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Multiple Choice Questions

1. The invoice price of a bond is the ______.

A. stated or flat price in a quote sheet plus accrued interest

B. stated or flat price in a quote sheet minus accrued interest

C. bid price

D. average of the bid and ask price

Answer: A. stated or flat price in a quote sheet plus accrued interest

2. Sinking funds are commonly viewed as protecting the _______ of the bond.

A. issuer

B. underwriter

C. holder

D. dealer

Answer: C. holder

3. A collateral trust bond is _______.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

Answer: A. secured by other securities held by the firm

4. A mortgage bond is _______.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

Answer: C. secured by property owned by the firm

5. A debenture is _________.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

Answer: D. unsecured

6. If you are holding a premium bond, you must expect a _______ each year until maturity. If

you are holding a discount bond, you must expect a _______ each year until maturity. (In

each case assume that the yield to maturity remains stable over time.)

A. capital gain; capital loss

B. capital gain; capital gain

C. capital loss; capital gain

D. capital loss; capital loss

Answer: C. capital loss; capital gain

7. Floating-rate bonds have a __________ that is adjusted with current market interest rates.

A. maturity date

B. coupon payment date

C. coupon rate

D. dividend yield

Answer: C. coupon rate

8. Inflation-indexed Treasury securities are commonly called ____.

A. PIKs

B. CARs

C. TIPS

D. STRIPS

Answer: C. TIPS

9. In regard to bonds, convexity relates to the _______.

A. shape of the bond price curve with respect to interest rates

B. shape of the yield curve with respect to maturity

C. slope of the yield curve with respect to liquidity premiums

D. size of the bid-ask spread

Answer: A. shape of the bond price curve with respect to interest rates

10. A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A

U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the

following statements is correct?

A. Both bonds are examples of Eurobonds.

B. The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.

C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

D. Neither bond is a Eurobond.

Answer: C. The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

11. The primary difference between Treasury notes and bonds is ________.

A. maturity at issue

B. default risk

C. coupon rate

D. tax status

Answer: A. maturity at issue

12. TIPS offer investors inflation protection by ______________ by the inflation rate each

year.

A. increasing only the coupon rate

B. increasing only the par value

C. increasing both the par value and the coupon payment

D. increasing the promised yield to maturity

Answer: C. increasing both the par value and the coupon payment

13. You would typically find all but which one of the following in a bond contract?

A. A dividend restriction clause

B. A sinking fund clause

C. A requirement to subordinate any new debt issued

D. A price-earnings ratio

Answer: D. A price-earnings ratio

14. To earn a high rating from the bond rating agencies, a company would want to have:

I. A low times-interest-earned ratio

II. A low debt-to-equity ratio

III. A high quick ratio

A. I only

B. II and III only

C. I and III only

D. I, II, and III

Answer: B. II and III only

15. According to the liquidity preference theory of the term structure of interest rates, an

increase in the yield on long-term corporate bonds versus short-term bonds could be due to

_______.

A. declining liquidity premiums

B. an expectation of an upcoming recession

C. a decline in future inflation expectations

D. an increase in expected interest rate volatility

Answer: D. an increase in expected interest rate volatility

16. __________ are examples of synthetically created zero-coupon bonds.

A. COLTS

B. OPOSSMS

C. STRIPS

D. ARMs

Answer: C. STRIPS

17. A __________ bond gives the bondholder the right to cash in the bond before maturity at

a specific price after a specific date.

A. callable

B. coupon

C. puttable

D. Treasury

Answer: C. puttable

18. TIPS are an example of _______________.

A. Eurobonds

B. convertible bonds

C. indexed bonds

D. catastrophe bonds

Answer: C. indexed bonds

19. Bonds issued in the currency of the issuer's country but sold in other national markets are

called _____________.

A. Eurobonds

B. Yankee bonds

C. Samurai bonds

D. foreign bonds

Answer: A. Eurobonds

20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out

to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive

in year 3 is _________.

A. $30

B. $33

C. $32.78

D. $30.90

Answer: C. $32.78

($30)(1.02)(1.03)(1.04) = $32.78

21. The bonds of Elbow Grease Dishwashing Company have received a rating of C by

Moody's. The C rating indicates that the bonds are _________.

A. high grade

B. intermediate grade

C. investment grade

D. junk bonds

Answer: D. junk bonds

22. Bonds rated _____ or better by Standard & Poor's are considered investment grade.

A. AA

B. BBB

C. BB

D. CCC

Answer: B. BBB

23. Consider the liquidity preference theory of the term structure of interest rates. On average,

one would expect investors to require _________.

A. a higher yield on short-term bonds than on long-term bonds

B. a higher yield on long-term bonds than on short-term bonds

C. the same yield on both short-term bonds and long-term bonds

D. none of these options (The liquidity preference theory cannot be used to make any of the

other statements.)

Answer: B. a higher yield on long-term bonds than on short-term bonds

24. 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 5 years, while bond B

will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%,

_________.

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

Answer: D. both bonds will decrease in value but bond B will decrease more than bond A

25. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid

off before which one of the following?

A. Mortgage bonds

B. Senior debentures

C. Preferred stock

D. Equipment obligation bonds

Answer: C. Preferred stock

26. Bonds with coupon rates that fall when the general level of interest rates rise are called

_____________.

A. asset-backed bonds

B. convertible bonds

C. inverse floaters

D. index bonds

Answer: C. inverse floaters

27. _______ bonds represent a novel way of obtaining insurance from capital markets against

specified disasters.

A. Asset-backed bonds

B. TIPS

C. Catastrophe

D. Pay-in-kind

Answer: C. Catastrophe

28. The issuer of ________ bond may choose to pay interest either in cash or in additional

bonds.

A. an asset-backed

B. a TIPS

C. a catastrophe

D. a pay-in-kind

Answer: D. a pay-in-kind

29. Everything else equal, the __________ the maturity of a bond and the __________ the

coupon, the greater the sensitivity of the bond's price to interest rate changes.

A. longer; higher

B. longer; lower

C. shorter; higher

D. shorter; lower

Answer: B. longer; lower

30. Which one of the following statements is correct?

A. Invoice price = Flat price - Accrued interest

B. Invoice price = Flat price + Accrued interest

C. Flat price = Invoice price + Accrued interest

D. Invoice price = Settlement price - Accrued interest

Answer: B. Invoice price = Flat price + Accrued interest

31. A __________ bond gives the issuer an option to retire the bond before maturity at a

specific price after a specific date.

A. callable

B. coupon

C. puttable

D. Treasury

Answer: A. callable

32. Which of the following possible provisions of a bond indenture is designed to ease the

burden of principal repayment by spreading it out over several years?

A. Callable feature

B. Convertible feature

C. Subordination clause

D. Sinking fund

Answer: D. Sinking fund

33. Serial bonds are associated with _________.

A. staggered maturity dates

B. collateral

C. coupon payment dates

D. conversion features

Answer: A. staggered maturity dates

34. In an era of particularly low interest rates, which of the following bonds is most likely to

be called?

A. Zero-coupon bonds

B. Coupon bonds selling at a discount

C. Coupon bonds selling at a premium

D. Floating-rate bonds

Answer: C. Coupon bonds selling at a premium

35. Consider the expectations theory of the term structure of interest rates. If the yield curve is

downward-sloping, this indicates that investors expect short-term interest rates to __________

in the future.

A. increase

B. decrease

C. not change

D. change in an unpredictable manner

Answer: B. decrease

36. A convertible bond has a par value of $1,000, but its current market price is $975. The

current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The

bond's market conversion value is _________.

A. $1,000

B. $884

C. $933

D. $980

Answer: B. $884

($26)(34) = $884

37. A convertible bond has a par value of $1,000, but its current market price is $950. The

current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The

bond's conversion premium is _________.

A. $50

B. $190

C. $200

D. $240

Answer: B. $190

Conversion premium = 950 - 40(19) = 190

38. A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5

years, and is selling today at $785. The actual yield to maturity on this bond is _________.

A. 7.2%

B. 8.8%

C. 9.1%

D. 9.6%

Answer: D. 9.6%

$785 =

Calculator entries are N = 5, PV = -785, PMT = 40, FV = 1,000, CPT I/Y → 9.62

39. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5

years, and is selling today at an $84.52 discount from par value. The yield to maturity on this

bond is _________.

A. 6%

B. 7.23%

C. 8.12%

D. 9.45%

Answer: C. 8.12%

Calculator entries are N = 5, PV = -915.48, PMT = 60, FV = 1,000, CPT I/Y → 8.12

40. A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5

years, and is selling today at a $75.25 discount from par value. The current yield on this bond

is _________.

A. 6%

B. 6.49%

C. 6.73%

D. 7%

Answer: B. 6.49%

Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%

41. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years

but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to

call on this bond is _________.

A. 6%

B. 6.58%

C. 7.2%

D. 8%

Answer: A. 6%

1,055.84 =

Calculator entries are N = 10, PV = -1,055.84, PMT = 60, FV = 1,100, CPT I/Y → 6

42. A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8

years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the

bond today will be __________.

A. $1,000

B. $1,062.81

C. $1,081.82

D. $1,100.03

Answer: B. $1,062.81

Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV → -1,062.81

43. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years,

and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond

today will be _________.

A. $856.04

B. $891.86

C. $926.47

D. $1,000

Answer: B. $891.86

44. A coupon bond that pays semiannual interest is reported in the Wall Street Journal as

having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2

months ago and the coupon rate is 6%, the invoice price of the bond will be _________.

A. $1,140

B. $1,170

C. $1,180

D. $1,200

Answer: C. $1,180

Invoice price = 1.17(1,000) + 30(2/6) = 1180

45. A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years

has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a

yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield

of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country

Marketing Corp. are, respectively, __________ and _________.

A. .4%; .3%

B. .4%; .5%

C. .5%; .5%

D. .5%; .8%

Answer: D. .5%; .8%

Default premium for 1-year bond = .068 - .063 = .005

Default premium for 5-year bond = .096 - .088 = .008

46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond

matures in 16 years, it should sell for a price of __________ today.

A. $458.11

B. $641.11

C. $789.11

D. $1,100.11

Answer: A. $458.11

47. Yields on municipal bonds are typically ___________ yields on corporate bonds of

similar risk and time to maturity.

A. lower than

B. slightly higher than

C. identical to

D. twice as high as

Answer: A. lower than

48. You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate

was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to

maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's

yield to maturity had changed to 3%, your annual total rate of return on holding the bond for

that year would have been approximately _________.

A. 5%

B. 5.5%

C. 7.6%

D. 8.9%

Answer: C. 7.6%

49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to

maturity and reinvestment rate of coupons is called ______.

A. multiyear analysis

B. horizon analysis

C. maturity analysis

D. reinvestment analysis

Answer: B. horizon analysis

50. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 1-year interest rate 1 year from now should be about _________.

A. 6%

B. 7.5 %

C. 9.02%

D. 10.08%

Answer: C. 9.02%

1.0752 = 1.06(1 + f2)

1.155625 = 1.06(1 + f2)

1 + f2 = 1.55625/1.06 = 1.0902123

f2 = 9.02%

51. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

One year from now bond C should sell for ________ (to the nearest dollar).

A. $857

B. $842

C. $835

D. $821

Answer: B. $842

1.07993 = 1.06(1 + 1F3)2

1.2593621/1.06 = (1 + 1F3)2

1 F3

= 11.81%

Price of bond C in 1 year = 1,000/1.1181 = 841.69

52. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 2-year interest rate 3 years from now should be _________.

A. 9.55%

B. 11.74%

C. 14.89%

D. 13.73%

Answer: C. 14.89%

(1 + 0R5)5 = (1 + 0R3)3(1 + 3F5)2

1.10705 = (1.07993)(1 + 3F5)2; 3F5 = 14.89%

53. The __________ of a bond is computed as the ratio of the annual coupon payment to the

market price.

A. nominal yield

B. current yield

C. yield to maturity

D. yield to call

Answer: B. current yield

54. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8%

with interest paid annually. If the current market price is $750, what is the capital gain yield

of this bond over the next year?

A. .72%

B. 1.85%

C. 2.58%

D. 3.42%

Answer: B. 1.85%

Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000, CPT = I/Y

→ 12.52

The current yield = 80/750 = 10.67%

Then we use the relationship YTM = Current yield + Capital gain yield

12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%

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

The expected 1-year interest rate 2 years from now should be _________.

A. 7%

B. 8%

C. 9%

D. 10%

Answer: C. 9%

56. Which of the following bonds would most likely sell at the lowest yield?

A. A callable debenture

B. A puttable mortgage bond

C. A callable mortgage bond

D. A puttable debenture

Answer: B. A puttable mortgage bond

57. A 1% decline in yield will have the least effect on the price of a bond with a _________.

A. 10-year maturity, selling at 80

B. 10-year maturity, selling at 100

C. 20-year maturity, selling at 80

D. 20-year maturity, selling at 100

Answer: B. 10-year maturity, selling at 100

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

The expected 1-year interest rate 3 years from now should be _________.

A. 7%

B. 8%

C. 9%

D. 10%

Answer: C. 9%

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

The expected 1-year interest rate 4 years from now should be _________.

A. 16%

B. 18%

C. 20%

D. 22%

Answer: A. 16%

60. You can be sure that a bond will sell at a premium to par when _________.

A. its coupon rate is greater than its yield to maturity

B. its coupon rate is less than its yield to maturity

C. its coupon rate is equal to its yield to maturity

D. its coupon rate is less than its conversion value

Answer: A. its coupon rate is greater than its yield to maturity

61. A corporate bond has a 10-year maturity and pays interest semiannually. The quoted

coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of

par. What is the bond's yield to call?

A. 6.72%

B. 9.17%

C. 4.49%

D. 8.98%

Answer: D. 8.98%

r/2 = 4.489%

r = YTC = 8.98%

Calculator entries are N = 6, PV = -1,000, PMT = 30, FV = 1,100, CPT I/Y → 4.4892

(semiannual)

Annual YTC = 2 × 4.4892 = 8.9784

62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates

remain constant, 1 year from now the price of this bond will be _________.

A. higher

B. lower

C. the same

D. indeterminate

Answer: A. higher

63. Under the pure expectations hypothesis and constant real interest rates for different

maturities, an upward-sloping yield curve would indicate __________________.

A. expected increases in inflation over time

B. expected decreases in inflation over time

C. the presence of a liquidity premium

D. that the equilibrium interest rate in the short-term part of the market is lower than the

equilibrium interest rate in the long-term part of the market

Answer: A. expected increases in inflation over time

64. The yield to maturity on a bond is:

I. Above the coupon rate when the bond sells at a discount and below the coupon rate when

the bond sells at a premium

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

III. Equal to the true compound return on investment only if all interest payments received are

reinvested at the yield to maturity

A. I only

B. II only

C. I and II only

D. I, II, and III

Answer: D. I, II, and III

65. Yields on municipal bonds are generally lower than yields on similar corporate bonds

because of differences in _________.

A. marketability

B. risk

C. taxation

D. call protection

Answer: C. taxation

66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of

$1,000 and a required return of 12% would be priced at _________.

A. $97.22

B. $104.49

C. $364.08

D. $732.14

Answer: A. $97.22

Calculator entries are N = 40, I/Y = 6, PMT = 0, FV = 1,000, CPT PV → -97.22

67. A discount bond that pays interest semiannually will:

I. Have a lower price than an equivalent annual payment bond

II. Have a higher EAR than an equivalent annual payment bond

III. Sell for less than its conversion value

A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

Answer: A. I and II only

68. A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded

for settlement on August 10. The accrued interest on the $100,000 face amount of this note is

_________.

A. $581.97

B. $1,163.93

C. $2,327.87

D. $3,000

Answer: B. $1,163.93

Accrued interest = 100,000(.06/2)(71/183) = 1163.93

69. The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a

market price of $625 is _____.

A. 4.8%

B. 6.1%

C. 7.7%

D. 10.4%

Answer: A. 4.8%

Calculator entries are N = 10, PV = -625, PMT = 0, FV = 1,000, CPT I/Y → 4.81

70. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and

coupon rate of 5%. Assume annual coupon payments.

What is the nominal rate of return on the TIPS bond in the first year?

A. 5%

B. 5.15%

C. 8.15%

D. 9%

Answer: C. 8.15%

71. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and

coupon rate of 5%. Assume annual coupon payments.

What is the real rate of return on the TIPS bond in the first year?

A. 5%

B. 8.15%

C. 7.15%

D. 4%

Answer: A. 5%

72. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA

corporate bonds.

Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline

would be ______.

A. The price of the Wildwood bond would decline by more than the price of the Asbury bond.

B. The price of the Wildwood bond would decline by less than the price of the Asbury bond.

C. The price of the Wildwood bond would increase by more than the price of the Asbury

bond.

D. The price of the Wildwood bond would increase by less than the price of the Asbury bond.

Answer: C. The price of the Wildwood bond would increase by more than the price of the

Asbury bond.

73. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA

corporate bonds.

If interest rates are expected to rise, then Joe Hill should ____.

A. prefer the Wildwood bond to the Asbury bond

B. prefer the Asbury bond to the Wildwood bond

C. be indifferent between the Wildwood bond and the Asbury bond

D. The answer cannot be determined from the information given.

Answer: B. prefer the Asbury bond to the Wildwood bond

74. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA

corporate bonds.

If the volatility of interest rates is expected to increase, then Joe Hill should __.

A. prefer the Wildwood bond to the Asbury bond

B. prefer the Asbury bond to the Wildwood bond

C. be indifferent between the Wildwood bond and the Asbury bond

D. The answer cannot be determined from the information given.

Answer: B. prefer the Asbury bond to the Wildwood bond

75. One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to

maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year

from today?

A. 2.07%

B. 8.03%

C. 9.01%

D. 11.12%

Answer: C. 9.01%

1.07(1 + f2) = 1.082 = 1.1664

(1 + f2) = 1.1664/1.07 = 1.0900935

f2 = 9.01%

76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the

actual price at which you can purchase this bond given a $10,000 par value is

_____________.

A. $9,828.12

B. $9,809.38

C. $9,840.62

D. $9,813.42

Answer: C. $9,840.62

77. If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the

newspaper as ________.

A. 102:10

B. 102:11

C. 102:12

D. 102:13

Answer: C. 102:12

78. A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the

annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6month period.)

A. $13.21

B. $12.57

C. $15.44

D. $16.32

Answer: B. $12.57

(75/2) × (61/182) = $12.57

79. A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment

was made 90 days ago. What is the invoice price if the annual coupon is $69?

A. $999.55

B. $1,002.01

C. $1,007.45

D. $1,012.13

Answer: B. $1,002.01

Invoice = 985 + (69)(90/365) = $1,002.01

80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the

actual price at which you can sell this bond given a $10,000 par value is _____________.

A. $9,828.12

B. $9,925

C. $9,934.37

D. $9,955.43

Answer: B. $9,925

81. A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was

paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

A. $4.81

B. $14.24

C. $25

D. $50

Answer: A. $4.81

Accrued interest = (50/2) × (35/182) = 4.81

82. The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a

comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the

approximate percentage value of the credit risk of the corporate bond?

A. 1.14%

B. 3.45%

C. 4.59%

D. 8.04%

Answer: A. 1.14%

Credit risk premium = 4.59 - 3.45 = 1.14%

83. You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to

maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity,

but you do not reinvest any of your coupons. What was your effective EAR over the holding

period?

A. 10.4%

B. 9.57%

C. 7.45%

D. 8.78%

Answer: D. 8.78%

Total value in 6 years = 1,000 + 6(75) = 1,450

Calculator entries for EAR are N = 6, PV = -875, PMT = 0, FV = 1,450, CPT I/Y → 8.78, or

(875)(1 + EAR)6 = 1,000 + (75)(6); EAR = 8.78%

84. You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual

payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period

return was ___.

A. .61%

B. -5.39%

C. 1.28%

D. -3.25%

Answer: A. .61%

This year's price is 1,000. since the YTM equals the coupon rate.

Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV → 46.11

At the end of 1 year you'll have 946.11 + 60 = 1,006.11

HPR = 1,006.11/1,000 - 1 = .6107%

85. You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell

the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first

year equal to _______.

A. $0

B. $4.27

C. $9.38

D. $33.51

Answer: C. $9.38

Taxes owed ($591.90 - $558.39)(.28) = $9.38

86. You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%.

You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will

owe taxes on this investment equal to _______.

A. $9.10

B. $4.25

C. $7.68

D. $5.20

Answer: C. $7.68

Calculator entries for this year's price are N = 10, I/Y = 6, PMT = 40, FV = 1,000, CPT PV →

852.80

Calculator entries for next year's price are N = 9, I/Y = 6, PMT = 40, FV = 1,000, CPT PV →

863.97

Taxes owed are ($863.97 - $852.80 + $40)(.15) = $7.68

87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What

is the current yield on this bond?

A. 4.8%

B. 4.85%

C. 9.6%

D. 9.7%

Answer: B. 4.85%

Current yield = 48/989.4 = .0485

88. If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the

following is the most likely yield to maturity on the bond?

A. 4.3%

B. 4.5%

C. 5.2%

D. 5.5%

Answer: A. 4.3%

A bond sells at a premium when the coupon rate > YTM.

89. The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at

the end of the period is $975. What is the holding-period return if the annual coupon rate is

4.5%?

A. 4.08%

B. 4.5%

C. 5.1%

D. 5.6%

Answer: A. 4.08%

HPR = [(975 + 45 - 980)/980] - 1 = 4.08%

90. A bond was purchased at a premium and is now selling at a discount because of a change

in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the

holding-period return if an investor decides to sell now?

A. Increased

B. Decreased

C. Stayed the same

D. The answer cannot be determined from the information given.

Answer: B. Decreased

91. The ___________ is the document that defines the contract between the bond issuer and

the bondholder.

A. indenture

B. covenant agreement

C. trustee agreement

D. collateral statement

Answer: A. indenture

Test Bank for Essentials of Investments

Zvi Bodie, Alex Kane, Alan Marcus

9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422