Corporate Finance, 12e (Ross)
1) A bond that makes no coupon payments and is initially priced at a deep discount is called a
________ bond.
A) Treasury
B) municipal
C) floating-rate
D) junk
E) zero coupon
2) The stated interest payment, in dollars, made on a bond each period is called the bond’s:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.
E) coupon rate.
3) The principal amount of a bond that is repaid at the end of the loan term is called the bond’s:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.
E) coupon rate.
4) The specified date on which the principal amount of a bond is repaid is called the bond’s:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.
E) coupon rate.
5) The rate of return required by investors in the market for owning a bond is called the:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.
E) coupon rate.
6) The annual interest paid by a bond divided by the bond’s face value is called the:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.
E) coupon rate.
7) A bond with a face value of $1,000 that sells for $1,000 in the market is called a ________
bond.
A) par value
B) discount
C) premium
D) zero coupon
E) floating rate
8) A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a
________ bond.
A) par
B) discount
C) premium
D) zero coupon
E) floating rate
9) A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par
will have a market price of ________ and interest payments in the amount of ________ each.
A) $1,006; $60
B) $1,060; $30
C) $1,060; $60
D) $1,000; $30
E) $1,000; $60
10) All else constant, a bond will sell at ________ when the yield to maturity is ________ the
coupon rate.
A) a premium; greater than
B) a premium; equal to
C) at par; greater than
D) at par; less than
E) a discount; greater than
11) All else constant, a coupon bond that is selling at a premium, must have:
A) a coupon rate that is equal to the yield to maturity.
B) a market price that is less than par value.
C) semiannual interest payments.
D) a yield to maturity that is less than the coupon rate.
E) a coupon rate that is less than the yield to maturity.
12) The market price of a bond increases when the:
A) face value decreases.
B) coupon rate decreases.
C) discount rate decreases.
D) par value decreases.
E) coupon is paid annually rather than semiannually.
13) Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be
repaid in 10 years. The company plans to issue the bonds at par value and pay interest annually.
Which one of the following statements is correct? Assume a face value of $1,000.
A) The bonds will pay 19 interest payments and one principal payment.
B) The bonds will initially sell at a discount.
C) At maturity, the bonds will pay a final payment of $1,027.50.
D) The bonds will pay twenty equal coupon payments.
E) At issuance, the bond’s yield to maturity is 5.5 percent.
14) A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The
effective annual rate provided by these bonds must be:
A) equal to 3.5 percent.
B) greater than 3.5 percent but less than 4 percent.
C) equal to 7 percent.
D) greater than 7 percent but less than 8 percent.
E) equal to 14 percent.
15) Rosina purchased one 15-year bond at par value when it was initially issued. This bond has a
coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type
and quality of bond is 7.5 percent, then Rosina should expect:
A) the bond issuer to increase the amount of all future interest payments.
B) the yield to maturity to remain constant due to the fixed coupon rate.
C) to realize a capital loss if she sold the bond at today’s market price.
D) today’s market price to exceed the face value of the bond.
E) the current yield today to be less than 7 percent.
16) Interest rate risk ________ as the time to maturity decreases and ________ as the coupon
rate decreases.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
E) increases; is unaffected
17) A zero coupon bond:
A) is sold at a large premium.
B) has a price equal to the future value of the face amount given a positive rate of return.
C) can only be issued by the U.S. Treasury.
D) has less interest rate risk than a comparable coupon bond.
E) has a market price that is computed using semiannual compounding of interest.
18) Which one of these bonds is the most interest-rate sensitive?
A) 5-year zero coupon bond
B) 10-year zero coupon bond
C) 5-year, 6 percent, annual coupon bond
D) 10-year, 6 percent, semiannual coupon bond
E) 10-year, 6 percent, annual coupon bond
19) The yield to maturity:
A) that is expected will be realized any time a bond is sold.
B) will exceed the coupon rate when the bond is selling at a premium.
C) equals the current yield for all annual coupon bonds.
D) can only be realized if a bond is purchased on the issue date at par value.
E) equals both the current yield and the coupon rate for par value bonds.
20) If a bond’s yield to maturity is less than its coupon rate, the bond will sell at a ________, and
increases in market interest rates will:
A) discount; decrease this discount.
B) discount; increase this discount.
C) premium; decrease this premium.
D) premium; increase this premium.
E) premium; not affect this premium.
21) The longest term bonds ever issued had an initial maturity date of:
A) 25 years.
B) 50 years.
C) 100 years.
D) 1,000 years.
E) never as the bonds are perpetual.
22) All else held constant, interest rate risk will increase when the time to maturity:
A) decreases or the coupon rate increases.
B) decreases or the coupon rate decreases.
C) increases or the coupon rate increases.
D) increases or the coupon rate decreases.
E) decreases and the coupon rate equals zero.
23) Which one of these combinations of bond ratings represents a crossover situation?
A) BBB; Baa
B) BB; Ba
C) Ba; B
D) Baa; BB
E) B; CCC
24) The interest paid on any municipal bond is:
A) free of default risk.
B) subject to default risk and is exempt from state income taxation.
C) free of both default risk and federal income taxation.
D) exempt from federal income taxation and may or may not be exempt from state taxation.
E) taxable at the federal level and tax exempt at the state and local level.
25) The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is
computed as:
A) Taxable rate/(1 − T*).
B) Tax-exempt rate × (1 − T*).
C) Taxable rate − (1 + T*).
D) Taxable rate × (1 − T*).
E) Tax-exempt rate/(1 + T*).
26) Bond dealers report all of their trading information using the system known as:
A) SEC-Bond.
B) NASDAQ.
C) FED trades.
D) FINRA.
E) TRACE.
27) Most of the trading in bonds is conducted:
A) in person on the floor of the NYSE.
B) by dealers located in Chicago.
C) by brokers on various trading floors.
D) electronically.
E) on the trade floor in Washington, DC.
28) Which entity provides a daily snapshot of bond prices for the most active issues?
A) Federal Reserve Bank
B) US Treasury Department
C) SEC
D) FINRA
E) NYSE
29) The dirty price of a bond is defined as the:
A) market price minus any taxes due on the accrued interest.
B) market price minus the accrued interest.
C) clean price minus the accrued interest.
D) quoted price plus the accrued interest.
E) clean price minus any taxes due on the accrued interest.
30) A newspaper listing of bond prices has an “Asked yield” column. This yield is based on the
asked price and represents the:
A) yield to maturity.
B) difference between the current yield and the yield to maturity.
C) difference between the bond’s yield and the yield of a comparable Treasury issue.
D) coupon rate.
E) current yield.
31) A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted to
mean:
A) the bond will pay semiannual interest payments of $105.4844 per $1,000 of face value.
B) you can sell that bond at a price equal to 105.4844 percent of face value.
C) the bond will pay annual interest payments of $105.4844 per $1,000 of face value.
D) you can buy that bond at a price equal to 105.4844 percent of face value.
E) the bond dealer is willing to sell that bond for a price equal to 105.4844 percent of par.
32) The total price you pay to purchase a premium bond is referred to as the:
A) dirty price or the full price.
B) clean price or the invoice price.
C) invoice price or the par value.
D) dirty price or the par value.
E) clean price or the par value.
33) The profit that is earned on a bond trade by a bond dealer is called the:
A) asked price.
B) spread.
C) bid price.
D) accrued interest.
E) quote value.
34) The Fisher formula is expressed as ________ where R is the nominal rate, r is the real rate,
and h is the inflation rate.
A) r = Rh
B) R = rh
C) 1 + h = (1 + r)/(1 + R)
D) 1 + R = (1 + r)/(1 + h)
E) 1 + R = (1 + r)(1 + h)
35) An increase in the rate of inflation will:
A) increase both the real and the nominal rate of interest.
B) decrease both the real and the nominal rate of interest.
C) increase the nominal interest rate while lowering the real interest rate.
D) increase the real interest rate but not affect the nominal interest rate.
E) increase the nominal interest rate but will not affect the real interest rate.
36) If you want to increase your purchasing power by investing in a bond, then:
A) you must purchase that bond at a discount.
B) the nominal rate of return on that bond must be less than the inflation rate.
C) you should purchase a premium bond.
D) the nominal rate of return must equal or exceed the rate of inflation.
E) you must earn a positive real rate of return on that bond.
37) The promised coupon payments on a US TIPS bond are specified in:
A) euros.
B) Canadian dollars.
C) nominal terms.
D) inflated terms.
E) real terms.
38) The monthly returns on US Treasury bills over the past 50 years have:
A) exceeded inflation for all periods.
B) provided consistently positive monthly rates of return for investors.
C) ranged between zero and five percent on an annualized basis.
D) always been positive on a real basis.
E) sometimes been less than the monthly rate of inflation.
39) The relationship between nominal rates, real rates, and inflation is known as the:
A) Miller and Modigliani theorem.
B) Fisher effect.
C) Gordon growth model.
D) term structure of interest rates.
E) interest rate risk premium.
40) The relationship between nominal interest rates on default-free, pure discount securities and
the time to maturity is called the:
A) liquidity effect.
B) Fisher effect.
C) term structure of interest rates.
D) inflation premium.
E) interest rate risk premium.
41) The ________ premium is that portion of a nominal interest rate or bond yield that represents
compensation for expected future loss in purchasing power.
A) default risk
B) taxability
C) liquidity
D) inflation
E) interest rate risk
42) The ________ premium is that portion of the bond yield that represents compensation for
potential difficulties that might be encountered should the bond holder wish to sell the bond prior
to maturity.
A) default risk
B) taxability
C) inflation
D) liquidity
E) interest rate risk
43) The term structure of interest rates reflects the:
A) real rate of interest.
B) real rate of interest plus the inflation premium.
C) nominal interest rate plus the interest rate risk premium.
D) pure time value of money.
E) real rate, inflation premium, interest rate risk premium, and the liquidity premium.
44) An upward-sloping term structure of interest rates indicates that:
A) longer-term rates are higher than shorter-term rates.
B) investors should expect interest rates to decline in the future.
C) short and intermediate term rates are real rates while long term rates are nominal rates.
D) the Fed is expected to decrease rates in the near term.
E) the larger the investment in dollars, the higher the interest rate paid.
45) The term structure of interest rates:
A) plots interest rates against bond ratings.
B) is just another name for the yield curve.
C) ignores interest rate risk premiums while the Treasury yield curve includes those premiums.
D) ignores both inflation and interest rate risk premiums.
E) is based on pure discount bonds while the Treasury yield curve is based on coupon bond
yields.
46) The term structure of interest rates:
A) must be upward-sloping.
B) can be humped in the middle.
C) is downward-sloping when inflation is expected to rise.
D) obtains its slope from the real rate of return.
E) generally has the same degree of steepness each year.
47) Which of these is included in the return on a municipal bond but excluded from the return on
a US Treasury bond?
A) Inflation premium and liquidity premium
B) Taxability premium and interest rate risk premium
C) Default risk premium and interest rate risk premium
D) Inflation premium and default risk premium
E) Liquidity premium and taxability premium
48) Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in
eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the
current value of a $1,000 face value bond?
A) $830.58
B) $843.07
C) $893.30
D) $929.17
E) $854.08
49) What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the
market required rate of return is 9.6 percent, compounded semiannually?
A) $153.30
B) $192.40
C) $195.26
D) $168.31
E) $172.19
50) The bonds issued by Manson and Son bear a coupon of 6 percent, payable semiannually. The
bond matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is
the yield to maturity?
A) 5.87 percent
B) 5.97 percent
C) 6.00 percent
D) 6.09 percent
E) 6.17 percent
51) A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is
$1,000 and the current market price is $1,108.15. The bond matures in 14 years. What is the
yield to maturity?
A) 6.31 percent
B) 7.82 percent
C) 8.00 percent
D) 8.04 percent
E) 8.12 percent
52) Otto Enterprises has a bond issue outstanding with a coupon of 8 percent that matures in 15
years. The bond is currently priced at $923.60 and has a par value of $1,000. Interest is paid
semiannually. What is the yield to maturity?
A) 8.67 percent
B) 9.93 percent
C) 9.16 percent
D) 8.93 percent
E) 8.45 percent