Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
6-1
Multiple Choice Questions
1. A zero-coupon bond refers to a bond which:
D. Pays coupons only if the bond price is above face value
2. A consol is:
A. Another name for a zero-coupon bond
3. A pure discount bond is also known as:
A. A consol
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
4. The most common form of zero-coupon bonds found in the United States is:
D. Municipal bonds
5. Which of the following best expresses the formula for determining the price of a U.S.
Treasury bill that matures n periods from now per $100 of face value when the interest rate is
i?
D. 1 + $100/(1 + i)n
6. Once you buy a coupon bond, which of the following can change?
A. Coupon rate
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
7. Which of the following makes fixed payments indefinitely?
D. Zero-coupon bond
8. A 10-year Treasury note has a face value of $1,000, price of $1,200, and a 7.5% coupon
rate. Based on this information, we know:
A. The present value is greater than its price
9. If the annual interest rate is 5% (.05), the price of a one-year Treasury bill per $100 of face
value would be:
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
10. If the annual interest rate is 5% (.05), the price of a six-month Treasury bill would be:
D. $95.00
11. If the annual interest rate is 5% (.05), the price of a three-month Treasury bill would be:
D. $97.59
12. The relationship between the price and the interest rate for a zero coupon bond is best
described as:
A. Volatile
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
13. When a loan is amortized, it means:
D. The principal is never repaid, only interest
14. Most home mortgages are good examples of:
A. Consols
15. The price of a coupon bond can best be described as:
A. The present value of the face value
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
16. The difference in the prices of a zero-coupon bond and a coupon bond with the same face
value and maturity date is simply:
A. Zero, since they are the same
17. The price (P) of a consol offering an annual coupon payment (C) is best expressed by:
A. F/C
18. If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price
of the consol is:
A. $47.17
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
19. Which of the following statements is most accurate?
A. Yield to maturity is equal to the coupon rate if the bond is held to maturity
20. When the price of a bond is above face value:
D. The yield to maturity will equal the coupon rate
21. When the price of a bond is below the face value, the yield to maturity:
D. Will equal the coupon rate
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
22. When the price of a bond equals the face value:
A. The yield to maturity will be above the coupon rate
23. If the purchase price of a bond exceeds the face value, the yield to maturity:
A. Is greater than the coupon rate because the capital gain is positive
24. The current yield of a bond:
A. Is another term for the coupon rate
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
25. A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has:
D. A yield to maturity and current yield equal to 6.00%
26. A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20
years to maturity has:
D. A yield to maturity and current yield equal to 6.00%
27. In calculating the current yield for a bond:
D. The present value of the coupon payments is the only important consideration
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
28. In calculating the current yield for a bond:
D. The present value of the coupon payments is the only important consideration
29. When the current yield and the coupon rate are equal, the bond is:
D. Purchased at a price that exceeds its face value
30. If a bond’s purchase price equals the face value:
A. The coupon rate equals the current yield, which is less than the yield to maturity
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
31. Which of the following is not a reason why the yield to maturity can differ from the
current yield?
A. Because the yield to maturity considers the capital gain/loss
32. A $1000 face value bond, with one year to maturity that sells for $950 and has a $40
annual coupon has:
33. A $1,000 face value bond, with an annual coupon of $40, one year to maturity and a
purchase price of $980 has:
A. A current yield that equals 4.00%
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
34. A 30-year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon
payment. Assume the price of this bond decreases to $1,100 over the next year. The one-year
holding period return is equal to:
A. -9.17%
35. The bid price for a bond quote is:
D. Determined solely by the time left to maturity
36. In reading bond quotes:
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
D. Usually negative; the dealer makes a profit holding the bonds
38. The size of the bond dealer’s spread is mainly a function of:
39. The larger the bond dealer’s spread:
D. The less risk there is for the dealer to hold that bond
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
40. The yield on a discount basis:
D. Uses the coupon payments to determine the return
41. The yield on a discount basis:
A. Will overstate the return on a Treasury bill versus using yield to maturity since they are
sold at discounts
42. The yield on a discount basis for a $100 Treasury bill that sells for $98.50 and matures in
90 days is:
A. 1.50%
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
43. U.S. Treasury strips are:
D. Initially zero-coupon bonds
44. The holding period return on a bond:
A. Can never be more than the yield to maturity
45. One characteristic that distinguishes holding period return from the coupon rate, the
D. Only the holding period return includes the capital gain/loss
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
46. Which of the following best expresses the equation for holding period return?
A. Current yield + coupon rate
47. In considering the holding period return, the longer the term of the bond the:
A. Less important is the capital gain and the more important in the current yield
48. The holding period return has relevance because:
A. Most bonds are held by the original purchaser until maturity
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
49. Suppose there is a decrease in the price at which a bondholder sells her bond. In this case,
the holding period return will:
D. Equal the coupon rate
50. If a one-year zero-coupon bond has a face value of $100, is purchased for $94, and is held
to maturity:
A. The holding period return will exceed the yield to maturity
51. When looking at Treasury note quotes in the Wall Street Journal, you notice that a
Treasury note has an “i” following the maturity date. This indicates that this financial
instrument:
D. Makes coupon payments intermittently
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
52. Bond prices and yields:
A. Move together in the same direction
53. As bond prices increase:
D. Yields increase
54. The bond supply curve slopes upward because:
A. As bond prices rise people holding bonds are more tempted to hold them
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
55. The bond demand curve slopes downward because:
D. As bond prices rise yields increase
56. If the quantity of bonds supplied exceeds the quantity of bonds demanded, bond prices:
D. Would fall and yields would fall
57. If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:
D. Will rise and yields would increase
Chapter 06 – Bonds, Bond Prices, and the Determination of Interest Rates
58. If the U.S. government’s borrowing needs increase, all other factors constant:
A. The demand for bonds will decrease
59. If the U.S. government’s borrowing needs decrease, all other factors constant:
60. If the U.S. government’s borrowing needs increase, all other factors constant:
D. The supply of bonds and the demand for bonds will both increase