Chapter 12 – Bond Fundamentals and Valuation
58. Collateralized Mortgage obligations are
a.
mortgage pass-through securities.
b.
mortgage pass-through securities with varying maturities.
c.
mortgage pass-through securities with no default risk.
d.
mortgage pass-through securities with variable coupon rates.
e.
mortgage pass-through securities with zero coupon rates.
59. A bond denominated in U.S. dollars and sold in Japan to Japanese investors is called a
a.
Samurai bond.
b.
Eurobond.
c.
Yankee bond.
d.
Euroyen bond
e.
foreign bond.
60. Collateralized mortgage obligations (CMOs) offset some of the problems associated with traditional mortgage pass-
Chapter 12 – Bond Fundamentals and Valuation
throughs because
a.
b.
c.
d.
e.
61. A bond that only pays a principal payment at maturity date is known as a(n)
a.
blank bond.
b.
maturity bond.
c.
interest free bond.
d.
mini-coupon bond.
e.
zero coupon bond.
62. What was developed in the early 1980s to offset some of the problems with traditional mortgage pass-throughs?
a.
variable rate mortgages
b.
collateralized mortgage obligations (CMOs)
c.
leveraged buyouts (LBOs)
d.
deep discount bonds (DDBs)
e.
high yield bonds.
63. Which of the following statements regarding Collateralized Debt Obligations (CDOs) is FALSE?
a.
CDOs experienced rapid growth since the year 2000.
b.
The assets used to back the CDOs are substantially diverse.
c.
The credit quality within a CDO at the time of issue is diverse.
d.
CDOs have generated significant credit and liquidity problems.
e.
All of these are correct.
64. A U.S. dollar-denominated bond sold in the United States by a Japanese-firm is called a(n)
a.
Yankee bond.
b.
homeland bond.
c.
international bond.
d.
U.S. Domestic bond.
e.
Japanese U.S. Regional bond.
65. When a borrower pledges financial assets as collateral for a bond it is called a(n)
a.
mortgage bond.
b.
equipment trust certificate.
c.
mortgage pass-through security.
d.
collateral trust bond.
e.
collateralized mortgage obligation (CMO).
66. The term structure of interest rates is a static function that relates the
a.
term to call and the yield to maturity.
b.
term to maturity and the yield to maturity.
c.
term to call and the yield to call.
d.
term to maturity and the coupon rate.
e.
term to maturity and the current yield.
67. Which set of conditions will result in a bond with the greatest volatility?
a.
a high coupon and a short maturity
b.
a high coupon and a long maturity
c.
a low coupon and a short maturity
d.
a low coupon and a long maturity
e.
a deferred call feature and a sinking fund
Chapter 12 – Bond Fundamentals and Valuation
68. According to the liquidity preference hypothesis, yield curves generally slope upward because
a.
investors prefer short maturity obligations to long maturity obligations.
b.
investors prefer long maturity obligations to short maturity obligations.
c.
investors prefer less volatile long maturity obligations.
d.
investors prefer more volatile short maturity obligations.
e.
None of these are correct.
69. According to the segmented-market hypothesis, a downward sloping yield curve indicates that
a.
demand for long term bonds has fallen and demand for short term bonds has fallen.
b.
demand for long term bonds has risen and demand for short term bonds has fallen.
c.
demand for long term bonds has fallen and demand for short term bonds has risen.
d.
demand for long term bonds has risen and demand for short term bonds has risen.
e.
None of these are correct.
70. According to the segmented-market hypothesis, a rising yield curve indicates that
a.
demand for long term bonds has fallen and demand for short term bonds has fallen.
Chapter 12 – Bond Fundamentals and Valuation
b.
demand for long term bonds has risen and demand for short term bonds has fallen.
c.
demand for long term bonds has fallen and demand for short term bonds has risen.
d.
demand for long term bonds has risen and demand for short term bonds has risen.
e.
None of these are correct.
71. According to the expectations hypothesis, a rising yield curve indicates that investors expect
a.
future short-term rates to fall.
b.
future short-term rates to rise.
c.
future long-term rates to rise.
d.
future long-term rates to fall.
e.
None of these are correct.
72. Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of
current and future on-year interest rates expected to prevail over the maturity of the issue?
a.
expectations hypothesis
b.
liquidity preference hypothesis
c.
segmented market hypothesis
d.
preferred habitat hypothesis
e.
hedging pressure hypothesis
73. Which of the four major yield spreads defines the difference in yields between pure government agency bonds and
corporate bonds?
a.
segments
b.
sectors
c.
coupons
d.
seasoning
e.
maturity
74. The annual interest paid on a bond relative to its prevailing market price is called its
a.
promised yield.
b.
yield to maturity.
c.
coupon rate.
d.
effective yield.
e.
current yield.
75. The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted at a value
a.
equal to or greater than par plus one year’s interest.
b.
equal to par.
c.
equal to par less one year’s interest.
d.
less than par.
e.
5 percent over par.
76. Which of the following is NOT a major risk premium component for bond investors?
a.
quality differentials
b.
term to maturity
c.
indenture provisions
d.
yield to maturity
e.
exchange rate risk differences
77. There are four major factors accounting for the existence of yield differentials. Which of the following is NOT a
factor?
a.
segments
b.
sectors
c.
indentures
d.
coupons
e.
maturities
78. A 4.75 percent coupon bond issued by the State of Washington sells for $1,000. What coupon rate on a corporate bond
selling at $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is
in the 28 percent marginal tax bracket?
a.
1.1 percent
b.
5.8 percent
c.
6.6 percent
d.
7.3 percent
e.
9.7 percent
79. A 6.5 percent coupon bond issued by the State of California sells for $1,000. What coupon rate on a corporate bond
selling at $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is
in the 26 percent marginal tax bracket?
a.
1.69 percent
b.
11.25 percent
c.
8.78 percent
d.
14.63 percent
e.
25 percent
80. An 8.5 percent coupon bond issued by the State of Ohio sells for $1,000. What coupon rate on a corporate bond
selling at $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is
in the 25 percent marginal tax bracket?
a.
2.13 percent
b.
12.25 percent
c.
11.33 percent
d.
13.53 percent
Chapter 12 – Bond Fundamentals and Valuation
e.
34.71 percent
81. A 7.0 percent coupon bond issued by the State of Tennessee sells for $1,000. What coupon rate on a corporate bond
selling at $1,000 par value would produce the same after-tax return to the investor as the municipal bond if the investor is
in the 29 percent marginal tax bracket?
a.
7.59 percent
b.
12.25 percent
c.
9.86 percent
d.
14.63 percent
e.
30.71 percent
82. At what point would an investor be indifferent between a Drifton corporate bond yielding 12.5 percent and a tax-free
municipal bond of equal financial strength if the investor’s marginal tax rate is 25 percent?
a.
6.05 percent
b.
7.10 percent
c.
8.15 percent
d.
9.38 percent
e.
16.27 percent
83. At what point would an investor be indifferent between a Compco corporate bond yielding 8.5 percent and a tax-free
municipal bond of equal financial strength if the investor’s marginal tax rate is 25 percent?
a.
6.05 percent
b.
7.10 percent
c.
8.15 percent
d.
6.38 percent
e.
2.34 percent
84. At what point would an investor be indifferent between a Bridgford corporate bond yielding 8.0 percent and a tax-free
municipal bond of equal financial strength if the investor’s marginal tax rate is 25 percent?
a.
5.00 percent
b.
7.10 percent
c.
8.00 percent
d.
9.15 percent
e.
6.00 percent
85. You purchase a 10 3/8s February $10,000 par Treasury note at 103:11 and hold it for exactly one year at which time
you sell it. What is your rate of return if your selling price is 101:13?
a.
8.14 percent
b.
8.16 percent
c.
8.22 percent
Chapter 12 – Bond Fundamentals and Valuation
d.
8.32 percent
e.
8.47 percent
86. You purchase a 9 3/4s February $10,000 par Treasury note at 101:11 and hold it for exactly one year at which time
you sell it. What is your rate of return if your selling price is 101:17?
a.
8.14 percent
b.
8.75 percent
c.
9.75 percent
d.
9.81 percent
e.
10.47 percent
87. You purchase an 8 1/2s February $10,000 par Treasury note at 105:16 and hold it for exactly one year at which time
you sell it. What is your rate of return if your selling price is 105:16?
a.
8.00 percent
b.
8.06 percent
c.
8.22 percent
d.
8.50 percent
e.
8.47 percent
88. You purchase an 11 3/8s February $10,000 par Treasury note at 103:11 and hold it for exactly one year at which time
you sell it. What is your rate of return if your selling price is 100:13?
a.
10.14 percent
b.
11.75 percent
c.
8.22 percent
d.
8.32 percent
e.
8.16 percent
89. You purchase a 10 1/4s February $10,000 par Treasury note at 102:15 and hold it for exactly one year at which time
you sell it. What is your rate of return if your selling price is 104:14?
a.
11.92 percent
b.
8.16 percent
c.
8.55 percent
d.
8.61 percent
e.
10.25 percent
Exhibit 12.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Last
Last
EST
Est $ Vol
Company
Ticker
Coupon
Maturity
Price
Yield
Spread
UST
(000’s)
Gen Elec
GE
4.75
9/15/2019
99.544
4.808
62
10
158736
90. Refer to Exhibit 12.1. What annual dollar coupon amount will investors receive?
a.
$4.75
b.
$47.50
c.
$4.808
d.
$48.08
e.
$62
91. Refer to Exhibit 12.1. What price would you pay in dollars to purchase this bond?
a.
$62
b.
$9.954
c.
$48.08
d.
$99.544
e.
$995.44
92. Refer to Exhibit 12.1. What is the estimated yield on Treasury securities?
a.
4.188 percent
b.
5.428 percent
c.
5.371 percent
d.
4.132 percent
e.
4.753 percent
93. Refer to Exhibit 12.1. What is the current yield for this bond?
a.
4.18 percent
b.
5.88 percent
c.
4.77 percent
d.
8.125 percent
e.
4.063 percent
94. Refer to Exhibit 12.1. What is the capital gains/loss yield on this bond?
a.
−0.038 percent
b.
0.456 percent
c.
0.038 percent
d.
−0.456 percent
e.
0 percent
95. How much would you expect to pay for a $10,000 Treasury note quoted at 96:27?
Chapter 12 – Bond Fundamentals and Valuation
a.
$9,627.00
b.
$10,000.00
c.
$968.44
d.
$9,684.38
e.
$962.70
96. How much would you expect to pay for a $10,000 stripped Treasury bond quoted at 101:16?
a.
$10,150.00
b.
$10,000.00
c.
$101.16
d.
$10,160.00
e.
$1,011.60
97. For bonds A and B below find the values of X and Y assuming each is a zero-coupon bond with a $1,000 face value
(semiannual compounding).
Maturity
Yield
Price
Bond
(Years)
(Percent)
($$)
A
X
10
458.10
B
9
Y
212.00
a.
eight years and 4 percent
b.
10 years and 8 percent
c.
12 years and 10 percent
d.
14 years and 12 percent
Chapter 12 – Bond Fundamentals and Valuation
e.
eight years and 18 percent
98. Calculate the yield to maturity of a zero-coupon bond with a face value of $1000, maturing in 10 years and selling for
a price of $529.30.
a.
6.57 percent
b.
8.45 percent
c.
4.16 percent
d.
10.23 percent
e.
12.17 percent
99. Calculate the yield to maturity of a zero-coupon bond with a face value of $1000, maturing in 15 years and selling for
a price of $525.75.
a.
5.62 percent
b.
4.38 percent
c.
8.74 percent
d.
15.26 percent
e.
16.27 percent