Chapter 14 – Bond Prices and Yields
14-1
Chapter 14
Bond Prices and Yields
Multiple Choice Questions
1. The current yield on a bond is equal to ________.
D. the internal rate of return
E. none of the above
Difficulty: Easy
2. If a 7% coupon bond is trading for $975.00, it has a current yield of ____________
percent.
A. 7.00
B. 6.53
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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3. If a 7.25% coupon bond is trading for $982.00, it has a current yield of ____________
percent.
D. 8.53
E. 7.18
Difficulty: Easy
4. If a 6.75% coupon bond is trading for $1016.00, it has a current yield of ____________
percent.
Difficulty: Easy
5. If a 7.75% coupon bond is trading for $1019.00, it has a current yield of ____________
percent.
A. 7.38
B. 6.64
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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6. If a 6% coupon bond is trading for $950.00, it has a current yield of ____________
percent.
A. 6.5
Difficulty: Easy
7. If an 8% coupon bond is trading for $1025.00, it has a current yield of ____________
percent.
D. 7.9
E. 8.1
Difficulty: Easy
8. If a 7.5% coupon bond is trading for $1050.00, it has a current yield of ____________
percent.
A. 7.0
B. 7.4
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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9. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a
coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is
___________.
D. 10.52%
E. none of the above
Difficulty: Moderate
10. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a
coupon rate of 8.25%, and has a yield to maturity of 8.64%. The current yield on this bond is
___________.
A. 8.65%
B. 8.45%
Difficulty: Moderate
11. A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a
coupon rate of 11%, and has a yield to maturity of 12%. The current yield on this bond is
___________.
A. 10.39%
B. 10.43%
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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12. A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a
coupon rate of 8.7%, and has a yield to maturity of 7.9%. The current yield on this bond is
___________.
A. 8.39%
B. 8.43%
Difficulty: Moderate
13. Of the following four investments, ________ is considered the safest.
A. commercial paper
B. corporate bonds
Difficulty: Easy
14. Of the following four investments, ________ is considered the least risky.
D. Treasury bonds
E. commercial paper
Only Treasury issues are insured by the U.S. government; the shorter-term the instrument, the
safer the instrument.
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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15. To earn a high rating from the bond rating agencies, a firm should have
A. a low times interest earned ratio
B. a low debt to equity ratio
Difficulty: Easy
16. A firm with a low rating from the bond rating agencies would have
A. a low times interest earned ratio
B. a low debt to equity ratio
Difficulty: Easy
17. At issue, coupon bonds typically sell ________.
A. above par value
B. below par
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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18. Accrued interest
A. is quoted in the bond price in the financial press.
Difficulty: Moderate
19. The invoice price of a bond that a buyer would pay is equal to
D. the bid price less accrued interest.
E. the bid price.
Difficulty: Easy
20. An 8% coupon U.S. Treasury note pays interest on May 30 and November 30 and is
traded for settlement on August 15. The accrued interest on the $100,000 face value of this
note is _________.
A. $491.80
B. $800.00
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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21. A coupon bond is reported as having an ask price of 108% of the $1,000 par value in the
Wall Street Journal. If the last interest payment was made one months ago and the coupon rate
is 9%, the invoice price of the bond will be ____________.
D. $1,160.25
E. none of the above
Difficulty: Moderate
22. A coupon bond is reported as having an ask price of 113% of the $1,000 par value in the
Wall Street Journal. If the last interest payment was made two months ago and the coupon
rate is 12%, the invoice price of the bond will be ____________.
A. $1,100
B. $1,110
Difficulty: Moderate
23. The bonds of Ford Motor Company have received a rating of “D” by Moody’s. The “D”
rating indicates
A. the bonds are insured
B. the bonds are junk bonds
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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24. The bond market
A. can be quite “thin”.
Difficulty: Easy
25. Ceteris paribus, the price and yield on a bond are
A. positively related.
Difficulty: Easy
26. The ______ is a measure of the average rate of return an investor will earn if the investor
buys the bond now and holds until maturity.
A. current yield
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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27. The _________ gives the number of shares for which each convertible bond can be
exchanged.
D. conversion premium
E. convertible floor
Difficulty: Easy
28. A coupon bond is a bond that _________.
D. always sells at par
E. none of the above
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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29. A ___________ bond is a bond where the bondholder has the right to cash in the bond
before maturity at a specified price after a specific date.
A. callable
B. coupon
Difficulty: Easy
30. Callable bonds
A. are called when interest rates decline appreciably.
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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31. A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years has a
yield of 6.2%. A bond issued by Ford Motor Company due in 5 years has a yield of 7.5%; a
bond issued by Shell Oil due in one year has a yield of 6.5%. The default risk premiums on
the bonds issued by Shell and Ford, respectively, are
A. 1.0% and 1.2%
Difficulty: Moderate
32. A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in 5 years has a
yield of 5.6%. A bond issued by Lucent Technologies due in 5 years has a yield of 8.9%; a
bond issued by Mobil due in one year has a yield of 6.2%. The default risk premiums on the
bonds issued by Mobil and Lucent Technologies, respectively, are:
D. 0.7% and 0.5%
E. none of the above
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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33. A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in 5 years has a
yield of 6.7%. A bond issued by Xerox due in 5 years has a yield of 7.9%; a bond issued by
Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by
Exxon and Xerox, respectively, are
D. 0.7% and 0.5%
E. none of the above
Difficulty: Moderate
34. A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in 5 years has a
yield of 5.06%. A bond issued by Boeing due in 5 years has a yield of 7.63%; a bond issued
by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds
issued by Boeing and Caterpillar, respectively, are
A. 3.33% and 2.10%
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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35. Floating-rate bonds are designed to ___________ while convertible bonds are designed to
__________.
D. maximize the holders’ interest rate risk; give investor the ability to share in the profits of
the issuing company
E. none of the above
Difficulty: Moderate
36. A coupon bond that pays interest annually is selling at par value of $1,000, matures in 5
years, and has a coupon rate of 9%. The yield to maturity on this bond is:
A. 8.0%
Difficulty: Easy
Chapter 14 – Bond Prices and Yields
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37. A coupon bond that pays interest semi-annually is selling at par value of $1,000, matures
in 7 years, and has a coupon rate of 8.6%. The yield to maturity on this bond is:
A. 8.0%
Difficulty: Easy
38. A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years,
and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the
coupon rate is 7%.
A. $712.99
B. $620.92
Difficulty: Moderate
39. A coupon bond that pays interest annually has a par value of $1,000, matures in 7 years,
and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ______ if
the coupon rate is 8.5%.
A. $712.99
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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40. A coupon bond that pays interest annually, has a par value of $1,000, matures in 5 years,
and has a yield to maturity of 10%. The intrinsic value of the bond today will be _________ if
the coupon rate is 12%.
A. $922.77
B. $924.16
Difficulty: Moderate
41. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5
years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be
__________ if the coupon rate is 8%.
D. $1,077.20
E. none of the above
Difficulty: Moderate
42. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 7
years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be
________ if the coupon rate is 9.5%.
E. none of the above
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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43. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5
years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be
________ if the coupon rate is 12%.
A. $922.77
B. $924.16
C. $1,075.80
Difficulty: Moderate
44. A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in 5
years, and is selling today at a $72 discount from par value. The yield to maturity on this bond
is __________.
A. 6.00%
B. 8.33%
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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45. You purchased an annual interest coupon bond one year ago that now has 6 years
remaining until maturity. The coupon rate of interest was 10% and par value was $1,000. At
the time you purchased the bond, the yield to maturity was 8%. The amount you paid for this
bond one year ago was
A. $1,057.50.
B. $1,075.50.
Difficulty: Moderate
46. You purchased an annual interest coupon bond one year ago that had 6 years remaining to
maturity at that time. The coupon interest rate was 10% and the par value was $1,000. At the
time you purchased the bond, the yield to maturity was 8%. If you sold the bond after
receiving the first interest payment and the yield to maturity continued to be 8%, your annual
total rate of return on holding the bond for that year would have been _________.
A. 7.00%
Difficulty: Difficult
Chapter 14 – Bond Prices and Yields
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47. Consider two bonds, A and B. Both bonds presently are selling at their par value of
$1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will
mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%,
____________.
A. both bonds will increase in value, but bond A will increase more than bond B
Difficulty: Moderate
48. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond
matures in 8 years, the bond should sell for a price of _______ today.
A. 422.41
Difficulty: Moderate
49. You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and
a par value of $1,000. What would your rate of return at the end of the year be if you sell the
bond? Assume the yield to maturity on the bond is 11% at the time you sell.
A. 10.00%
Difficulty: Moderate
Chapter 14 – Bond Prices and Yields
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50. A Treasury bill with a par value of $100,000 due one month from now is selling today for
$99,010. The effective annual yield is __________.
A. 12.40%
B. 12.55%
Difficulty: Moderate
51. A Treasury bill with a par value of $100,000 due two months from now is selling today
for $98,039, with an effective annual yield of _________.
A. 12.40%
Difficulty: Moderate
52. A Treasury bill with a par value of $100,000 due three months from now is selling today
for $97,087, with an effective annual yield of _________.
A. 12.40%
Difficulty: Moderate