Chapter 4—Valuing Bonds
MULTIPLE CHOICE
1. A 15-year, 8%, $1000 face value bond is currently trading at $958. The yield to maturity of this bond
must be
a.
less than 8%.
b.
equal to 8%.
c.
greater than 8%.
d.
unknown.
2. A bond that grants the investor the right to exchange their bonds for common stock, is called a
a.
zero-coupon bond.
b.
Treasury bond.
c.
convertible bond.
d.
mortgage bond.
3. Of the following bonds, which one has the highest degree of interest rate risk?
a.
20 year 8% bond
b.
5 year 8% bond
c.
10 year 8% bond
d.
Not enough information.
4. Which of the following information cannot be found in a bond’s indenture?
a.
The coupon rate.
b.
The maturity of the bond.
c.
The price of the bond.
d.
None of the above.
5. Bonds issued by US states or local governments are called:
a.
Treasury bonds.
b.
Municipal bonds.
c.
Corporate bonds.
d.
Yankee bonds.
6. Bavarian Sausage just issued a 10 year 7% coupon bond. The face value of the bond is $1,000 and the
bond makes ANNUAL coupon payments. If the required return on the bond is 10%, what is the bond’s
price?
a.
$815.66
b.
$923.67
c.
$1,000.00
d.
$1,256.35
7. Bavarian Sausage just issued a 10-year 7% coupon bond. The face value of the bond is $1,000 and the
bond makes SEMIANNUAL coupon payments. If the required return on the bond is 10%, what is the
bond’s price?
a.
$815.66
b.
$1,000
c.
$813.07
d.
$1,035.27
8. Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and
the bond makes ANNUAL coupon payments. If the required return on the bond is 10%, what is the
bond’s price?
a.
$815.16
b.
$1,000
c.
$1,122.89
d.
$1067.24
9. Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and
the bond makes SEMIANNUAL coupon payments. If the required return on the bond is 10%, what is
the bond’s price?
a.
$1,122.89
b.
$815.26
c.
$1,000.00
d.
$1,124.62
10. Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and
the bond makes ANNUAL coupon payments. If the bond is trading at $967.25, what is the bond’s
yield to maturity?
a.
12.00%
b.
12.59%
c.
11.26%
d.
13.27%
11. Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and
the bond makes SEMIANNUAL coupon payments. If the bond is trading at $867.25, what is the
bond’s yield to maturity?
a.
12.00%
b.
12.37%
c.
14.56%
d.
10.86%
12. Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and
the bond makes SEMIANNUAL coupon payments. If the bond is trading at $1,267.25, what is the
bond’s yield to maturity?
a.
12.00%
b.
8.06%
c.
14.38%
d.
10.97%
13. Bavarian Sausage wants to issue a 10-year coupon bond. The face value of the bond is $1,000 and the
bond makes SEMIANNUAL coupon payments. Outstanding Bavarian Sausage 8% bonds with a
remaining maturity of 10 years are currently trading at $1,145. These bonds also have a face value of
$1,000 and make SEMIANNUAL payments. If Bavarian Sausage wants the new bonds to sell at par,
what should be the coupon rate on these bonds?
a.
8.00%
b.
6.05%
c.
7.25%
d.
9.35%
14. You just bought a bond with a yield to maturity of 9.5%. If the rate of inflation is expected to be 4%,
what is the real return on your investment?
a.
9.50%
b.
5.29%
c.
4.00%
d.
Not enough information.
15. What is the value of a 15-year 10% coupon bond with a face value of $1,000. The required return on
the bond is 12% and the bond makes SEMIANNUAL payments.
a.
$862.35
b.
$1,167.39
c.
$925.76
d.
$1,000
16. You are offered a zero-coupon bond with a $1,000 face value and 5 years left to maturity. If the
required return on the bond is 8%, what is the most you should pay for this bond?
a.
$752.69
b.
$680.58
c.
$1,000
d.
$1,126.94
17. You just bought a 5-year zero coupon bond with a $1,000 face value for $735.67. What is the yield to
maturity of this bond?
a.
10.36%
b.
6.33%
c.
4.69%
d.
8.18%
18. You just bought a 5-year zero coupon bond with a $1,000 face value for $735.67. What is the taxable
capital gain on this bond next year?
a.
$274.33
b.
$68.51
c.
$169.47
d.
$46.64
19. The real return is 10% and the expected rate of inflation is 4.5%. What is the nominal rate?
a.
4.50%
b.
14.95%
c.
10.00%
d.
8.69%
20. A one-year bond offers a yield of 6% and a two year bond offers a yield of 7.5%. Under the
expectations theory what should be the yield on a one year bond next year?
a.
13.50%
b.
4.52%
c.
7.38%
d.
9.02%
21. A two-year bond offers a yield of 6% and a three year bond offers a yield of 7.5%. Under the
expectations theory what should be the yield on a one year bond in two years?
a.
5.95%
b.
10.56%
c.
3.06%
d.
12.49%
22. The yield on a one-year bond is 6% today and is expected to be 8.5% next year. Based on the
expectations theory, what is the yield of a two year bond today?
a.
15.01%
b.
12.68%
c.
5.67%
d.
7.24%
23. You are looking up bond prices in the newspaper and you find the following quote for a $1,000 face
value treasury bond: 103:26. What is the price of this bond?
a.
$103.26
b.
$1,038.13
c.
$1,032.60
d.
$1,000
24. You have the choice between investing in a corporate bond with a yield of 8% or a municipal bond. If
your marginal tax rate is 28%, what should be the yield on the municipal bond in order to be
competitive?
a.
8.00%
b.
5.76%
c.
11.11%
d.
13.69%
25. You have the choice between investing in a corporate bond or a municipal bond with a yield of 8%. If
your marginal tax rate is 28%, what should be the yield on the corporate bond in order to be
competitive?
a.
8.00%
b.
5.76%
c.
13.64%
d.
11.11%
26. McLaughlin Enterprises has an outstanding $1,000 par value bond with a 11% coupon that pays at the
end of each year. The bond matures in nine years. Bonds of similar risk have a required return of 10%.
What is the market value of the McLaughlin bond?
a.
$890.00
b.
$1,053.35
c.
$1,000.00
d.
$1,057.59
27. Winburn Sports & Entertainment has an outstanding $1,000 par value bond with a 11% coupon that
pays SEMIANNUALLY at the end of each period. The bond matures in nine years. Bonds of similar
risk have a required return of 10%. What is the market value of the Winburn bond?
a.
$1,035.54
b.
$1,057.59
c.
$1,058.45
d.
$1,073.05
28. A 10-year Treasury bond with par value of $1,000 has a 6% coupon rate and pays interest every six
months. The bond is three years old and has just made its sixth payment. The market now only
requires a 5% return on the bond. What is the expected price of the bond?
a.
$802.03
b.
$1,058.45
c.
$1,077.95
d.
$1,350.73
29. A $1,000 par value bond that makes ANNUAL interest payments of $50 and matures in four years
sells for $980. What is the yield to maturity of the bond?
a.
5.57%
b.
2.47%
c.
4.54%
d.
2.04%
30. Alexis Media issued five-year bonds one year ago with a 7.5% coupon that pays SEMIANNUALLY
(the bonds just paid the second coupon payment). Alexis announced a revised advertising revenue
forecast that is quite bleak compared with the prevailing forecast at the time of the bond issuance.
Investors now require a 9% return on Alexis bonds. What is the percent change in price of the bonds
associated with the change in business conditions?
a.
4.95% decrease
b.
8.30% decrease
c.
29.06% decrease
d.
19.79% increase
e.
Can’t determine with the information given
31. A new one-year bond pays interest of 1.04%. A new two-year bond pays interest of 1.46%. Using
expectations theory of term structure and assuming the market is in equilibrium, what interest rate does
the market expect a new one year bond to have one year from now?
a.
0.42%
b.
1.18%
c.
1.25%
d.
1.88%
32. The value of any asset
a.
is based upon the benefits provided by the asset in prior years.
b.
is based upon the benefits that the asset will provide the owner of the asset this year.
c.
equals the present value of future benefits accruing to the asset’s owner.
d.
is not described by any of the above.
33. The greater the uncertainty about an asset’s future benefits,
a.
the lower the discount rate investors will apply when discounting those benefits to the
present.
b.
the higher the discount rate investors will apply when discounting those benefits to the
present.
c.
the greater is the present value of those benefits.
d.
none of the above.
34. You will be receiving $204,000.00 at the end of each year for the next 20 years. If the correct discount
rate for such a stream of cash flows is 10% then what is the present value of the cash flows?
a.
$1,736,767.00
b.
$4,080,000.00
c.
$185,454.55
d.
none of the above
35. A bond’s coupon rate
a.
equals its annual coupon payment divided by the bonds’ current market price.
b.
varies during the life of the bond.
c.
equals its annual coupon payment divided by its par value.
d.
both a and b are correct.
36. WeOweYou, Inc. has a 12-year bond outstanding that makes 9.5% ANNUAL coupon payments. If the
appropriate discount rate for such a bond is 7%, what the appropriate price for the bond?
a.
$1,200.73
b.
$1,000.00
c.
$1,198.57
d.
$754.56
37. WeOweEveryone, Inc. has a 12-year bond outstanding that has 9.5% coupon rate. If the appropriate
discount rate for such a bond is 7%, what the appropriate price for the SEMIANNUAL coupon paying
bond?
a.
$1,200.73
b.
$1,198.57
c.
$1,000.00
d.
$762.77
38. Astro Investors is interested in purchasing the bonds of the Jetson Company. Jetson’s bonds are
currently priced at $1,100.00 and have 14.5 years to maturity. If the bonds have a 6% coupon rate what
is the yield-to–maturity of these SEMIANNUAL coupon paying bonds?
a.
5.00%
b.
5.02%
c.
2.51%
d.
2.50%
39. Elroy Investors is interested in purchasing the bonds of the Judy Company. Judy’s bonds are currently
priced at $1,100.00 and have 14 years to maturity. If the bonds have a 6% coupon rate what is the
yield-to-maturity of these ANNUAL coupon paying bonds?
a.
5.00%
b.
4.99%
c.
2.50%
d.
none of the above.
40. You recently earned a 13% return on an investment during the preceding year. If the rate of inflation
during that period is 8% what was your real return during that period?
a.
5%
b.
4.63%
c.
4.42%
d.
none of the above.
41. You are considering the purchase of a motorized scooter where the price of the scooter is based upon
the miles per gallon (mpg) of gasoline that the scooter can achieve. That is, the current price of the
scooter that you want is $1,000 because the scooter can achieve 100 miles per gallon and the cost per
mpg is $10. Right before you are about to purchase the scooter, your best friend requests that you loan
him $1,000 for one year. You make the loan in order to be able to buy a 105 mpg scooter at the
conclusion of the loan. If you anticipate that the cost per mpg will increase to $11, what rate of interest
do you charge your friend?
a.
5%
b.
10%
c.
15%
d.
15.5%
42. Unsecured bonds that have legal claims inferior to other outstanding bonds are
a.
debentures.
b.
mortgage bonds.
c.
subordinated debentures.
d.
discount bonds.
43. With respect to the company that has issued a callable bond,
a.
the value of the call increases as the stock price increases.
b.
the value of the call increases as interest rates increase.
c.
the value of the call increases as interest rates decrease.
d.
none of the above.
44. With respect to the owner of a putable bond,
a.
the value of the put increases as interest rates increase.
b.
the value of the put increases as interest rates decrease.
c.
the value of the put increases as the value of the stock decreases.
d.
none of the above.
45. You notice that the price of a 4.0% coupon, 12-year Treasury Note is priced at 90:16 in the Wall Street
Journal. What is the bond’s yield to maturity?
a.
2.56%
b.
2.565%
c.
5.07%
d.
5.13%
46. You read in the financial press that a company’s Moody’s debt rating is one step above junk. What is
the rating?
a.
Ba1
b.
BB+
c.
Baa3
d.
BBB–
47. You are trying to find the correct yield spread for a Standard and Poor’s rated A+, 7-year maturity
bond. You find that a 7-year maturity, AA- bond’s spread is 65 basis points while that of a 7-year
maturity A bond’s spread is 80 basis points. Which of the following should be a possibility for the
spread of the A+ rated bond?
a.
64 basis points
b.
70 basis points
c.
80 basis points
d.
both b and c are possible spreads for the bond.
48. The relationship between time to maturity and yield to maturity for bonds of equal risk is referred to as
a.
the term structure of interest rates.
b.
the forward rate.
c.
the spot curve.
d.
the forward curve.
49. You find that the yield on a 4-year bond is 10% while that of a 2-year bond is 8%. What should be the
yield on a 2-year bond beginning two years from now as predicted by the expectations’ theory?
a.
2.00%
b.
12.04%
c.
25.25%
d.
none of the above
50. You find that the yield on a 6-year bond is 12% while that of a 4-year bond is 9%. What should be the
yield on a 2-year bond beginning four years from now as predicted by the expectations’ theory?
a.
3.00%
b.
18.25%
c.
39.83%
d.
none of the above
51. You find that the yield on a 4-year bond is 9% while the yield on a 2-year bond beginning four years
from now is 10%. What should be the yield on a 6-yr bond as predicted by the expectations’ theory?
a.
1.00%
b.
9.33%
c.
14.32%
d.
70.80%
52. If you were trying to describe the effect on the yield curve that certain investors have a definite
preference for the maturity of the bonds that they invest in, then you would be referring to
a.
the expectations theory.
b.
the liquidity preference theory.
c.
the preferred habitat theory.
d.
none of the above.
53. Fence Place Diary Company (FPD) has a 15-year maturity bond outstanding that is currently
convertible into 50 shares of FPD common stock. FPD common stock currently sells for $25 a share
and the coupon rate (SEMIANNUAL coupons) for the bond is 5%. If the yield on a similarly rated
convertible bond (on The New York Calendar Corp.) is 5%, then what should be the correct price of
the FPD convertible bond?
a.
$750.00
b.
$1,000
c.
$1,250
d.
either a or b
54. You own a bond that pays a 12% annualized SEMIANNUAL coupon rate. The bond has 10 years to
maturity. If the discount rate suddenly moves from 14% to 16%, then what is the dollar increase
(decrease) in value for the bond?
a.
($90.42)
b.
($89.01)
c.
$89.01
d.
$90.42
55. You own a bond that pays a 12% annualized SEMIANNUAL coupon rate and has 10 years to
maturity. If the discount rate increases from 14% to 16% during the next two years of the bonds life,
then what is the dollar increase (decrease) in value for the bond during the two year period?
a.
($69.42)
b.
($71.09)
c.
$69.42
d.
$71.09
56. Oogle Corp. has decided to do things differently with respect to their corporate bond issue. They have
a bond outstanding that makes quarterly coupon payments instead of SEMIANNUALLY. The stated
coupon rate on the bond is 10% and the yield to maturity on the 5-year bond is 12%. What is the price
of the bond?
a.
$927.90
b.
$926.40
c.
$925.61
d.
none of the above
57. Suppose investment A and investment B have identical cash flows. Why would an investor pay more
for investment A than investment B?
a.
This is incorrect. You would always pay the same amount for two investments with equal
future cash flows.
b.
The risk in the cash flows for investment A is greater than the risk of the cash flows of
investment B.
c.
The risk in the cash flows for investment B is greater than the risk of the cash flows of
investment A.
d.
The return required for investment B is lower than the return required for investment A.
58. A bond pays an ANNUAL coupon rate of 7% with a face value of $1,000. The bond is scheduled to
mature in two years and currently trades at $920.00. What is the coupon yield of the bond currently?
a.
7.00%
b.
7.61%
c.
14.00%
d.
15.22%
59. Consider the following details for a bond issued by Bravo Incorporated.
Issue Date
8/5/2000
Maturity Date
8/5/2030
Coupon Rate (ANNUAL coupons)
9%
Face Value
$1,000
Suppose that today’s date is 8/5/2004, what should the current trading price be for this bond if
investors want a 12% ANNUAL return?
a.
$658.09
b.
$763.13
c.
$908.88
d.
$1,000.00
60. Consider the following details for a bond issued by Bravo Incorporated.
Issue Date
8/5/2000
Maturity Date
8/5/2030
Annual Coupon Rate (semi-annual coupons)
9%
Face Value
$1,000
Suppose that today’s date is 8/5/2004, what should the current trading price by for this bond if
investors want a 12% annual return?
a.
$762.08
b.
$763.13
c.
$906.85
d.
$1,000.00
61. Which answer is FALSE regarding bond prices and interest rates?
a.
Bond prices and interest rates move in opposite directions.
b.
The price of a bond is the present value of the coupon payments and the face value.
c.
The prices of short-term bonds display greater price sensitivity to interest rate changes
than do the prices of long-term bonds.
d.
Interest rate risk can be described as the risk that changes in market interest rates will
cause fluctuations in the bond’s price.
62. A bond is priced such that it has a 9% yield to maturity. However, inflation is expected to be 2% per
year over the remaining life of the bond. What is the real return for this investment?