Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Which of the following statements is false?
1)
A)
The yield to maturity is typically stated as an annual rate by multiplying the calculated YTM
by the number of coupon payment per year, thereby converting it to an APR.
B)
Treasury bills are zero–coupon bonds.
C)
Bond traders typically quote bond prices rather than bond yields .
D)
Zero–coupon bonds always trade at a discount.
2)
Which of the following statements is false?
2)
A)
Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are
longer–term zero coupon bonds.
B)
Bond prices converge to the bond’s face value due to the time effect, but simultaneously move
up and down due to unpredictable changes in bond yields.
C)
Bonds with higher coupon rates are more sensitive to interest rate changes.
D)
As interest rates and bond yields fall, bond prices will rise.
3)
Which of the following statements is false?
3)
A)
Bond ratings encourage widespread investor participation and relatively liquid markets.
B)
The two best–known bond–rating companies are Standard & Poor‘s and Dow Jones.
C)
The bond’s expected return, which is equal to the firm’s debt cost of capital, is less than the
yield to maturity if there is a risk of default.
D)
Bonds in the bottom five categories are often call speculative bonds, junk bonds, or high–yield
bonds.
Use the information for the question(s) below.
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond
certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made
semi–annually.
4)
Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at
4)
A)
par.
B)
a premium.
C)
a discount.
D)
None of the above
5)
Which of the following statements is false?
5)
A)
It is possible to replicate the cash flows of a coupon bond using zero–coupon bonds.
B)
The plot of the yields of coupon bonds of different maturities is called the coupon–paying
yield curve.
C)
We can use the law of one price to compute the price of a coupon bond from the prices of
zero–coupon bonds.
D)
Because the coupon bond provides cash flows at different points in time, the yield to maturity
of a coupon bond is the simple average of the yields of the zero–coupon bonds of equal and
shorter maturities.
Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten–year bonds
with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for
similar ten–year corporate bonds of various credit ratings:
Rating AAA AA ABBB BB
YTM 6.70% 6.80% 7.00% 7.40% 8.00%
6)
Assuming that Luther’s bonds receive a AAA rating, the number of bonds that Luther must issue to
raise the needed $25 million is closest to:
6)
A)
26,681
B)
24,655
C)
25,000
D)
24,477
7)
Which of the following statements is false?
7)
A)
When the yield curve is flat, all zero–coupon and coupon–paying bonds will have the same
yield, independent of their maturities and coupon rates.
B)
Given the spot interest rates, we can determine the price and yield of any other default–free
bond.
C)
When U.S. bond traders refer to “the yield curve,” they are often referring to the
coupon–paying Treasury yield curve.
D)
As the coupon increases, earlier cash flows become relatively less important than later cash
flows in the calculation of the present value.
Use the table for the question(s) below.
The following table summarizes prices of various default–free zero–coupon bonds (expressed as a percentage of face value):
Maturity (years) 1 2 3 4 5
Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35
8)
Based upon the information provided in the table above, you can conclude
8)
A)
that the yield curve is upward sloping.
B)
that the yield curve is flat.
C)
nothing about the shape of the yield curve.
D)
that the yield curve is downward sloping.
9)
Which of the following formulas is incorrect?
9)
A)
Coupon =Coupon rate × Face Value
number of coupon payments per year
B)
Price of an n–period bond =Coupon
(1 +YTM)1+Coupon
(1 +YTM)2+ … +Coupon + Face
(1 +YTM)n
C)
Price of an n–period bond = Coupon ×1
YTM 1 –1
(1 +YTM)n+Face Value
(1 +YTM)n
D)
Yield to maturity for an n–period zero–coupon bond =face value
price – 1 1/n
Use the information for the question(s) below.
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond
certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made
semi–annually.
10)
Assuming that this bond trades for $903, then the YTM for this bond is closest to:
10)
A)
9.2%
B)
9.9%
C)
8.0%
D)
6.8%
11)
Consider a corporate bond with a $1000 face value, 8% coupon with semiannual coupon payments,
7 years until maturity, and a YTM of 9%. It has been 57 days since the last coupon payment was
made and there are 182 days in the current coupon period. The dirty (cash) price for this bond is
closest to:
11)
A)
$961.40
B)
$948.90
C)
$949.70
D)
$936.40
Use the table for the question(s) below.
Consider the following four bonds that pay annual coupons:
Bond Years to maturity Coupon YTM
A 1 0% 5%
B 5 6% 7%
C10 10% 9%
D20 0% 8%
12)
Which of the four bonds is the least sensitive to a one percent increase in the YTM?
12)
A)
Bond A
B)
Bond B
C)
Bond C
D)
Bond D
13)
The percentage change in the price of the bond “A” if its yield to maturity increases from 5% to 6%
is closest to:
13)
A)
–1%
B)
4%
C)
–6%
D)
–4%
Use the table for the question(s) below.
Consider the following yields to maturity on various one–year zero–coupon securities:
Security Yield (%)
Treasury 4.6
AAA corporate 4.8
BBB corporate 5.6
B Corporate 6.2
14)
The credit spread of the B corporate bond is closest to:
14)
A)
1.0%
B)
1.6%
C)
1.4%
D)
0.8%
Use the table for the question(s) below.
Consider the following zero–coupon yields on default free securities:
Maturity (years) 1 2 3 4 5
Zero–Coupon YTM 5.80% 5.50% 5.20% 5.00% 4.80%
15)
The YTM of a 4 year default free security with a face value of $1000 and an annual coupon rate of
5.25% is closest to:
15)
A)
5.2%
B)
5.25%
C)
4.9%
D)
5.0%
16)
Consider a zero coupon bond with 20 years to maturity. The amount that the price of the bond will
change if its yield to maturity decreases from 7% to 5% is closest to:
16)
A)
–$53
B)
$673
C)
$120
D)
$53
Use the table for the question(s) below.
Consider the following zero–coupon yields on default free securities:
Maturity (years) 1 2 3 4 5
Zero–Coupon YTM 5.80% 5.50% 5.20% 5.00% 4.80%
17)
The forward rate for year 2 (the forward rate quoted today for an investment that begins in one
year and matures in two years) is closest to:
17)
A)
5.65%
B)
5.20%
C)
5.50%
D)
5.80%
18)
The YTM of a 3 year default free security with a face value of $1000 and an annual coupon rate of
6% is closest to:
18)
A)
5.2%
B)
5.8%
C)
5.5%
D)
5.5%
19)
Which of the following statements is false?
19)
A)
Credit spreads are high for bonds with high ratings.
B)
We refer to the difference between the yields of the corporate bonds and the Treasury yields
as the default spread or credit spread.
C)
Credit spreads fluctuate as perceptions regarding the probability of default change.
D)
Investors pay less for bonds with credit risk than they would for an otherwise identical
default–free bond.
Use the table for the question(s) below.
Consider the following yields to maturity on various one–year zero–coupon securities:
Security Yield (%)
Treasury 4.6
AAA corporate 4.8
BBB corporate 5.6
B Corporate 6.2
20)
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:
20)
A)
94.16
B)
94.70
C)
95.42
D)
95.60
Use the table for the question(s) below.
Consider the following zero–coupon yields on default free securities:
Maturity (years) 1 2 3 4 5
Zero–Coupon YTM 5.80% 5.50% 5.20% 5.00% 4.80%
21)
The price today of a 3 year default free security with a face value of $1000 and an annual coupon
rate of 6% is closest to:
21)
A)
$1000
B)
$1021
C)
$1005
D)
$1013
22)
Consider a zero–coupon bond with a $1000 face value and 10 years left until maturity. If the bond
is currently trading for $459, then the yield to maturity on this bond is closest to:
22)
A)
10.4%
B)
7.5%
C)
8.1%
D)
9.7%
Use the table for the question(s) below.
Consider the following four bonds that pay annual coupons:
Bond Years to maturity Coupon YTM
A 1 0% 5%
B 5 6% 7%
C10 10% 9%
D20 0% 8%
23)
The percentage change in the price of the bond “C” if its yield to maturity increases from 9% to 10%
is closest to:
23)
A)
–17%
B)
4%
C)
–6%
D)
–4%
24)
If a bond is currently trading at its face (par) value, then it must be the case that
24)
A)
the bond’s yield to maturity is greater than its coupon rate.
B)
the bond’s yield to maturity is equal to its coupon rate.
C)
the bond’s yield to maturity is less than its coupon rate.
D)
the bond is a zero–coupon bond.
Use the table for the question(s) below.
Consider the following zero–coupon yields on default free securities:
Maturity (years) 1 2 3 4 5
Zero–Coupon YTM 5.80% 5.50% 5.20% 5.00% 4.80%
25)
A 4 year default free security with a face value of $1000 and an annual coupon rate of 5.25% will
trade
25)
A)
at a premium.
B)
at a discount.
C)
at par.
D)
There is insufficient information to provided to answer this question.
Use the table for the question(s) below.
The following table summarizes prices of various default–free zero–coupon bonds (expressed as a percentage of face value):
Maturity (years) 1 2 3 4 5
Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35
26)
The yield to maturity for the three year zero–coupon bond is closest to:
26)
A)
5.6%
B)
5.8%
C)
5.4%
D)
6.0%
Use the information for the question(s) below.
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond
certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made
semi–annually.
27)
Assuming the appropriate YTM on the Sisyphean bond is 9.0%, then the price that this bond trades
for will be closest to:
27)
A)
$1,000
B)
$946
C)
$919
D)
$1,086
Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten–year bonds
with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for
similar ten–year corporate bonds of various credit ratings:
Rating AAA AA ABBB BB
YTM 6.70% 6.80% 7.00% 7.40% 8.00%
28)
Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond.
What is the likely rating that Luther’s bonds received?
28)
A)
AA
B)
B
C)
A
D)
BBB
29)
Which of the following statements is false?
29)
A)
The forward rate is only a good predictor of spot interest rates in the future when investors
are risk adverse.
B)
We can use the law of one price to calculate the forward rate from the zero–coupon yield
curve.
C)
The forward rate for year 1 is the rate on an investment that starts today and is repaid in one
year; it is equivalent to an investment in a one–year zero–coupon bond.
D)
An interest rate forward contract is a contract today that fixes the interest rate for a loan or
investment in the future.
30)
Which of the following statements is false?
30)
A)
When the yield curve is flat, all zero–coupon and coupon–paying bonds will have the same
yield, independent of their maturities and coupon rates.
B)
The yield to maturity of a coupon bond is a weighted average of the yields on the
zero–coupon bonds.
C)
If the zero–coupon yield curve is downward sloping, the yield to maturity will decrease with
the coupon rate.
D)
The information in the zero–coupon yield curve is sufficient to price all other risk–free bonds.
Use the table for the question(s) below.
Consider the following four bonds that pay annual coupons:
Bond Years to maturity Coupon YTM
A 1 0% 5%
B 5 6% 7%
C10 10% 9%
D20 0% 8%
31)
Which of the four bonds is the most sensitive to a one percent increase in the YTM?
31)
A)
Bond A
B)
Bond B
C)
Bond C
D)
Bond D
Use the information for the question(s) below.
Luther Industries needs to raise $25 million to fund a new office complex. The company plans on issuing ten–year bonds
with a face value of $1000 and a coupon rate of 7.0% (annual payments). The following table summarizes the YTM for
similar ten–year corporate bonds of various credit ratings:
Rating AAA AA ABBB BB
YTM 6.70% 6.80% 7.00% 7.40% 8.00%
32)
What rating must Luther receive on these bonds if they want the bonds to be issued at par?
32)
A)
BBB
B)
B
C)
AA
D)
A
33)
Which of the following statements is false?
33)
A)
In general, we can compute the forward rate for year n by comparing an investment in an
n–year, zero–coupon bond to an investment in an (n + 1) year, zero–coupon bond, with the
interest rate earned in the nth year being guaranteed through an interest rate forward
contract.
B)
In general, the expected future spot interest rate will reflect investor’s preferences toward the
risk of future interest rate fluctuations.
C)
If investors did not care about risk, then they would be indifferent between investing in a
two–year bond and investing in a one–year bond and rolling over the money in one–year.
D)
When we refer to the one–year forward rate for year 5, we mean the rate available today on a
one–year investment that begins four years from today and is repaid five years from today.
34)
Which of the following statements is false?
34)
A)
Ultimately, the prices of all bonds approach the bond’s face value when the bonds mature and
their last coupon are paid.
B)
When a bond trades at a price equal to its face value, it is said to trade at par.
C)
When a bond is trading at a discount, the price drop when a coupon is paid will be larger
than the price increase between coupons, so the bond’s discount will tend to decline as time
passes.
D)
As interest rates and bond yield rise, bond prices will fall.
35)
Consider a zero coupon bond with 20 years to maturity. The price will this bond trade if the YTM
is 6% is closest to:
35)
A)
$306
B)
$335
C)
$215
D)
$312
36)
Which of the following statements is false?
36)
A)
Because the yield to maturity for a bond is calculated using the promised cash flows, the yield
of bond’s with credit risk will be lower than that of otherwise identical default–free bonds.
B)
Because the cash flows promised by the bond are the most that bondholders can hope to
receive, the cash flows that a purchaser of a bond with credit risk expects to receive may be
less than that amount.
C)
A higher yield to maturity does not necessarily imply that a bond’s expected return is higher.
D)
By consulting bond ratings, investors can assess the credit–worthiness of a particular bond
issue.
Use the table for the question(s) below.
Consider the following four bonds that pay annual coupons:
Bond Years to maturity Coupon YTM
A 1 0% 5%
B 5 6% 7%
C10 10% 9%
D20 0% 8%
37)
The amount that the price of bond “D” will change if its yield to maturity increases from 8% to 9%
is closest to:
37)
A)
–$39
B)
$36
C)
$9
D)
–$36
38)
Consider a zero–coupon bond with a $1000 face value and 10 years left until maturity. If the YTM
of this bond is 10.4%, then the price of this bond is closest to:
38)
A)
$1000
B)
$602
C)
$372
D)
$1040
Use the table for the question(s) below.
Consider the following zero–coupon yields on default free securities:
Maturity (years) 1 2 3 4 5
Zero–Coupon YTM 5.80% 5.50% 5.20% 5.00% 4.80%
39)
A 3 year default free security with a face value of $1000 and an annual coupon rate of 6% will
trade?
39)
A)
at par
B)
There is insufficient information to provided to answer this question.
C)
at a premium
D)
at a discount
40)
Which of the following statements is false?
40)
A)
The risk of default, which is known as the credit risk of the bond, means that the bond’s cash
flows are not known with certainty.
B)
For corporate bonds, the issuer may default—that is, it might not pay back the full amount
promised in the bond certificate.
C)
Investors pay less for bonds with credit risk than they would for an otherwise identical
default–free bond.
D)
The yield to maturity of a defaultable bond is equal to the expected return of investing in the
bond.