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Exam 7: Interest Rates and Bond Valuation

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Question 61

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Which of the following statements is correct concerning the term structure of interest rates? I. Expectations of lower inflation rates in the future tend to lower the slope of the term structure of interest rates. II. The term structure of interest rates includes both an inflation premium and an interest rate risk premium. III. The real rate of return has minimal, if any, affect on the slope of the term structure of interest rates. IV. The term structure of interest rates and the time to maturity are always directly related.

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

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

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Question 62

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A deferred call provision is which one of the following?

A) requirement that a bond issuer pay the current market price, plus accrued interest, should the firm decide to call a bond
B) ability of a bond issuer to delay repaying a bond until after the maturity date should the issuer so opt
C) prohibition placed on an issuer which prevents that issuer from ever redeeming bonds prior to maturity
D) prohibition which prevents bond issuers from redeeming callable bonds prior to a specified date
E) requirement that a bond issuer pay a call premium which is equal to or greater than one year's coupon should that issuer decide to call a bond

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

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Question 63

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The collar of a floating-rate bond refers to the minimum and maximum:

A corporate bond is quoted at a price of 103.16 and carries a 6.50 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?

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 zero coupon bond:

Which of the following relationships apply to a par value bond? I. coupon rate < yield-to-maturity II. current yield = yield-to-maturity III. market price = call price IV. market price = face value

The liquidity premium is compensation to investors for:

A bond that has only one payment, which occurs at maturity, defines which one of the following?

Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.

Which of the following correctly describe U.S. Treasury bonds? I. have a "tick" size of 1/32 II. highly liquid III. quoted in dollars and cents IV. quoted at the dirty price

The taxability risk premium compensates bond holders for which one of the following?

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the:

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?

Bond S is a 4 percent coupon bond. Bond T is a 10 percent coupon bond. Both bonds have 11 years to maturity, make semiannual payments, and have a yield-to-maturity of 7 percent. If interest rates suddenly rise by 2 percent, what will the percentage change in the price of Bond T be?

Collingwood Homes has a bond issue outstanding that pays an 8.5 percent coupon and matures in 18.5 years. The bonds have a par value of $1,000 and a market price of $964.20. Interest is paid semiannually. What is the yield to maturity?

Which one of the following risk premiums compensates for the possibility of nonpayment by the bond issuer?

Which of the following are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ratio of 1.10 or better. II. No debt senior to this issue can be issued. III. The company cannot lease any major assets without approval by the lender. IV. The company must maintain the loan collateral in good working order.

Mary just purchased a bond which pays $60 a year in interest. What is this $60 called?

Real rates are defined as nominal rates that have been adjusted for which of the following?