Chapter 12 – Bond Fundamentals and Valuation
100. Calculate the price of a zero-coupon bond with yield to maturity of 8.75 percent, a face value of $1000, and maturing
in five years.
a.
$1000
b.
$756.43
c.
$675.44
d.
$435.12
e.
$875.14
101. What is the value of a zero-coupon bond with a yield to maturity of 9 percent, a par value of $1,000, and 10 years to
maturity? (Assume semi-annual compounding)
a.
$208.29
b.
$414.64
c.
$422.41
d.
$643.93
e.
$910.00
Exhibit 12.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
XLR Corporation just issued a $1,000 par value bond with a 7 percent yield to maturity, twenty years to maturity, with an
8 percent semi-annual coupon rate.
102. Refer to Exhibit 12.2. What is the price of the XLR Corporate bond?
a.
$901.04
b.
$932.04
c.
$1,102.62
d.
$1,105.94
e.
$1,106.78
103. Refer to Exhibit 12.2. If market interest rates are constant, what will the price of the XLR Corporate bond be in three
years?
a.
$904.29
b.
$1,097.63
c.
$1,098.50
d.
$1,102.85
e.
$1,105.62
104. Refer to Exhibit 12.2. If market interest rates rise to 10 percent, what will the price of the XLR Corporate bond be in
three years?
a.
$832.89
b.
$838.07
c.
$1097.63
d.
$1,102.85
e.
$1,191.43
105. A 9.0 percent coupon bond issued by the State of Iowa 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 30 percent marginal tax bracket?
a.
b.
c.
d.
e.
106. At what point would an investor be indifferent between a GM corporate bond yielding 9.5 percent and a tax-free
municipal bond of equal financial strength if the investor’s marginal tax rate is 25 percent?
a.
b.
c.
d.
e.
107. Calculate the yield to maturity of a zero-coupon bond with a face value of $1000, maturing in 10 years, and selling
Chapter 12 – Bond Fundamentals and Valuation
for a price of $628.72.
a.
4.18 percent
b.
4.75 percent
c.
6.29 percent
d.
8.23 percent
e.
9.54 percent
108. If the holding period is equal to the term to maturity for a corporate bond, then the rate of discount represents the
a.
coupon yield.
b.
effective yield.
c.
yield to call.
d.
yield to maturity.
e.
reinvestment rate.
109. The nominal yield of a bond is the
a.
annual coupon as a percent of the current price.
b.
annual rate earned including the capital gain or loss.
c.
rate earned giving consideration to coupon reinvestment.
d.
coupon rate.
e.
promised yield to maturity.
110. If the coupon payments are NOT reinvested during the life of the issue, then the
a.
promised yield is greater than the realized yield.
b.
promised yield is less than the realized yield.
c.
nominal yield declines.
d.
nominal yield is greater than the promised yield.
e.
current yield equals the yield to maturity.
111. The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.
a.
low, short
b.
low, long
c.
high, short
d.
high, long
e.
zero, very long
112. The best way for an investor to “lock in” to high interest rates would be to purchase a bond that has a ____ coupon
and a ____ term to maturity.
a.
low, short
b.
low, long
Chapter 12 – Bond Fundamentals and Valuation
c.
high, short
d.
high, long
e.
zero, very long
113. The promised yield to maturity calculation assumes that
a.
all coupon interest payments are reinvested at the current market interest rate for the bond.
b.
all coupon interest payments are reinvested at the coupon interest rate for the bond.
c.
all coupon interest payments are reinvested at short-term money market interest rates.
d.
all coupon interest payments are not reinvested.
e.
None of these are correct.
114. If the coupon payments are not reinvested during the life of the issue then the
a.
promised yield is greater than realized yield.
b.
promised yield is less than realized yield.
c.
nominal yield declines.
d.
nominal yield is greater than promised yield.
e.
current yield equals the yield to maturity.
115. Consider a bond portfolio manager who expects interest rates to decline and must choose between the following two
bonds.
Bond A: 10 years to maturity, 5 percent coupon, 5 percent yield to maturity
Bond B: 10 years to maturity, 3 percent coupon, 4 percent yield to maturity
a.
Bond A because it has a higher coupon rate
b.
Bond A because it has a higher yield to maturity
c.
Bond B because it has a lower coupon rate
d.
Bond A or Bond B because the maturities are the same
e.
None of these are correct.
116. ____ measures the expected rate of return of a bond assuming that you sell it prior to its maturity.
a.
Yield to maturity
b.
Current yield
c.
Realized yield
d.
Coupon rate
e.
None of these are correct.
117. 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.
Chapter 12 – Bond Fundamentals and Valuation
b.
equal to par.
c.
equal to par less one year’s interest.
d.
less than par.
e.
5 percent over par.
118. Consider a 12 percent, 15-year bond that pays interest semiannually, and its current price is $675. What is the
promised yield to maturity?
a.
b.
c.
d.
e.
119. Consider a 15 percent, 20-year bond that pays interest annually, and its current price is $850. What is the promised
yield to maturity?
a.
b.
c.
d.
e.
120. Consider a 10 percent, 15-year bond that pays interest annually quarterly, and its current price is $1060. What is the
promised yield to maturity?
a.
b.
c.
d.
e.
121. Consider a zero-coupon bond that has a current price of $436.19 and matures in 10 years. What is its yield to
maturity?
a.
b.
c.
d.
e.
122. What is the current price of a zero-coupon bond with a 6 percent yield to maturity that matures in 15 years?
a.
$4.17
Chapter 12 – Bond Fundamentals and Valuation
b.
$41.27
c.
$417.27
d.
$4,172.00
e.
$41,720.00
123. What is the current price of a zero-coupon bond with a 7 percent yield to maturity that matures in 20 years?
a.
$1,000
b.
$2,582
c.
$25.82
d.
$258.42
e.
$100.00
124. Consider a bond with a 9 percent coupon and a current yield of 8 1/2 percent. What is this bond’s price?
a.
$1058.82
b.
$1009.00
c.
$1085.00
d.
$1062.44
e.
$1077.96
125. Consider a bond with a current yield of 8 percent and a price of $1,250. What is this bond’s coupon?
a.
8.0 percent
b.
10.0 percent
c.
11.0 percent
d.
8.5 percent
e.
9.6 percent
126. Consider a bond with a price of $944.44 and a coupon of 8 1/2 percent. What is the current yield?
a.
9.4 percent
b.
6.8 percent
c.
8.6 percent
d.
9.0 percent
e.
11.0 percent
127. Suppose you have a 12 percent, 20-year bond traded at $850. If it is callable in 5 years at $1,100, what is the bond’s
yield to call? Interest is paid semiannually.
a.
8 percent
b.
9.0 percent
c.
18.0 percent
d.
9.4 percent
e.
16.5 percent
128. Suppose you have a 15 percent, 25-year bond traded at $975. If it is callable in 5 years at $1050, what is the bond’s
yield to call? Interest is paid annually.
a.
15 percent
b.
16.5 percent
c.
7.65 percent
d.
8.52 percent
e.
9.64 percent
129. Suppose you have a 10 percent, 20-year bond traded at $1,120. If it is callable in 5 years at $1,150, what is the bond’s
approximate yield to call? Interest is paid quarterly.
a.
7.78 percent
b.
8.00 percent
c.
9.40 percent
d.
9.36 percent
e.
9.72 percent
130. If the price before yields changed was $950, what is the resulting price?
Chapter 12 – Bond Fundamentals and Valuation
a.
$922.64
b.
$918.66
c.
$1000.00
d.
$968.50
e.
$1012.45
131. If the price before yields changed was $925, what is the resulting price?
a.
$865.22
b.
$918.66
c.
$889.11
d.
$1000.00
e.
$1012.45
132. If the price before yields changed was $975, what is the resulting price?
a.
$937.46
b.
$918.66
c.
$965.55
d.
$898.62
e.
$1012.45
133. Assume that you purchase a three-year, $1,000 par value bond, with an 8 percent coupon and a yield of 10 percent.
After you purchase the bond, one-year interest rates are as follows: year 1 = 10 percent, year 2 = 8 percent, year 3 = 6
percent (these are the reinvestment rates). Calculate the realized horizon yield if you hold the bond to maturity. Interest is
paid annually.
a.
b.
c.
d.
e.
134. Assume that you purchase a 10-year, $1,000 par value bond, with a 12 percent coupon and a yield of 9 percent.
Immediately after you purchase the bond, yields fall to 8 percent and remain at that level to maturity. Calculate the
realized horizon yield, if you hold the bond for five years and then sell. Interest is paid annually.
a.
b.
c.
d.
e.
135. Estimate the percentage price change for a five-year, $1,000 par value bond, with a 6 percent coupon, if the yield
Chapter 12 – Bond Fundamentals and Valuation
rises from 8 percent to 8.5 percent. Interest is paid semiannually.
a.
2.1 percent
b.
−2.1 percent
c.
4.4 percent
d.
−4.4 percent
e.
0 percent
136. A 15-year bond has a $1,000 par value bond, a 4 percent coupon, and a yield to maturity of 3.3 percent. Interest is
paid annually. The bond’s current yield is
a.
3.7 percent.
b.
4.0 percent.
c.
3.3 percent.
d.
7.3 percent.
e.
8.3 percent.
137. A five-year bond has a $1,000 par value bond, a 12 percent coupon, and a yield to maturity of 8 percent. Interest is
paid semiannually. The bond’s price is
a.
$864.65.
b.
$1081.78.
c.
$852.80.
d.
$1162.22.
e.
$1785.35.
138. A 15-year bond, purchased five years ago, has a $1,000 par value bond, a 10 percent coupon, and a yield to maturity
of 12 percent. Interest is paid annually. The bond’s price is
a.
$864.
b.
$887.
c.
$1152.
d.
$1123.
e.
$1253.