a.
4.50%
b.
6.86%
c.
7.00%
d.
9.00%
63. A bond issued by the Federal Home Loan Bank or the Federal Home Loan Mortgage Corporation are
examples of what type of bond?
a.
Treasury bond
b.
Corporate bond
c.
Municipal bond
d.
Agency bond
64. The Treasury Department sells a zero-coupon bond that will mature in two years. The bond has a face
value of $10,000, and sold at auction for $9,400. What is the annual return for an investor buying the
bond?
a.
3.00%
b.
3.14%
c.
6.38%
d.
7.00%
65. A bond is trading on the secondary market and will mature in 10 years. The bond has a face value of
$1,000 that will be paid at maturity. Further, the bond pays an ANNUAL coupon at 9% of face value.
What should the trading price be for the bond if investors seek a 12% on their investment?
a.
$1,192.53
b.
$830.49
c.
$827.95
d.
$508.52
66. Which type of bond has the highest daily trading volume in our economy?
a.
Treasury bonds
b.
Agency bonds
c.
Corporate bonds
d.
Municipal bonds
67. A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and
pays an ANNUAL coupon at 9% of face value. The face value of the bond is $1,000. What is the yield
to maturity for this bond?
a.
8.86%
b.
9.00%
c.
9.23%
d.
9.40%
68. A bond currently trades at $980 on the secondary market. The bond has 10 years until maturity and
pays a SEMIANNUAL coupon at 9% APR of face value. The face value of the bond is $1,000. What
is the yield to maturity for this bond?
a.
9.00%
b.
9.18%
c.
9.25%
d.
9.31%
69. A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and
pays an ANNUAL coupon at 9% of face value. The face value of the bond is $1,000. What is the
coupon yield for this bond?
a.
8.86%
b.
9.00%
c.
9.23%
d.
9.40%
NARRBEGIN: Exhibit 4-1
Exhibit 4-1
In the financial section of your local paper, you see the following bond quotation:
Company
RATE
MATURITY
MO/YR
BID
ASK
CHG
ASK
YLD
BIG CITY
7.00%
Aug 12
104:07
104:08
2
?????
NARREND
70. Given Exhibit 4-1, what is the current ask yield of the Big City bond? Assume that today’s date is
August, 2004.
a.
6.14%
b.
6.31%
c.
6.58%
d.
6.73%
71. Given Exhibit 4-1, what is the current coupon yield of the Big City bond? Assume that today’s date is
August, 2004.
a.
6.14%
b.
6.34%
c.
6.58%
d.
6.71%
72. What is the minimum rating required for a bond to be considered investment grade?
a.
AA
b.
A
c.
BBB
d.
BB
73. Your friend wants you to invest in his new sporting goods store. For an initial investment, he will pay
you $2,000 per year for the next twenty years. All payments are at the end of the year. You realize that
this is a very risky investment and want a 20% return on each invested dollar. How much are you
willing to loan him today for his new store?
a.
$5,946
b.
$9,739
c.
$10,000
d.
$17,027
74. A $1,000 par value bond makes two coupon payments per year of $60 each. What is the bond’s yield
to maturity if the bond currently trades at $1,200 and will mature in two years?
a.
1.78%
b.
3.48%
c.
6.00%
d.
6.43%
75. A one-year Treasury security currently returns a 4.50% yield to maturity. A two-year Treasury security
offers a 4.80% yield to maturity. If the expectations hypothesis is true, what is the expected return on a
one-year security next year?
a.
4.80%
b.
4.90%
c.
5.00%
d.
5.10%
76. A TIPS bond issued by the Treasury Department was issued with an ANNUAL coupon of 5%. The
bond has a par value of $1,000 and will mature in 10 years. Suppose that inflation during the first year
of the bond’s life was 3%. What is the new coupon payment for this bond?
a.
$50.97
b.
$51.50
c.
$53.00
d.
$81.50
77. Suppose you have a chance to buy a Treasury strip. The strip is from a government bond with a 6%
coupon rate (face value of $1,000). You will receive this strip in one year and have a discount rate of
10%. What is the price you are willing to pay for this strip?
a.
$36.87
b.
$54.55
c.
$60.00
d.
$94.34
NARRBEGIN: EarthCOM
EarthCOM
On October 4th, 2000, long distance company, EarthCOM, issued bonds to finance a new wireless
product. The bonds were issued for 30 years (mature on October 4th, 2030), with a face value of
$1,000, and SEMIANNUAL coupons. The coupon rate on these bonds is 8% APR. Over the last 4
years, the company has experienced financial difficulty as the long distance market has grown more
competitive.
NARREND
78. Refer to EarthCOM. The risk associated with EarthCOM bonds has increased dramatically, as
investors now want a 15% APR return to hold the bonds. What price should the bonds trade at
TODAY (October 4th, 2004)?
a.
$544.19
b.
$545.66
c.
$794.99
d.
$800.15
79. Refer to EarthCOM. Suppose that today (October 4th, 2002), EarthCOM admits to fraud in reporting
revenues over the last 3 years. The price of EarthCOM immediately tumbles to $500. What is the new
yield-to-maturity on EarthCOM bonds? (Express as an APR)
a.
16.04%
b.
16.21%
c.
18.12%
d.
20.77%
80. Which of the following statements are CORRECT?
Statement I:
A change in a bond’s interest rate risk has a greater price impact on bonds
with longer maturities.
Statement II:
Government bonds have lower default risk than corporate bonds or
municipal bonds.
Statement III:
Trading volume is greater for corporate bonds than government bonds.
a.
Statement I only
b.
Statement II only
c.
Statements I and II only
d.
Statements II and III only
81. A bond pays $60 interest payments twice a year. What is the coupon rate for the bond if the par value
of the bond is $1,000?
a.
6.00%
b.
9.00%
c.
12.00%
d.
15.00%
82. Which of the following statements is FALSE?
a.
The valuation process involves linking an asset’s past benefits and uncertainty to
determine a fair present value.
b.
Holding future benefits in the form of cash flows constant, the riskier the benefits the
higher the estimated present value.
c.
Finance theory focuses primarily on intangible benefits expected from an asset.
d.
All of the above statements are true.
e.
All of the above statements are false.
83. The required rate of return:
a.
is used as the discount rate when valuing an asset’s expected cash flows.
b.
is increased when an asset’s cash flows are considered to be riskier.
c.
is a fixed rate that remains the same for all investors regardless of changes in the market.
d.
Both (a) and (b)
e.
All of the above
84. Additional features offered by bonds may include:
a.
a call feature which allows the issuer to redeem the bond at a predetermined price prior to
maturity.
b.
the issuer’s right to forgo interest payments to the bondholders without repercussion in the
event that the firm is undergoing financial difficulty.
c.
the ability of the bondholder to convert to a predetermined number of shares of the issuer’s
common stock.
d.
All of the above
e.
Both (a) and (c)
85. The holding period yield (HPY) calculation differs from the yield to maturity (YTM) calculation in
that:
a.
the future value for the HPY calculation is always the par value of the bond
b.
the future value for the HPY calculation is the sale price of the bond
c.
the time period for the HPY calculation is the number of time periods until the bond
matures
d.
the time period for the HPY calculation is the number of time periods the bond was
actually held
e.
Both (b) and (d)
86. Assuming a 28% lender’s affordability ratio, estimated monthly property taxes and insurance of $250,
a 25% down payment (of the purchase price), and an annual gross income of $84,800, calculate the
maximum purchase price based on monthly income. The monthly payment will occur at the end of the
month and you plan to pay off the mortgage over a 30-year period at a 6.25% annual interest rate.
a.
$374,343
b.
$280,757
c.
$282,219
d.
$321,360
e.
None of the above
87. Which of the following statements is true?
a.
As time passes and a bond approaches its maturity date the price will converge to par
value plus the final interest payment.
b.
The most important factor having an impact on a bond‘s price is the current yield on the
bond.
c.
Bond prices and interest rates move in the same direction.
d.
Shorter-term bonds are more sensitive to changes in interest rates than longer-term bonds.
e.
None of the above statements is true.
88. Bond ratings:
a.
have no impact on a bond’s price.
b.
are based upon the bond rating agencies’ assessment of the borrower’s default risk
c.
result in yield spreads between different quality bonds.
d.
Both (b) and (c)
e.
All of the above
89. Yield spreads are quoted in terms of basis points. Which of the following is true for basis points?
a.
10 basis points = 10%
b.
100 basis points = 1%
c.
1 basis point = 1%
d.
100 basis points = 100%
90. The yield curve:
a.
is a graph showing the term structure of interest rates.
b.
generally shows that longer-term bonds offer lower yields than shorter-term bonds.
c.
generally slopes down
d.
Both (a) and (b)
e.
Both (b) and (c)
91. The expectations theory ignores several factors including the idea that:
a.
investors may have a preference for investing in longer-term bonds due to the added risk
they offer over shorter-term bonds.
b.
investors may have a preference for investing in shorter-term bonds due to the added risk
offered by longer-term bonds.
c.
some investors such as pension funds have a desire to match the maturity of their
liabilities.
d.
All of the above
e.
both (b) and (c)
92. Roxy Bonds have 14 years to maturity, with a coupon rate of 8%, paid ANNUALLY; if the
appropriate discount rate is 8% what is the current value of Roxy Bonds?
a.
$1,000
b.
$ 920
c.
$1,080
d.
$1,800
93. Louis Bonds have 14 years to maturity, with a coupon rate of 8%, paid ANNUALLY; if the
appropriate discount rate is 12% what is the current value of Louis Bonds?
a.
$1,000.00
b.
$ 734.87
c.
$ 340.46
d.
$ 350.56
94. Emma Bonds have 14 years to maturity, with a coupon rate of 8%, paid ANNUALLY; if the
appropriate discount rate is 6% what is the current value of Emma Bonds?
a.
$1,060.22
b.
$1,180.22
c.
$1,185.90
d.
$1,080.00
95. Roxy Bonds have 15 years to maturity, with a coupon rate of 4%, paid ANNUALLY; if the bonds sell
for $800, what is the yield to maturity of Roxy Bonds?
a.
4.00%
b.
5.25%
c.
5.92%
d.
6.07%
96. Louis Bonds have 15 years to maturity, with a coupon rate of 4%, paid ANNUALLY; if the bonds sell
for $1100, what is the yield to maturity of Louis Bonds?
a.
3.15%
b.
2.03%
c.
4.00%
d.
4.26%
97. Emma Bonds have 12 years to maturity, with a coupon rate of 9%, paid ANNUALLY; if the bonds
sell for $1050, what is the yield to maturity of Emma Bonds?
a.
8.33%
b.
9.00%
c.
7.08%
d.
6.05%
98. Roxy Bonds have 14 years to maturity, with a coupon rate of 8%, paid ANNUALLY; if the
appropriate discount rate is 8% what is the CURRENT yield of Roxy Bonds?
a.
8.33%
b.
8.00%
c.
11.89%
d.
12.62%
99. Louis Bonds have 14 years to maturity, with a coupon rate of 8%, paid ANNUALLY; if the
appropriate discount rate is 12% what is the CURRENT yield of Louis Bonds?
a.
8.33%
b.
9.00%
c.
10.84%
d.
12.00%
100. Louis Bonds have 14 years to maturity, with a coupon rate of 8%, paid ANNUALLY; if the
appropriate discount rate is 12% what is the CURRENT yield of Louis Bonds?
a.
8.33%
b.
9.00%
c.
10.84%
d.
12.00%
101. Roxy Bonds will mature in 16 years, the coupon rate of the bond is 5% paid SEMIANNUALLY, if the
appropriate discount rate is 7%; what is the value of the bond?
a.
$ 747.07
b.
$ 811.06
c.
$ 809.31
d.
$1,178.74
102. Louis Bonds will mature in 16 years, the coupon rate of the bond is 5% paid SEMIANNUALLY, if the
appropriate discount rate is 4%; what is the value of the bond?
a.
$ 731.89
b.
$1,178.74
c.
$1,116.52
d.
$1,117.34
103. Emma Bonds will mature in 8 years, the coupon rate of the bond is 6% paid SEMIANNUALLY, if the
appropriate discount rate is 4%; what is the value of the bond?
a.
$1,135.78
b.
$1,293.02
c.
$1,073.25
d.
$1,543.11
104. Roxy Bonds will mature in 16 years, the coupon rate of the bond is 5% paid SEMIANNUALLY, if the
bonds currently sell for $1180 what is the bond’s yield to maturity?
a.
3.52%
b.
2.50%
c.
4.62%
d.
5.00%
105. Emma Bonds will mature in 8 years, the coupon rate of the bond is 6% paid SEMIANNUALLY, if
bonds currently sell for $820 what is the bond’s yield to maturity?
a.
9.23%
b.
6.00%
c.
4.61%
d.
3.00%
106. Roxy Bonds will mature in 16 years; the coupon rate of the bond is 5% paid SEMIANNUALLY, if
bonds currently sell for $1180 what is the bond’s CURRENT yield?
a.
1.76%
b.
3.52%
c.
2.12%
d.
4.24%
107. Louis Bonds will mature in 16 years; the coupon rate of the bond is 5% paid SEMIANNUALLY, if the
discount rate is 4% what is the bond’s CURRENT yield?
a.
4.47%
b.
2.23%
c.
4.45%
d.
4.24%
108. Emma Bonds will mature in 8 years; the coupon rate of the bond is 6% paid SEMIANNUALLY, if the
discount rate is 9% what is the bond’s CURRENT yield?
a.
4.47%
b.
4.53%
c.
7.22%
d.
6.00%
109. A zero coupon bond has a yield to maturity of 5%; what is the bond’s taxable capital gain in last year
of the bonds existence?
a.
$ 47.61
b.
$ 1,000.00
c.
$ 0.00
d.
$ 45.26
110. A zero coupon bond has a yield to maturity of 8%; what is the bond’s taxable capital gain in last year
of the bonds existence?
a.
$ 74.07
b.
$ 1,000.00
c.
$ 80.00
d.
$ 920.00
111. Observing the following term structure; a US treasury bond maturing in 1 year has a yield of 3% while
US Treasury bond maturing in 2 years has a yield of 7%; what is the expected 1 year rate, 1 year from
now?
a.
10.16%
b.
11.00%
c.
11.16%
d.
11.23%
112. Observing the following term structure; a US treasury bond maturing in 1 year has a yield of 5% while
US Treasury bond maturing in 2 years has a yield of 6%; what is the expected 1 year rate, 1 year from
now?
a.
7.00%
b.
7.01%
c.
7.30%
d.
5.66%
113. Observing the following term structure; a US treasury bond maturing in 5 years has a yield of 6%
while US Treasury bond maturing in 3 years has a yield of 4%; what is the expected 2 year rate, 3
years from now?
a.
10.00%
b.
9.07%
c.
8.86%
d.
9.00%
114. Observing the following term structure; a US treasury bond maturing in 5 years has a yield of 6%
while US Treasury bond maturing in 3 years has a yield of 8%; what is the expected 2 year rate, 3
years from now?
a.
3.07%
b.
8.07%
c.
2.36%
d.
4.35%