Fundamentals of Investments, 8e (Jordan)
Chapter 10 Bond Prices and Yields
1) Which one of the following is the correct definition of a coupon rate?
A) semi-annual interest payment/par value
B) annual interest/par value
C) annual interest/market value
D) semi-annual coupon/bond price
E) annual coupon/bond price
2) What is the annual interest divided by the market price of a bond called?
A) coupon rate
B) effective annual yield
C) current yield
D) yield to maturity
E) yield to market
3) The yield to maturity is the:
A) discount rate that equates a bond’s price with the present value of the bond’s future cash
flows.
B) rate you will earn if your bond is called on the earliest possible date.
C) rate computed by dividing the annual interest by the par value.
D) rate used to compute the amount of each interest payment.
E) rate computed as the annual interest divided by the market value.
4) A premium bond is defined as a bond that:
A) has a duration that is less than 1.0.
B) has a face value that exceeds its market value.
C) is callable at a price which exceeds the face value.
D) has a market price that exceeds par value.
E) is selling for less than face value.
5) A discount bond:
A) pays a variable coupon payment.
B) has a market price in excess of face value.
C) has a duration that is less than that required by an investor.
D) has a par value that is less than $1,000.
E) has a face value that exceeds the market value.
6) The price of a bond, net of accrued interest, is referred to as the bond’s:
A) dirty price.
B) par value.
C) clean price.
D) maturity value.
E) discount value.
7) The dirty price of a bond is the:
A) invoice price.
B) quoted price.
C) issue price.
D) average of the bid and asked prices.
E) dealer purchase price.
8) A callable bond:
A) can be paid off early at either the issuer’s or the bondholder’s request.
B) can be redeemed early if the bondholder so requests.
C) can have its maturity date extended by the issuer.
D) can be redeemed by the issuer prior to maturity.
E) is a bond that pays a variable interest payment.
9) Which one of the following does an issuer pay to redeem a bond prior to maturity?
A) par value
B) face value
C) put price
D) call price
E) discounted price
10) Which one of the following prices is equal to the present value of a bond’s future cash flows
and is paid when a bond is redeemed prior to maturity?
A) call protected
B) face value
C) make-whole call
D) tender-offer
E) deferred
11) An issuer has a bond outstanding that matures in 18 years. Which one of the following
prevents the issuer from buying back that bond today?
A) make-whole provision
B) call protection period
C) newly issued provision
D) put provision
E) call premium
12) The yield that a bond will earn given that it is bought back by the issuer at the earliest
possible date is the:
A) market yield.
B) current yield.
C) yield to maturity.
D) yield to put.
E) yield to call.
13) Which one of the following is the risk that market rates may increase causing the price of a
bond to decline?
A) inflation risk
B) reinvestment risk
C) yield risk
D) interest rate risk
E) default risk
14) The rate of return an investor actually earns from owning a bond is called which one of the
following?
A) market return
B) realized yield
C) annualized coupon yield
D) maturity yield
E) call yield
15) Which one of the following measures a bond’s sensitivity to changes in market interest rates?
A) yield to call
B) yield to market
C) duration
D) immunization
E) target date valuation
16) A change in a bond’s price caused by which one of the following is defined as the dollar
value of an 01?
A) change in yield to call due to passage of one year
B) change in yield to maturity of one percent
C) change in yield to maturity of one basis point
D) change in coupon rate of one percent
E) change in coupon rate of one basis point
17) The yield value of a 32nd is the change needed in which one of the following to cause a
bond’s price to change by 1/32nd?
A) current yield
B) yield to maturity
C) coupon rate
D) call premium
E) call date
18) A dedicated portfolio is a bond portfolio created to:
A) maximize current interest income.
B) provide an increasing steady stream of income.
C) maximize the return given declining interest rates.
D) fund a future cash outlay.
E) avoid taxation.
19) Which one of the following risks is associated with investing a coupon payment at a rate that
is lower than the bond’s yield-to-maturity?
A) reinvestment rate risk
B) current rate risk
C) payment risk
D) current yield risk
E) maturity risk
20) Which one of the following involves creating a portfolio in a manner which minimizes the
uncertainty of the portfolio’s maturity target date value?
A) duration
B) reinvestment
C) immunization
D) modification
E) call protection
21) Price risk is the risk that:
A) coupon payments will be reinvested at a rate that is less than the bond’s yield-to-maturity.
B) the bond principal will not be paid in full or on time.
C) the bonds in a dedicated portfolio will decrease in value in response to an increase in interest
rates.
D) market prices increase due to market interest rate changes making bonds more expensive to
purchase.
E) the yield-to-maturity will be less than the inflation risk causing the real rate of return to be
negative.
22) Periodically rebalancing a portfolio so that the duration continues to match the target date is
called:
A) risk assessment.
B) duration testing.
C) dedication matching.
D) portfolio matching.
E) dynamic immunization.
23) A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments
is referred to as which one of the following?
A) pure discount bond
B) premium bond
C) inflation bond
D) straight bond
E) conversion bond
24) Which of the following will increase if the coupon rate increases?
I. face value
II. market value
III. yield-to-maturity
IV. current yield
A) I and II only
B) III and IV only
C) I, II, and III only
D) II, III, and IV only
E) I, II, III, and IV
25) Which one of the following will decrease the current yield of a bond?
A) increase in the face value
B) change from semi-annual to annual coupon payments
C) decrease in the call premium
D) decrease in the coupon rate
E) decrease in the bond price
26) Which one of the following will occur if a bond’s discount rate is lowered?
A) market price will increase
B) coupon payment amount will decrease
C) current yield will increase
D) call premium will increase
E) coupon rate will decrease
27) Which one of the following statements is correct concerning premium bonds?
A) The premium increases when interest rates increase.
B) The coupon rate is less than the current yield.
C) As the time to maturity decreases, the premium increases.
D) The yield to maturity is less than the coupon rate.
E) The par value exceeds the face value.
28) Which one of the following statements is correct concerning discount bonds?
A) The current yield is less than the yield to maturity.
B) The bonds will be redeemed at maturity for less than face value.
C) The coupon rate is greater than the current yield.
D) The clean price is greater than the dirty price.
E) Only zero-coupon bonds sell at a discount.
29) Which one of the following statements applies to a par value bond?
A) The current yield is less than the coupon rate.
B) The yield-to-maturity equals the risk-free, or Treasury bill, rate.
C) The par value exceeds the market price.
D) The current yield, coupon rate, and yield-to-maturity are equal.
E) The dirty price equals the clean price.
30) Assuming there is no default risk, both a premium bond and a discount bond must share
which one of the following characteristics?
A) market price less than a par value bond
B) yield-to-maturity less than the coupon rate
C) maturity value equal to a par value bond
D) current yield equal to that of a par value bond
E) coupon rate exceeding the yield-to-maturity
31) A bond has a current yield that is equal to the yield-to-maturity. Given this, which one of the
following must also be true?
A) The bond must pay annual interest.
B) The maturity value must be greater than the bond price.
C) The bond can have any maturity date.
D) The coupon rate must exceed the current yield.
E) The price must exceed the par value.
32) For a premium bond, the:
A) current yield is equal to the coupon rate but less than the yield to maturity.
B) yield to maturity exceeds both the coupon rate and the current yield.
C) coupon rate is equal to the yield to maturity but less than the current yield.
D) current yield is less than either the coupon rate or the yield to maturity.
E) coupon rate exceeds both the yield to maturity and the current yield.
33) Davidson Industrial bonds have a current market price of $992 and a 5 percent coupon. The
bonds pay interest semi-annually on March 1 and September 1. Assume today is January 1. How
many months of accrued interest are included in the dirty price of these bonds?
A) zero
B) two
C) three
D) four
E) five
34) A bond pays interest semiannually on February 1 and August 1. Assume today is October 1.
How many months of accrued interest are included in the clean price of this bond?
A) zero
B) two
C) three
D) four
E) five
35) The yield-to-maturity assumes which one of the following?
A) The bond is purchased at par value.
B) All interest payments earn the latest rate of market interest.
C) The bond is called on the earliest possible date.
D) The bond is a pure discount bond.
E) All coupon payments are reinvested at the yield-to-maturity rate.
36) Which one of the following increases the probability that a bond will be called?
A) The call premium is relatively high.
B) The bond is within the call protection period.
C) The bond was issued within the past year.
D) Market interest rates decline.
E) The bond is selling at par.
37) Which one of the following statements is correct concerning a callable bond that is currently
selling below face value? Assume there is no risk of default. Also assume the issuer only calls
bonds when they can be refinanced at a lower rate of interest.
A) The bond will most likely be called while the bonds are selling at a discount.
B) The yield-to-maturity is presently more relevant to an investor than the yield-to-call.
C) The bond is likely going to be called due to the low current interest rates.
D) The bond is currently paying a premium.
E) The bond issue will most likely be replaced with a new bond issue.
38) Which one of the following statements is correct?
A) Investors know the rate of return they will earn with certainty provided they hold bonds until
they mature.
B) Reinvestment risk causes realized yields to differ from promised yields.
C) Realized yields generally equal promised yields as long as a bond is not called.
D) Redeeming a bond early helps ensure an investor earns the promised yield.
E) Realized yields cannot exceed promised yields.
39) According to Malkiel’s theorems, bond prices and bond yields are:
A) inversely related.
B) uncorrelated.
C) positively related.
D) directly related.
E) independent of each other.
40) Which combination of bond characteristics causes a bond to be most sensitive to changes in
market interest rates?
I. low coupon rates
II. high coupon rates
III. short time to maturity
IV. long time to maturity
A) III only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
41) How does the size of the change in a bond’s price react in response to a given change in the
yield to maturity as the time to maturity increases?
A) decreases at an increasing rate
B) decreases at a diminishing rate
C) increases at a constant rate
D) increases at a diminishing rate
E) increases at an increasing rate
42) Which one of the following statements is correct according to Malkiel’s Theorems?
A) For a given change in a bond’s yield to maturity, the shorter the term to maturity, the greater
will be the magnitude of the change in the bond’s price.
B) The price of an outstanding bond is unaffected by changes in market interest rates.
C) The size of the change in a bond’s price increases at a constant rate given even incremental
increases in a bond’s yield-to-maturity even as the term to maturity lengthens.
D) For a given change in a bond’s yield-to-maturity, the absolute magnitude of the resulting
change in the bond’s price is directly related to the bond’s coupon rate.
E) For a given absolute change in a bond’s yield-to–maturity, a decrease in yield will cause a
greater change in the bond’s price than will an increase in yield.