Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
20) A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3%
and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the
clean price of the bond is $959.71. After three more months go by, what would you expect
the dirty price to be?
A) $978.71
B) $969.21
C) $997.71
D) Cannot be determined from information given.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
21) Under what situation should the clean price, dirty price, and the price calculated by the
basic annuity and present value (PV) equations for a bond be equal?
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Revised
6.5 Corporate Bonds
1) Bonds with a high risk of default generally ofer high yields.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) The credit spread of a bond shrinks if it is perceived that the probability of the issuer
defaulting increases.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
Use the information for the question(s) below.
31
3) The above information is for a corporate bond issued by the Markel Corporation. What
sort of bond is this?
A) a high-risk bond
B) an investment grade bond
C) a speculative bond
D) a high-yield bond
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
4) Which of the following best describes a bond rated by Standard & Poor's and Moody as
B?
A) judged to be high quality by all standards
B) considered to be medium grade obligations
C) neither highly protected nor poorly secured
D) generally lacks the characteristics of a desirable investment
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
5) Why are the interest rates of U.S. Treasury securities less than the interest rates of
equivalent corporate bonds?
A) The U.S. government has a high credit spread.
B) There is signiicant risk that the U.S. government will default.
C) U.S. Treasury securities are widely regarded to be risk-free.
D) U.S. Treasury securities yield inlation adjusted interest rates.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
32
6)
Security: Treasury AAA Corporate BBB Corporate B Corporate
Yield (%): 5.2 5.4 6.6 6.9
The above table shows the yields to maturity on a number of three-year, zero-coupon
securities. What is the price per $100 of the face value of a three-year, zero-coupon
corporate bond with a BBB rating?
A) $99.06
B) $115.57
C) $82.55
D) $66.04
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7)
Security: Treasury AAA Corporate BBB Corporate B Corporate
Yield (%): 5.2 5.4 6.8 7.2
The above table shows the yields to maturity on a number of two-year, zero-coupon
securities. What is the credit spread on a two-year, zero-coupon corporate bond with a B
rating?
A) 2.4%
B) 2.0%
C) 2.8%
D) 1.6%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
33
8) A irm issues two-year bonds with a coupon rate of 6.7%, paid semiannually. The credit
spread for this irm's two-year debt is 0.8%. New two-year Treasury notes are being issued
at par with a coupon rate of 3.1%. What should the price of the irm's outstanding two-year
bonds be per $100 of face value?
A) $126.40
B) $147.47
C) $84.27
D) $105.34
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9) A irm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit
spread for this irm's 5-year debt is 1.2%. New 5-year Treasury notes are being issued at
par with a coupon rate of 5.1%. What should the price of the irm's outstanding 5-year
bonds be if their face value is $1,000?
A) $932.28
B) $12.00
C) $1305.19
D) $745.82
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
34
10)
Security:
AAA
Corporate
AA
Corporate
A
Corporate
BBB
Corporate
BB
Corporate
Yield (%): 5.6 5.7 6.1 6.4 7.0
A mining company needs to raise $100 million in order to begin open-pit mining of a coal
seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and
a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for
similar 30-year corporate bonds of diferent ratings. If the company's bonds are rated A,
what will be their selling price?
A) $1265.37
B) $1476.27
C) $1054.48
D) $843.58
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
11)
Security:
AAA
Corporate
AA
Corporate
A
Corporate
BBB
Corporate
BB
Corporate
Yield (%): 6.2 6.4 6.7 7.0 7.5
Consolidated Insurance wants to raise $35 million in order to build a new headquarters.
The company will fund this by issuing 10-year bonds with a face value of $1,000 and a
coupon rate of 6.3%, paid semiannually. The above table shows the yield to maturity for
similar 10-year corporate bonds of diferent ratings. Which of the following is closest to
how many more bonds Consolidated Insurance would have to sell to raise this money if
their bonds received an A rating rather than an AA rating?
A) 937 bonds
B) 1093 bonds
C) 781 bonds
D) 625 bonds
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
35
12)
Security:
AAA
Corporate
AA
Corporate
A
Corporate
BBB
Corporate
BB
Corporate
Yield (%): 5.7 5.8 6.0 6.6 6.9
Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the
production of ceramic tiles. The company funded this by issuing 15-year bonds with a face
value of $1,000 and a coupon rate of 6.2%, paid annually. The above table shows the yield
to maturity for similar 15-year corporate bonds of diferent ratings issued at the same time.
When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the
following is most likely to be the rating these bonds received?
A) AA
B) A
C) BBB
D) BB
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
13) A corporate bond which receives a BBB rating from Standard & Poor's is considered
________.
A) a junk bond
B) an investment grade bond
C) a defaulted bond
D) a high-yield bond
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
36
14) Consider the following yields to maturity on various one-year, zero-coupon securities:
Security Yield (%)
Treasury 5.5
AAA
Corporate 5.7
BBB
Corporate 6.5
B Corporate 7.1
The price (expressed as a percentage of the face value) of a one-year, zero-coupon
corporate bond with a BBB rating is closest to ________.
A) 112.68
B) 131.46
C) 75.12
D) 93.90
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
15) Consider the following yields to maturity on various one-year, zero-coupon securities:
Security Yield (%)
Treasury 5.5
AAA
Corporate 5.7
BBB
Corporate 6.5
B Corporate 7.1
The price (expressed as a percentage of the face value) of a one-year, zero-coupon
corporate bond with a AAA rating is closest to ________.
A) 113.53
B) 132.45
C) 75.69
D) 94.61
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
37
