par-or face-value

Question 25

match those following concepts

preminum bond

Answer 25

bond trading above its face value or in other words

Question 26

match those following concepts

par-value bond

Answer 26

bound price that equals the face value

Question 27

Match those following concepts about bond characteristics

zero-coupon bonds

Answer 27

bonds have no coupon payments

Question 28

collateral

Answer 28

when there are specific assets that are designated as security for a bond

Question 29

sinking fund

Answer 29

when there is a bank account that holds the cash to be used to make a bonds payments

Question 30

seniority

Answer 30

there is a specific ordering to which bonds get paid first from a firms cash and which ones get paid last

Question 31

callable

Answer 31

the issuer can repurchase the bond at some fixes price

Question 32

convertible

Answer 32

the bondholder can exchange the bond for some other security, stock

Question 33

What are the features of the US Treasury? (4)

(a) They can have risk arising from other sources, such as politics, inflation, changing interest rates, taxes, and liquidity
(b) no risk of default
(c) US treasury bond will have a lower price and lower yield than the corporate bond if they have the same time to maturity
(d) US treasury bond will have a higher price and lower yield than the corporate bond if they have the same time to maturity
(e) US treasury bond will have a lower price and higher yield than the corporate bond if they have the same time to maturity
(f) the yields on US treasuries are commonly used as a benchmark in order to evaluate the impact of risk on other bonds

Answer 33

(a) They can have risk arising from other sources, such as politics, inflation, changing interest rates, taxes, and liquidity
(b) no risk of default
(d) US treasury bond will have a higher price and lower yield than the corporate bond if they have the same time to maturity
(f) the yields on US treasuries are commonly used as a benchmark in order to evaluate the impact of risk on other bonds

Question 34

the spread

Answer 34

the difference in yields

Question 35

default spread

Answer 35

the difference between two bonds that are similar except for their level of risks

Question 36

term spread

Answer 36

the difference between two bonds with the same level of risks but different maturities

Question 37

T/F municipal bonds or “munis” are risk-free

Answer 37

F

Question 38

Who can issue munis?

(A) Coporation
(B) highway authorities, school districts, universities, airports, or public utilities
(C) city government
(D) any branch of a state, county

Answer 38

(B) highway authorities, school districts, universities, airports, or public utilities
(C) city government
(D) any branch of a state, county

Question 39

Calculate Corporate bond yield if Muni bond yield is 16% and tax rate is 22%

Answer 39

muni bound yield/(1-T)

0.16/(1-0.22)