41)
Which of the following equations is incorrect?
41)
A)
Expected future spot interest rate = forward interest rate + risk premium
B)
fn=
(1 +YTMn – 1)n – 1
(1 +YTMn)n– 1
C)
(1 +YTMn)n= (1 +YTMn – 1)n – 1(1 +fn)
D)
(1 + f1) × (1 + f2) × (1 + f3) × … × (1 +fn) = (1 +YTMn)n
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%
42)
The amount that the price of bond “B” will change if its yield to maturity increases from 7% to 8%
is closest to:
42)
A)
$39
B)
$9
C)
$36
D)
–$36
43)
Which of the following statements is false?
43)
A)
The yield to maturity of a bond is the discount rate that sets the future value of the promised
bond payments equal to the current market price of the bond.
B)
Financial professionals also use the term spot interest rates to refer to the default–free
zero–coupon yields.
C)
When we calculate a bond’s yield to maturity by solving the formula, Price of an n–period
bond =Coupon
(1 +YTM)1+Coupon
(1 +YTM)2+ … +Coupon + Face
(1 +YTM)n, the yield we compute will be a rate
per coupon interval.
D)
The IRR of an investment in a zero–coupon bond is the rate of return that investors will earn
on their money if they buy a default free bond at its current price and hold it to maturity.
44)
Which of the following statements is false?
44)
A)
The IRR of an investment opportunity is the discount rate at which the NPV of the investment
opportunity is equal to zero.
B)
The yield to maturity for a zero–coupon bond is the return you will earn as an investor from
holding the bond to maturity and receiving the promised face value payment.
C)
When prices are quoted in the bond market, they are conventionally quoted in increments of
$1000.
D)
Zero–coupon bonds are also called pure discount bonds.
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%
45)
The price today of a 4 year default free security with a face value of $1000 and an annual coupon
rate of 5.25% is closest to:
45)
A)
$1008
B)
$1003
C)
$987
D)
$1000
46)
The forward rate for year 3 (the forward rate quoted today for an investment that begins in two
years and matures in three years) is closest to:
46)
A)
4.5%
B)
5.2%
C)
4.6%
D)
5.0%
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
47)
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:
47)
A)
95.42
B)
95.60
C)
94.16
D)
94.70
48)
The credit spread of the BBB corporate bond is closest to:
48)
A)
0.8%
B)
1.6%
C)
1.0%
D)
5.6%
49)
Forward interest rates tend
49)
A)
accurately predict future spots rates because of the law of one price.
B)
tend to be biased upward as predictors of future spot rates when the yield curve is downward
sloping.
C)
not to be good predictors of future spot rates.
D)
tend to be biased downward as predictors of future spot rates when the yield curve is upward
sloping.
50)
Which of the following statements is false?
50)
A)
If a coupon bond‘s yield to maturity exceeds its coupon rate, the present value of its cash
flows at the yield to maturity will be greater than its face value.
B)
A bond trades at par when its coupon rate is equal to its yield to maturity.
C)
The clean price of a bond is adjusted for accrued interest.
D)
The price of the bond will drop by the amount of the coupon immediately after the coupon is
paid.
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.
51)
How much will each semi–annual coupon payment be?
51)
A)
$60
B)
$40
C)
$80
D)
$120
52)
Consider a zero coupon bond with 20 years to maturity. The percentage change in the price of the
bond if its yield to maturity decreases from 7% to 5% is closest to:
52)
A)
22%
B)
17%
C)
46%
D)
38%
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%
53)
The forward rate for year 5 (the forward rate quoted today for an investment that begins in four
years and matures in five years) is closest to:
53)
A)
4.0%
B)
4.2%
C)
3.8%
D)
4.8%
54)
The forward rate for year 4 (the forward rate quoted today for an investment that begins in three
years and matures in four years) is closest to:
54)
A)
4.6%
B)
4.4%
C)
4.5%
D)
5.0%
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%
55)
Assuming that Luther’s bonds receive a AAA rating, the price of the bonds will be closest to:
55)
A)
$1021
B)
$1000
C)
$937
D)
$1014
56)
Which of the following statements is false?
56)
A)
The promised interest payments of a bond are called coupons.
B)
The principal or face value of a bond is the notional amount we use to compute the interest
payments.
C)
Payments are made on bonds until a final repayment date, called the term date of the bond.
D)
The coupon rate of a bond is set by the issuer and stated on the bond certificate.
57)
Which of the following statements is false?
57)
A)
The bond certificate typically specifies that the coupons will be paid periodically until the
maturity date of the bond.
B)
The only cash payments the investor will receive from a zero coupon bond are the interest
payments that are paid up until the maturity date.
C)
The bond certificate indicates the amounts and dates of all payments to be made.
D)
Usually the face value of a bond is repaid at maturity.
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%
58)
The price of a five–year, zero–coupon, default–free security with a face value of $1000 is closest to:
58)
A)
$754
B)
$791
C)
$776
D)
$772
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
59)
The yield to maturity for the two year zero–coupon bond is closest to:
59)
A)
5.8%
B)
5.5%
C)
5.6%
D)
6.0%
60)
Consider a bond that pays annually an 8% coupon with 20 years to maturity. The percentage
change in the price of the bond if its yield to maturity increases from 5% to 7% is closest to:
60)
A)
24%
B)
–24%
C)
–22%
D)
22%
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.
61)
Assuming that this bond trades for $1,112, then the YTM for this bond is closest to:
61)
A)
3.4%
B)
9.2%
C)
6.8%
D)
8.0%
62)
Consider a corporate bond with a $1000 face value, 10% coupon with semiannual coupon
payments, 5 years until maturity, and currently is selling for (has a cash price of) $1,113.80. The
next coupon payment will be made in 63 days and there are 182 days in the current coupon period.
The clean price for this bond is closest to:
62)
A)
$1065.70
B)
$1146.50
C)
$1113.80
D)
$1081.10
63)
Which of the following statements is false?
63)
A)
One advantage of quoting the yield to maturity rather than the price is that the yield is
independent of the face value of the bond.
B)
The IRR of an investment in a bond is given a special name, the yield to maturity (YTM).
C)
Because we can convert any bond price into a yield, and vice versa, bond prices and yields are
often used interchangeably.
D)
Unlike the case of bonds that pay coupons, for zero–coupon bonds, there is no simple formula
to solve for the yield to maturity directly.
64)
Which of the following statements is false?
64)
A)
When a coupon–paying bond is trading at a premium, an investor’s return from the coupons
is diminished by receiving a face value less than the price paid for the bond.
B)
A bond that trades at a premium is said to trade above par.
C)
Holding fixed the bond’s yield to maturity, for a bond not trading at par, the present value of
the bond’s remaining cash flows changes as the time to maturity decreases.
D)
If a bond trades at a premium, its yield to maturity will exceed its coupon rate.
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.
65)
Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at
65)
A)
par.
B)
a premium.
C)
a discount.
D)
None of the above
66)
A corporate bond which receives a BBB rating from Standard and Poor’s is considered
66)
A)
a junk bond.
B)
a defaulted bond.
C)
an investment grade bond.
D)
a high–yield bond.
67)
Which of the following statements is false?
67)
A)
Bonds typically make two types of payments to their holders.
B)
Bonds are a securities sold by governments and corporations to raise money from investors
today in exchange for promised future payments.
C)
The time remaining until the repayment date is known as the term of the bond.
D)
By convention the coupon rate is expressed as an effective annual rate.
68)
Which of the following statements is false?
68)
A)
Prices of bonds with lower durations are more sensitive to interest rate changes.
B)
The sensitivity of a bond’s price changes in interest rates is the bond’s duration.
C)
When a bond is trading at a discount, the price increase between coupons will exceed the
drop when a coupon is paid, so the bond’s price will rise and its discount will decline as time
passes.
D)
Coupon bonds may trade at a discount, at a premium, or at par.
69)
The discount rate that sets the present value of the promised bond payments equal to the current
market price of the bond is called
69)
A)
the zero coupon yield.
B)
the discount yield.
C)
the current yield.
D)
the yield to maturity.
70)
Which of the following statements is false?
70)
A)
Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or
very near to, par.
B)
If the bond trades at a discount, and investor who buys the bond will earn a return both from
receiving the coupons and from receiving a face value that exceeds the price paid for the
bond.
C)
At any point in time, changes in market interest rates affect a bond’s yield to maturity and its
price.
D)
Coupon bonds always trade for a discount.
71)
Which of the following statements is false?
71)
A)
Bond ratings encourage widespread investor participation and relatively liquid markets.
B)
Debt issues with a low–priority claim in bankruptcy will have a better rating than issues from
the same company that have a higher priority in bankruptcy.
C)
Bonds in the top four categories are often referred to as investment grade bonds.
D)
A bond’s rating depends on the risk of bankruptcy as well as the bondholder’s ability to lay
claim to the firm’s assets in the event of a bankruptcy.
72)
Which of the following statements is false?
72)
A)
A spot rate is an interest rate that we can guarantee today for a loan or investment that will
occur in the future.
B)
One of the most important tools to manage the risk of interest rate changes are interest rate
forward contracts.
C)
Forward rates tend not to be good predictors of future spot rates.
D)
Given the risk associated with interest rate changes, corporate managers require tools to help
manage this risk.
73)
Which of the following statements is false?
73)
A)
The amount of each coupon payment is determined by the coupon rate of the bond.
B)
Treasury bills are U.S. government bonds with a maturity of up to one year.
C)
The simplest type of bond is a zero–coupon bond.
D)
Prior to its maturity date, the price of a zero–coupon bond is always greater than its face
value.
74)
Which of the following statements is false?
74)
A)
If the zero coupon yield curve is upward sloping, the resulting yield to maturity decreases
with the coupon rate of the bond.
B)
By convention, practitioners always plot the yield of the most senior issued bonds, termed the
on–the–run–bonds.
C)
The yield to maturity of a coupon bond is a weighted average of the yields on the
zero–coupon bonds.
D)
We can determine the no–arbitrage price of a coupon bond by discounting its cash flows
using the zero–coupon yields.
75)
Consider a bond that pays annually an 8% coupon with 20 years to maturity. The amount that the
price of the bond will change if its yield to maturity increases from 5% to 7% is closest to:
75)
A)
–$250
B)
–$310
C)
–$270
D)
–$225
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.
76)
Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then the price that this bond trades
for will be closest to:
76)
A)
$1,000
B)
$957
C)
$1,045
D)
$691
77)
Which of the following formulas is incorrect?
77)
A)
Clean price = dirty price – accrued interest
B)
Invoice price = dirty price
C)
Cash price = clean price + accrued interest
D)
Accrued interest = coupon amount ×days since last coupon payment
360
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
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.
78)
Assuming that this bond trades for $1,035.44, then the YTM for this bond is equal to:
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
79)
Plot the zero–coupon yield curve (for the first five years).
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%
80)
Assume that the YTM increases by 1% for each of the four bonds listed. Rank the bonds based upon the
sensitivity of their prices from least to most sensitive.
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
81)
Compute the yield to maturity for each of the five zero–coupon bonds.
82)
What is the relationship between a bond’s price and its yield to maturity?
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.
83)
How much are each of the semi–annual coupon payments? Assuming the appropriate YTM on the Sisyphean
bond is 8.8%, then at what price should this bond trade for?
84)
If its YTM does not change, how does a bond’s cash price change between coupon payments?
85)
Explain why the expected return of a corporate bind does not equal its yield to maturity?
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%
86)
What is the price today of a two–year, default–free security with a face value of $1000 and an annual coupon
rate of 5.75%? Does this bond trade at a discount, premium, or at par?
Answer Key
Testname: C8
Answer Key
Testname: C8
35
Answer Key
Testname: C8