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2012 Review Questions-Bonds (1)

# 2012 Review Questions-Bonds (1)

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Published by Semaus Lui

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Published by: Semaus Lui on Jul 13, 2012
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Review/Exam Questions1. Bond Terminology
1) The coupon value of a bond is the face value of that bond.Answer: FALSE2) A bond is said to mature on the date when the issuer repays its notional value.Answer: TRUE3) Which of the following best illustrates why a bond is a type of loan?A) The issuers of bonds regularly pay interest on the face value of the bond to the buyers of those bonds.B) When a company issues a bond, the buyer of that bond becomes a part owner of the issuingcompany.C) Federal and local governments issue bonds to finance long-term projects.D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, withthe assurance it will be repaid at a date in the future.Answer: D4) How much will the coupon payments be of a 20-year \$500 bond with a 8% coupon rate andquarterly payments?A) \$3.33B) \$10.00C) \$20.00D) \$40.00Answer: BExplanation: B) \$500 × 0.08 / 4 = \$105) How much will the coupon payments be of a 30-year \$10,000 bond with a 4.5% coupon rateand semiannual payments?A) \$30B) \$225C) \$350D) \$450Answer: BExplanation: B) \$10,000 × 0.045 / 2 = \$2256) A corporate bond makes payments of \$9.67 every month for ten years with a final payment of \$2009.67. Which of the following best describes this bond?A) a 10-year bond with a face value of \$2000 and a coupon rate of 4.8% with monthly paymentsB) a 10-year bond with a face value of \$2000 and a coupon rate of 5.8% with monthly paymentsC) a 10-year bond with a face value of \$2009.67 and a coupon rate of 4.8% with monthlypaymentsD) a 10-year bond with a face value of \$2009.67 and a coupon rate of 5.8% with monthly

paymentsAnswer: BExplanation: B) \$9.67 × 12 / 2000 = 5.802%7) An investor holds a Ford bond with a face value of \$5000, a coupon rate of 4%, andsemiannual payments that matures on 01/15/2009. How much will the investor receive on01/15/2009?A) \$200B) \$5000C) \$5100D) \$5200Answer: CExplanation: C) \$5000 + \$5000 × 0.04 /2 = \$51008) Which of the following best shows the timeline for cash flows from a five-year bond with aface value of \$2,000, a coupon rate of 4.2%, and semiannual payments?A) 0 1 2 3 4 5+-----+-----+-----+-----+-----+\$84 \$84 \$84 \$84 \$2,084B) 0 1 2 3 9 10+-----+-----+-----+--- . . . -----+-----+\$17.50\$17.50\$17.50 \$17.50\$2,017.50C) 0 1 2 3 9 10+-----+-----+-----+--- . . . -----+-----+\$48 \$48 \$48 \$48 \$48D) 0 1 2 3 9 10+-----+-----+-----+--- . . . -----+-----+\$42 \$42 \$42 \$42 \$2,042Answer: D9) 0 1 2 3 59 60+-----+-----+-----+--- . . . -----+-----+\$62.50\$62.50\$62.50 \$62.50 \$62.50 +\$5,000A corporation issues a bond that generates the above cash flows. If the periods shown are 3months, which of the following best describes that bond?A) a 15-year bond with a notional value of \$5000 and a coupon rate of 5% paid quarterlyB) a 15-year bond with a notional value of \$5000 and a coupon rate of 1.25% paid annuallyC) a 30-year bond with a notional value of \$5000 and a coupon rate of 3.75% paid semiannuallyD) a 60- year bond with a notional value of \$5000 and a coupon rate of 5% paid quarterly

Answer: A10) A university issues a bond with a face value of \$10,000 and a coupon rate of 5.65% thatmatures on 07/15/2015. The holder of such a bond receives coupon payments of \$282.50. Howfrequently are coupon payments made in this case?A) monthlyB) quarterlyC) semiannuallyD) annuallyAnswer: C11) Which of the following statements is FALSE?A) Bonds are a securities sold by governments and corporations to raise money from investorstoday in exchange for promised future payments.B) By convention the coupon rate is expressed as an effective annual rate.C) Bonds typically make two types of payments to their holders.D) The time remaining until the repayment date is known as the term of the bond.Answer: B12) A bond certificate indicates:A) the amounts and dates of all payments to be made.B) the individual to whom payments will be made.C) the yield to maturity of the bond.D) the price of the bondAnswer: A13) Which of the following is true about the face value of a bond?A) It is the notional amount we use to compute coupon payments.B) It is the amount that is repaid at maturity.C) It is usually denominated in standard increments, such as \$1,000.D) All of the above are true.Answer: D14) How are the cash flows of a coupon bond different from an amortizing loan?Answer: A coupon bond pays interest over the life of the bond and returns the principal at theend of the term. Thus the cash flows are smaller over the life of the bond with a lump-sumpayment at the end. In contrast, an amortizing loan has identical cash flows over its life with apart of the cash flow going toward interest and the balance as return of principal.
2. Zero-Coupon Bonds
1) The only cash payment an investor in a zero-coupon bond receives is the face value of thebond on its maturity date.

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