4) The National Insurance Corporation has $1,000 par value bonds with a coupon rate of 8% per
year making semiannual coupon payments. If there are twelve years remaining prior to maturity
and these bonds are selling for $876.40, what is the yield to maturity for these bonds?
A) 9.80%
B) 8.00%
C) 9.77%
D) 8.33%
5) Cedar Links Recreation Inc. has issued ten-year zero-coupon bonds with a $1,000 face value.
If the bonds are currently selling for $514.87, what is the yield to maturity?
A) 6.75%
B) 6.86%
C) 10.45%
D) This question cannot be answered because there is no coupon payment provided.
6) When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par
value.
A) coupon rate; premium over
B) coupon rate; discount to
C) time to maturity; discount to
D) time to maturity; same price as
7) MicroMedia Inc. $1,000 par value bonds are selling for $1,265. Which of the following
statements is TRUE?
A) The bond market currently requires a rate (yield) less than the coupon rate.
B) The bonds are selling at a premium to the par value.
C) The coupon rate is greater than the yield to maturity.
D) All of the above are true.
8) MacroMedia Inc. $1,000 par value bonds are selling for $832. Which of the following
statements is TRUE?
A) The bonds must have more than six years to maturity.
B) The bonds are selling at a premium to the par value.
C) The coupon rate is greater than the yield to maturity.
D) None of the above is true.
9) Which of the following statements about the relationship between yield to maturity and bond
prices is FALSE?
A) When the yield to maturity and coupon rate are the same, the bond is called a par value bond.
B) A bond selling at a premium means that the coupon rate is greater than the yield to maturity.
C) When interest rates go up, bond prices go up.
D) A bond selling at a discount means that the coupon rate is less than the yield to maturity.
10) The Rogue Outfitters Corporation $1,000 par value, 15% annual coupon bonds, have 6 years
remaining to maturity and are currently selling for $938.45. What is the firm’s yield to maturity
for these bonds?
A) 15.00%
B) 16.70%
C) 16.66%
D) 15.47%
11) Douglas Dynamics Inc. has outstanding $1,000 face value 8% coupon bonds that make
semiannual payments, and have 14 years remaining to maturity. If the current price for these
bonds is $1,118.74, what is the annualized yield to maturity?
A) 6.68%
B) 6.67%
C) 6.12%
D) 6.00%
12) Douglas Dynamics Inc. has outstanding $1,000 face value 8% coupon bonds that make
semiannual payments, and have 14 years remaining to maturity. If the current price for these
bonds is $987.24, what is the annualized yield to maturity?
A) 8.00%
B) 8.38%
C) 8.15%
D) 8.64%
13) Douglas Dynamics Inc. has outstanding $1,000 face value 4% coupon bonds that make
semiannual payments, and have 10 years remaining to maturity. If the current price for these
bonds is $938.57, what is the annualized yield to maturity?
A) 4.78%
B) 4.96%
C) 5.02%
D) 5.13%
14) Douglas Dynamics Inc. has outstanding $1,000 face value 12% coupon bonds that make
semiannual payments, and have 8 years remaining to maturity. If the current price for these
bonds is $1,274.35, what is the annualized yield to maturity?
A) 7.81%
B) 7.40%
C) 6.12%
D) 6.00%
15) When the coupon rate is less than the yield to maturity, the bond sells for a premium over the
par value.
16) If the par value of a bond is equal to the bond price, then we know the yield to maturity is
equal to the coupon rate.
17) If a bond is selling at a premium above the par value that means that the yield to maturity is
greater than the coupon rate.
18) Southern Transit Corporation has $1,000 par value, twenty-year, 6% annual coupon bonds,
outstanding currently selling for $696.25. What is the yield to maturity on these bonds? Use a
calculator for your answer.
19) Describe the relationship between the yield to maturity and the coupon rate of a bond.
1) Which of the following is NOT a category for rating classifications of bonds?
A) Investment grade bonds
B) American grade bonds
C) Extremely speculative grade bonds
D) Speculative grade bonds
2) As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means
that ________.
A) the credit rating increases, the default risk increases, and the required rate of return decreases
B) the credit rating increases, the default risk decreases, and the required rate of return increases
C) the credit rating increases, the default risk decreases, and the required rate of return decreases
D) the credit rating decreases, the default risk decreases, and the required rate of return decreases
3) From 1980 to 2013, the default risk premium differential between Aaa-rated bonds and Aa-
rated bonds has averaged between ________.
A) 5 to 10 basis points
B) 11 to 23 basis points
C) 24 to 35 basis points
D) 36 to 50 basis points
4) From 1980 to 2013, the default risk premium differential between Aaa-rated bonds and Baa-
rated bonds has averaged between ________.
A) 5 to 15 basis points
B) 20 to 50 basis points
C) 100 to 200 basis points
D) 250 to 350 basis points
5) “Junk” bonds are a street name for ________ grade bonds.
A) investment
B) speculative
C) extremely speculative
D) speculative and investment
6) A basis point is ________.
A) one-thousandth of a percentage point
B) one percentage point
C) one-tenth of a percentage point
D) one-hundredth of a percentage point
7) Moody’s has developed a corporate bond default-risk rating system using capital and lower
case letters and numbers. Below are several examples of Moody’s ratings. Which answer choice
lists a collection of ratings for “high credit investment grade” bonds?
A) Baa1, A1, A3
B) Ba1, Baa2, Baa3
C) Aa2, Aa3, A1
D) Caa, Ca, C
8) According to bond rating agencies, a bond rated “AAA” has a higher probability of default
than a bond with a “BBB” rating.
9) A higher bond rating usually means a lower yield.
10) What type of risk is being rated when bond agencies assign ratings to outstanding debt?
What are the two main reasons for having bond agencies rate bonds?
1) The ________ is the written contract between the bond issuer and the bondholder.
A) debenture
B) sinking fund
C) indenture
D) corpus
2) ________ are always unsecured bonds.
A) Mortgage bonds
B) Debentures
C) Callable bonds
D) Junior debt bonds
3) When a company is in financial difficulty and cannot fully pay all of its creditors, the first
lenders to be paid are the ________.
A) stockholders
B) sinking fund holders
C) junior debtholders
D) senior debtholders
4) Which of the following is NOT an example of a bond that contains an option feature?
A) Callable bond
B) Putable bond
C) Convertible bond
D) These are all examples of bonds with option features.
5) Espresso Petroleum Inc. has a contractual option to buy back, prior to maturity, bonds the firm
issued five years ago. This is an example of what type of bond?
A) Putable bond
B) Callable bond
C) Convertible bond
D) Junior bond
6) With a bearer bond, whoever held it was entitled to the ________ and the ________.
A) interest payments; principal
B) dividend payments; principal
C) interest payments; dividend payments
D) interest payments; voting rights
7) When real property is used as collateral for a bond, it is termed a/an ________.
A) debenture
B) mortgaged security
C) indenture
D) senior bond
8) A sinking fund may be used for each of the following EXCEPT ________.
A) to be held on to and used to pay off the principal at maturity
B) to call in bonds early
C) to buy back some of the bonds over time
D) to be used to pay off other outstanding debt issues
9) Which of the following types of bonds may the issuer buy back before maturity?
A) Callable bond
B) Putable bond
C) Convertible bond
D) Zero-coupon bond
10) Which of the following types of bonds may the buyer sell back before maturity?
A) Callable bond
B) Putable bond
C) Convertible bond
D) Zero-coupon bond
11) When a bond is callable, the ability to call the bond is an option for ________.
A) the bond issuer
B) the bond purchaser
C) a mutual decision between the issuer and the purchaser of the bond
D) the trustee holding the bond
12) Which of the choices below is FALSE?
A) When issuing a putable bond, the firm anticipates that interest rates will rise over the life of
the bond.
B) When issuing a callable bond, the firm anticipates that interest rates will fall over the life of
the bond.
C) When issuing a callable bond, the firm anticipates that interest rates will rise over the life of
the bond.
D) A putable bond is essentially the reverse of a callable bond.
13) The interest rate banks charge to their best customers is the ________ rate.
A) variable
B) prime
C) discount
D) federal funds
14) Bonds that pay interest tied to the earnings of the company are known as ________ bonds.
A) income
B) exotic
C) floating rate
D) variable earnings
15) A ________ is an unsecured bond, and most of the bonds sold today in the United States are
of this type.
A) mortgage bond
B) debenture
C) senior bond
D) bond indenture
16) Exotic bonds are ________ difficult to price than ordinary bonds and they attract ________
potential buyers.
A) more; more
B) less; more
C) more; fewer
D) less; fewer
17) An indenture is an unsecured bond, and most of the bonds sold today in the United States are
of this type.
18) A callable bond allows the bond issuer to “call-in” the bond prior to maturity.
19) A putable bond allows the bond issuer to “call-in” the bond prior to maturity.
20) Callable and putable bonds add options to an ordinary bond. These options may be exercised
at the discretion of the bondholder in one type, or the bond issuer in the other. Describe callable
and putable bonds. In your description, be sure to include which party has the option to exercise,
and the impact of the option on the price of the bond.
1) Which of the following are issued with the shortest time to maturity?
A) Treasury bills
B) Treasury notes
C) Treasury bonds
D) Treasury stocks
2) Treasury ________ and ________ are semiannual bonds, while Treasury ________ are zero-
coupon instruments.
A) bills; bonds; notes
B) notes; bills; bonds
C) notes; bonds; bills
D) bonds; bills; notes
3) A U.S. Treasury bill is currently selling at a discount basis of 2.25%. The par value of the bill
is $100,000, and will mature in ninety days. What is the price of this Treasury bill?
A) $97,750.00
B) $99,437.5
C) $99,952.05
D) $97,952.78
4) A U.S. Treasury bill is currently selling at a discount basis of 4.25%. The par value of the bill
is $100,000, and will mature in 180 days. What is the price of this Treasury bill?
A) $97,875.00
B) $97,937.50
C) $96,975.00
D) $99,500.00
5) A U.S. Treasury bill is currently selling at a discount basis of 0.50%. The par value of the bill
is $100,000 and will mature in thirty days. What is the price of this Treasury bill?
A) $98,850.25
B) $99,830.17
C) $99,907.00
D) $99,956.33
6) The Department of the Treasury offers three types of “bonds” for sale: Treasury bills,
Treasury munis, and Treasury bonds.
7) Treasury notes and bonds are zero-coupon bonds that sell at a discount while Treasury bills
have coupon payments.
8) Describe the three types of financial instruments issued by the U.S. Department of the
Treasury.