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The taxability risk premium compensates bond holders 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

F) B) and C)
G) All of the above

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You are trying to compare the present values of two separate streams of cash flows which 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) You cannot compare the present values of these two streams of cash flows.

F) A) and B)
G) A) and D)

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The 7 percent, semi-annual coupon bonds offered by House Renovators are callable in 2 years at $1,054.What is the amount of the call premium on a $1,000 par value bond?


A) $52
B) $54
C) $72
D) $84
E) $89

F) C) and D)
G) A) and B)

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An 8 percent corporate bond that pays interest semi-annually was issued last year.Which two of the following most likely apply to this bond today if the current yield-to-maturity is 7 percent? I.a structure as an interest-only loan II.a current yield that equals the coupon rate III.a yield-to-maturity equal to the coupon rate IV.a market price that differs from the face value


A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) III and IV only

F) A) and D)
G) A) and C)

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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

F) A) and E)
G) B) and E)

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A bond that pays interest annually yielded 7.47 percent last year.The inflation rate for the same period was 4 percent.What was the actual real rate of return on this bond for last year?


A) 2.19 percent
B) 2.25 percent
C) 3.34 percent
D) 3.41 percent
E) 3.49 percent

F) C) and E)
G) A) and B)

Correct Answer

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Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000.The bonds will be repaid in 10 years and will be sold at par.Given this, which one of the following statements is correct?


A) The bonds will become discount bonds if the market rate of interest declines.
B) The bonds will pay 10 interest payments of $60 each.
C) The bonds will sell at a premium if the market rate is 5.5 percent.
D) The bonds will initially sell for $1,030 each.
E) The final payment will be in the amount of $1,060.

F) A) and E)
G) A) and D)

Correct Answer

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Define liquidity risk, default risk, and taxability risk and explain how these risks relate to bonds and bond yields.

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Liquidity risk is the inability to quick...

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Dexter Mills issued 20-year bonds a year ago at a coupon rate of 10.2 percent.The bonds make semiannual payments.The yield-to-maturity on these bonds is 9.2 percent.What is the current bond price?


A) $985.55
B) $991.90
C) $1,042.16
D) $1,089.02
E) $1,098.00

F) C) and D)
G) A) and B)

Correct Answer

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A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56.The bond matures in 22 years.What is the implicit interest, in dollars, for the first year of the bond's life?


A) $14.72
B) $15.50
C) $15.90
D) $16.63
E) $16.89

F) A) and D)
G) A) and C)

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Getty Markets has bonds outstanding that pay a 5 percent semiannual coupon, have a 5.28 percent yield to maturity, and a face value of $1,000.The current rate of inflation is 4.1 percent.What is the real rate of return on these bonds?


A) 0.86 percent
B) 0.90 percent
C) 1.04 percent
D) 1.13 percent
E) 1.19 percent

F) B) and E)
G) A) and E)

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The yield-to-maturity on a bond is the interest rate you earn on your investment if interest rates do not change.If you actually sell the bond before it matures, your realized return is known as the holding period yield.Suppose that today, you buy a 12 percent annual coupon bond for $1,000.The bond has 13 years to maturity.Two years from now, the yield-to-maturity has declined to 11 percent and you decide to sell.What is your holding period yield?


A) 8.84 percent
B) 9.49 percent
C) 12.00 percent
D) 13.01 percent
E) 14.89 percent

F) A) and B)
G) A) and E)

Correct Answer

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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.

F) B) and E)
G) C) and D)

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The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent.What is the amount of each interest payment if the face value of the bonds is $1,000?


A) $41.50
B) $42.25
C) $43.15
D) $85.00
E) $86.29

F) C) and D)
G) A) and E)

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Mary 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, putable, high coupon bond
B) 5-year TIPS
C) 10-year AAA coupon bond
D) 5-year floating rate bond
E) 7- year income bond

F) C) and D)
G) A) and B)

Correct Answer

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A U.S.Treasury bond that is quoted at 100:11 is selling:


A) for 11 percent more than par value.
B) at an 11 percent discount.
C) for 100.11 percent of face value.
D) at par and pays an 11 percent coupon.
E) for 100 and 11/32nds percent of face value.

F) A) and B)
G) C) and D)

Correct Answer

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Which of the following are characteristics of a premium bond? I.coupon rate < yield-to-maturity II.coupon rate > yield-to-maturity III.coupon rate < current yield IV.coupon rate > current yield


A) I only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only

F) B) and E)
G) C) and D)

Correct Answer

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The specified date on which the principal amount of a bond is payable is referred to as which one of the following?


A) coupon date
B) yield date
C) maturity
D) dirty date
E) clean date

F) C) and E)
G) None of the above

Correct Answer

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A 6 percent, annual coupon bond is currently selling at a premium and matures in 7 years.The bond was originally issued 3 years ago at par.Which one of the following statements is accurate in respect to this bond today?


A) The face value of the bond today is greater than it was when the bond was issued.
B) The bond is worth less today than when it was issued.
C) The yield-to-maturity is less than the coupon rate.
D) The coupon rate is greater than the current yield.
E) The yield-to-maturity equals the current yield.

F) B) and D)
G) A) and E)

Correct Answer

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Kaiser Industries has bonds on the market making annual payments, with 14 years to maturity, and selling for $1,382.01.At this price, the bonds yield 7.5 percent.What is the coupon rate?


A) 8.00 percent
B) 8.50 percent
C) 9.00 percent
D) 10.50 percent
E) 12.00 percent

F) A) and D)
G) A) and C)

Correct Answer

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