50) Samantha owns a reverse convertible bond. At maturity, the principal amount will be repaid
in:
A) shares of stock.
B) cash while the interest is paid in shares of stock.
C) the form of a newly issued bond.
D) either shares of stock or a newly issued bond.
E) either cash or shares of stock.
51) Nadine is a retired widow who is financially dependent upon the interest income produced
by her bond portfolio. Which one of the following bonds is the least suitable for her to own?
A) 6-year, high-coupon, put bond
B) 5-year TIPS
C) 10-year AAA coupon bond
D) 5-year floating rate bond
E) 7-year income bond
52) Al is retired and his sole source of income is his bond portfolio. Although he has sufficient
principal to live on, he only wants to spend the interest income and thus is concerned about the
purchasing power of that income. Which one of the following bonds should best ease Al’s
concerns?
A) 6-year coupon bonds
B) 5-year TIPS
C) 20-year coupon bonds
D) 5-year municipal bonds
E) 7-year income bonds
53) Kurt has researched T-Tek and believes the firm is poised to vastly increase in value. He has
decided to purchase T-Tek bonds as he needs a steady stream of income. However, he still
wishes that he could share in the firm’s success along with the shareholders. Which one of the
following bond features will help him fulfill his wish?
A) Put provision
B) Positive covenant
C) Warrant
D) Crossover rating
E) Call provision
54) A bond that has only one payment, which occurs at maturity, defines which one of these
types of bonds?
A) Debenture
B) Callable
C) Floating-rate
D) Junk
E) Zero coupon
55) A highly illiquid bond that pays no interest but might entitle its holder to rental income from
an asset is most apt to be a:
A) NoNo bond.
B) put bond.
C) contingent callable bond.
D) structured note.
E) sukuk.
56) Which one of the following is the price at which a dealer will sell a bond?
A) Call price
B) Asked price
C) Bid price
D) Bid–ask spread
E) Par value
57) If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent,
which one of the following prices will you receive?
A) Call price
B) Par value
C) Bid price
D) Asked price
E) Bid–ask spread
58) The difference between the price that a dealer is willing to pay and the price at which he or
she will sell is called the:
A) equilibrium.
B) premium.
C) discount.
D) call price.
E) spread.
59) A bond is quoted at a price of $1,011. This price is referred to as the:
A) call price.
B) face value.
C) clean price.
D) dirty price.
E) maturity price.
60) Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its
initial 20 years left until maturity. This price is referred to as the:
A) quoted price.
B) spread price.
C) clean price.
D) dirty price.
E) call price.
61) U. S. Treasury bonds:
A) are highly illiquid.
B) are quoted as a percentage of par.
C) are quoted at the dirty price.
D) pay interest that is federally tax-exempt.
E) must be held until maturity.
62) A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on
February 1 and August 1. Assume today is October 1. What will be the difference, if any,
between this bond’s clean and dirty prices today?
A) No difference
B) One months’ interest
C) Two months’ interest
D) Four months’ interest
E) Five months’ interest
63) Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest
on January 1 and July 1. Which one of the following prices represents your total cost of
purchasing this bond today?
A) Clean price
B) Dirty price
C) Asked price
D) Quoted price
E) Bid price
64) Which one of the following rates represents the change, if any, in your purchasing power as a
result of owning a bond?
A) Risk-free rate
B) Realized rate
C) Nominal rate
D) Real rate
E) Current rate
65) Which one of the following statements is correct?
A) The risk-free rate represents the change in purchasing power.
B) Any return greater than the inflation rate represents the risk premium.
C) Historical real rates of return must be positive.
D) Nominal rates exceed real rates by the amount of the risk-free rate.
E) The real rate must be less than the nominal rate given a positive rate of inflation.
66) The Fisher effect primarily emphasizes the effects of ________ on an investor’s rate of
return.
A) default
B) market movements
C) interest rate changes
D) inflation
E) the time to maturity
67) You are trying to compare the present values of two separate streams of cash flows that have
equivalent risks. One stream is expressed in nominal values and the other stream is expressed in
real values. You decide to discount the nominal cash flows using a nominal annual rate of 8
percent. What rate should you use to discount the real cash flows?
A) 8 percent
B) EAR of 8 percent compounded monthly
C) Comparable risk-free rate
D) Comparable real rate
E) Nominal rate minus the risk-free rate
68) Real rates are defined as nominal rates that have been adjusted for which of the following?
A) Inflation
B) Default risk
C) Accrued interest
D) Interest rate risk
E) Both inflation and interest rate risk
69) Interest rates that include an inflation premium are referred to as:
A) annual percentage rates.
B) stripped rates.
C) effective annual rates.
D) real rates.
E) nominal rates.
70) The Fisher effect is defined as the relationship between which of the following variables?
A) Default risk premium, inflation risk premium, and real rates
B) Nominal rates, real rates, and interest rate risk premium
C) Interest rate risk premium, real rates, and default risk premium
D) Real rates, inflation rates, and nominal rates
E) Real rates, interest rate risk premium, and nominal rates
71) The pure time value of money is known as the:
A) liquidity effect.
B) Fisher effect.
C) term structure of interest rates.
D) inflation factor.
E) interest rate factor.
72) Which one of the following premiums is compensation for the possibility that a bond issuer
may not pay a bond’s interest or principal payments as expected?
A) Default risk
B) Taxability
C) Liquidity
D) Inflation
E) Interest rate risk
73) The interest rate risk premium is the:
A) additional compensation paid to investors to offset rising prices.
B) compensation investors demand for accepting interest rate risk.
C) difference between the yield to maturity and the current yield.
D) difference between the market interest rate and the coupon rate.
E) difference between the coupon rate and the current yield.
74) A Treasury yield curve plots Treasury interest rates relative to:
A) market rates.
B) comparable corporate bond rates.
C) the risk-free rate.
D) inflation rates.
E) time to maturity.
75) Which one of the following risk premiums compensates for the inability to easily resell a
bond prior to maturity?
A) Default risk
B) Taxability
C) Liquidity
D) Inflation
E) Interest rate risk
76) The taxability risk premium compensates bondholders for which one of the following?
A) Yield decreases in response to market changes
B) Lack of coupon payments
C) Possibility of default
D) A bond’s unfavorable tax status
E) Decrease in a municipality’s credit rating
77) Which bond would you generally expect to have the highest yield?
A) Risk-free Treasury bond
B) Nontaxable, highly liquid bond
C) Long-term, high-quality, tax-free bond
D) Short-term, inflation-adjusted bond
E) Long-term, taxable junk bond
78) Which one of the following statements is false concerning the term structure of interest
rates?
A) Expectations of lower inflation rates in the future tend to lower the slope of the term structure
of interest rates.
B) The term structure of interest rates includes both an inflation premium and an interest rate risk
premium.
C) The term structure of interest rates and the time to maturity are always directly related.
D) The real rate of return has minimal, if any, effect on the slope of the term structure of interest
rates.
E) The interest rate risk premium increases as the time to maturity increases.
79) The yields on a corporate bond differ from those on a comparable Treasury security
primarily because of:
A) interest rate risk and taxes.
B) taxes and default risk.
C) default and interest rate risks.
D) liquidity and inflation rate risks.
E) default, inflation, and interest rate risks.
80) The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight
years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to
maturity?
A) 6.97 percent
B) 6.92 percent
C) 6.88 percent
D) 7.22 percent
E) 7.43 percent
81) You own a bond that pays $64 in interest annually. The face value is $1,000 and the current
market price is $1,021.61. The bond matures in 11 years. What is the yield to maturity?
A) 6.12 percent
B) 6.22 percent
C) 6.46 percent
D) 6.71 percent
E) 5.80 percent
82) New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The
bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually.
What is the yield to maturity?
A) 6.36 percent
B) 6.42 percent
C) 5.61 percent
D) 5.74 percent
E) 5.18 percent
83) Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to
maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if
the face value is $1,000?
A) $949.70
B) $929.42
C) $936.48
D) $902.60
E) $913.48
84) Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The
bonds pay interest semiannually. What is the market price per bond if the face value is $1,000
and the yield to maturity is 7.2 percent?
A) $1,199.80
B) $999.85
C) $903.42
D) $1,091.00
E) $1,007.52
85) Luxury Properties offers bonds with a coupon rate of 8.8 percent paid semiannually. The
yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market
price of this bond if the face value is $1,000?
A) $850.34
B) $896.67
C) $841.20
D) $846.18
E) $863.30
86) Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price
of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid
annually. How many years is it until these bonds mature?
A) 17.84 years
B) 14.19 years
C) 17.41 years
D) 16.16 years
E) 18.32 years
87) World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market
price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many
years is it until these bonds mature?
A) 12.26 years
B) 12.53 years
C) 18.49 years
D) 24.37 years
E) 25.05 years
88) A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of
$1,000. What is the percentage change in the price of this bond if the market yield to maturity
rises to 5.7 percent from the current rate of 5.5 percent?
A) −1.79 percent
B) −1.38 percent
C) −1.64 percent
D) 1.79 percent