Question 1

A note is:

Accepted Answer

A)   unsecured debt that is generally payable within the next ten years.
B)   a formal type of loan that is secured by real estate.
C)   long-term debt secured by part, or all, of the assets of the borrower.
D)   debt that is secured by a borrower's accounts receivables.
E)   the written agreement which details the information relative to a bond issue.F) None of the above
G) B) and D)

Question 2

Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity?

Accepted Answer

A)   5.77 percent
B)   5.84 percent
C)   6.00 percent
D)   6.13 percent
E)   6.27 percentF) A) and B)
G) B) and C)

Question 3

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

Accepted Answer

A)   note.
B)   bearer form bond.
C)   debenture.
D)   registered form bond.
E)   call protected bond.F) B) and C)
G) None of the above

Question 4

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Accepted Answer

A)   Interest rate risk premium
B)   Inflation premium
C)   Liquidity premium
D)   Taxability premium
E)   Default risk premiumF) A) and C)
G) B) and C)

Question 5

The Deltona Instrument Company has 9 percent coupon bonds on the market with 6 years left to maturity. The bonds make annual payments. If the bond currently sells for $974.60, what is its YTM?

Accepted Answer

A)   8.82 percent
B)   8.90 percent
C)   8.98 percent
D)   9.58 percent
E)   9.63 percentF) A) and E)
G) A) and B)

Question 6

Which one of the following refers to the relationship between nominal returns, real returns, and inflation?

Accepted Answer

A)   Call premium
B)   Fisher effect
C)   Conversion ratio
D)   Bid-ask spread
E)   Clean-dirty spreadF) C) and D)
G) B) and E)

Question 7

An unexpected decrease in market interest rates will cause a:

Accepted Answer

A)   coupon bond's current yield to increase.
B)   zero coupon bond's price to decrease.
C)   fixed-rate bond's coupon rate to decrease.
D)   zero-coupon bond's current yield to decrease.
E)   coupon bond's yield-to-maturity to decrease.F) C) and E)
G) A) and D)

Question 8

The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value. The bonds mature in 8 years and pay interest semiannually. These bonds have current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent.

Accepted Answer

A)   6.12; 6.32; 6.36
B)   6.12; 6.32; 6.42
C)   6.12; 6.36; 6.42
D)   6.23; 6.32; 6.36
E)   6.23; 6.36; 6.42F) B) and D)
G) A) and E)

Question 9

Which one of the following statements concerning sinking funds is correct?

Accepted Answer

A)   Bond issuers must fund a sinking fund at the time the bonds are issued.
B)   Sinking funds must include at least one "balloon payment".
C)   Sinking funds must be funded annually, starting on the issue date.
D)   Sinking funds may be used to purchase bonds in the open market.
E)   Sinking funds can only be used to call bonds.F) None of the above
G) A) and B)

Question 10

Explain what a mortgage backed security (MBS) is and how it functions. Also, explain why these securities were such a problem during 2008.

Accepted Answer

MBSs are bonds that are issued by a trus...

Question 11

One year ago, you purchased a 7.5 percent annual coupon bond for a clean price of $980. The bond now has 7 years remaining until maturity. Today, the yield to maturity on this bond is 6.87 percent. How does today's clean price of this bond compare to your purchase price?

Accepted Answer

A)   4.24 percent lower
B)   4.70 percent lower
C)   5.48 percent lower
D)   5.52 percent higher
E)   6.61 percent higherF) A) and C)
G) A) and B)

Question 12

Which of the following combinations is assured to decrease the interest rate sensitivity of a bond?

Accepted Answer

A)   Increase in both the time to maturity and the coupon rate
B)   Increase in the time to maturity and a decrease in the coupon rate
C)   Decrease in both the time to maturity and the coupon rate
D)   Decrease in the time to maturity and an increase in the coupon rate
E)   A decrease in the time to maturity and an increase in the face valueF) All of the above
G) None of the above

Question 13

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

Accepted Answer

A)   OTC
B)   Death
C)   CAT
D)   PETS
E)   TIPSF) A) and B)
G) A) and C)

Question 14

Explain the difference between a bid price and an asked price and also explain why the prices are different.

Accepted Answer

A bid price is the price a bond dealer i...

Question 15

You purchase a bond with a coupon rate of 8 percent, semiannual coupons, and a clean price of $1,011. If the next coupon payment is due in five months, what is the invoice price?

Accepted Answer

A)   $1,017.67
B)   $1,024.33
C)   $1,031.00
D)   $1,037.67
E)   $1,044.33F) A) and C)
G) B) and E)

Question 16

A $100,000 Treasury bond has a bid price quote of 115:21 and an asked quote of 115:22. In dollars, what is the value of the bid-ask spread on this bond?

Accepted Answer

A)   $0.31
B)   $3.12
C)   $31.25
D)   $312.50
E)   $3,125.00F) C) and D)
G) None of the above

Question 17

Which one of the following terms refers to a bond's rate of return that is required by the market place?

Accepted Answer

A)   Coupon rate
B)   Yield to maturity
C)   Dirty yield
D)   Call yield
E)   Discount rateF) A) and D)
G) A) and C)

Question 18

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

Accepted Answer

A)   had to be recently issued.
B)   is selling at a premium.
C)   has reached its maturity date.
D)   is priced at par.
E)   is selling at a discount.F) A) and E)
G) C) and D)

Question 19

A "floater" bond frequently has a:

Accepted Answer

A)   flexible deferred call period.
B)   fixed yield-to-maturity but a flexible coupon payment.
C)   a government guarantee.
D)   fixed-dollar obligation.
E)   a put provision.F) B) and E)
G) A) and B)

Question 20

Which one of the following statements is correct?

Accepted Answer

A)   Bond markets have less daily trading volume than equity markets.
B)   There are less bond issues than there are equity issues.
C)   Municipal bond prices are highly transparent.
D)   Bond markets are dealer based.
E)   Most bond trades occur on the NYSE.F) B) and E)
G) A) and D)

Exam 6: Interest Rates and Bond Valuation

A note is:

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Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

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A "floater" bond frequently has a:

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Which one of the following statements concerning sinking funds is correct?

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The Deltona Instrument Company has 9 percent coupon bonds on the market with 6 years left to maturity. The bonds make annual payments. If the bond currently sells for $974.60, what is its YTM?

Correct AnswerverifiedShow Answer

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

Correct AnswerverifiedShow Answer

One year ago, you purchased a 7.5 percent annual coupon bond for a clean price of $980. The bond now has 7 years remaining until maturity. Today, the yield to maturity on this bond is 6.87 percent. How does today's clean price of this bond compare to your purchase price?

Correct AnswerverifiedShow Answer

You purchase a bond with a coupon rate of 8 percent, semiannual coupons, and a clean price of $1,011. If the next coupon payment is due in five months, what is the invoice price?

Correct AnswerverifiedShow Answer

Which one of the following terms refers to a bond's rate of return that is required by the market place?

Correct AnswerverifiedShow Answer

Which one of the following types of bonds should an investor purchase if he or she is primarily concerned about ensuring that bond ownership will increase his or her purchasing power?

Correct AnswerverifiedShow Answer

Which of the following combinations is assured to decrease the interest rate sensitivity of a bond?

Correct AnswerverifiedShow Answer

Explain what a mortgage backed security (MBS) is and how it functions. Also, explain why these securities were such a problem during 2008.

Correct AnswerverifiedMBSs are bonds that are issued by a trus...View AnswerShow Answer

Explain the difference between a bid price and an asked price and also explain why the prices are different.

Correct AnswerverifiedA bid price is the price a bond dealer i...View AnswerShow Answer

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

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The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value. The bonds mature in 8 years and pay interest semiannually. These bonds have current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent.

Correct AnswerverifiedShow Answer

An unexpected decrease in market interest rates will cause a:

Correct AnswerverifiedShow Answer

A $100,000 Treasury bond has a bid price quote of 115:21 and an asked quote of 115:22. In dollars, what is the value of the bid-ask spread on this bond?

Correct AnswerverifiedShow Answer

Which one of the following refers to the relationship between nominal returns, real returns, and inflation?

Correct AnswerverifiedShow Answer

Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity?

Correct AnswerverifiedShow Answer

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MBSs are bonds that are issued by a trus...
View Answer

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A bid price is the price a bond dealer i...
View Answer

Correct Answer
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The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value. The bonds mature in 8 years and pay interest semiannually. These bonds have current yield of ___ percent, a yield to maturity of _ percent, and an effective annual yield of ___ percent.

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