Chap 007

Chapter 07 - Interest Rates and Bond Valuation
Chapter 07
Interest Rates and Bond Valuation

Multiple Choice Questions

1. Mary just purchased a bond which pays $0 a year in interest. !hat is this $0 called"
#. coupon
B. $ace %alue
C. discount
&. call pre'iu'
(. yield

). Bert owns a bond that will pay hi' $7* each year in interest plus a $1+000 principal
pay'ent at 'aturity. !hat is the $1+000 called"
#. coupon
B. $ace %alue
C. discount
&. yield
(. dirty price

,. # bond-s coupon rate is e.ual to the annual interest di%ided by which one o$ the $ollowin/"
#. call price
B. current price
C. $ace %alue
&. clean price
(. dirty price

0. 1he speci$ied date on which the principal a'ount o$ a bond is payable is re$erred to as
which one o$ the $ollowin/"
#. coupon date
B. yield date
C. 'aturity
&. dirty date
(. clean date

7-1
*. Currently+ the bond 'ar2et re.uires a return o$ 11. percent on the 10-year bonds issued by
!inston Industries. 1he 11. percent is re$erred to as which one o$ the $ollowin/"
#. coupon rate
B. $ace rate
C. call rate
&. yield to 'aturity
(. interest rate

. 1he current yield is de$ined as the annual interest on a bond di%ided by which one o$ the
$ollowin/"
#. coupon
B. $ace %alue
C. 'ar2et price
&. call price
(. dirty price

7. #n indenture is3
#. another na'e $or a bond-s coupon.
B. the written record o$ all the holders o$ a bond issue.
C. a bond that is past its 'aturity date but has yet to be repaid.
&. a bond that is secured by the in%entory held by the bond-s issuer.
(. the le/al a/ree'ent between the bond issuer and the bondholders.

4. #tlas (ntertain'ent has 1*-year bonds outstandin/. 1he interest pay'ents on these bonds
are sent directly to each o$ the indi%idual bondholders. 1hese direct pay'ents are a clear
indication that the bonds can accurately be de$ined as bein/ issued3
#. at par.
B. in re/istered $or'.
C. in street $or'.
&. as debentures.
(. as callable.

7-)
5. # bond that is payable to who'e%er has physical possession o$ the bond is said to be in3
#. new-issue condition.
B. re/istered $or'.
C. bearer $or'.
&. debenture status.
(. collateral status.

10. 1he 6eeward Co'pany just issued 1*-year+ 4 percent+ unsecured bonds at par. 1hese
bonds $it the de$inition o$ which one o$ the $ollowin/ ter's"
#. note
B. discounted
C. 7ero-coupon
&. callable
(. debenture

11. !hich o$ the $ollowin/ de$ines a note"
I. secured
II. unsecured
III. 'aturity less than 10 years
IV. 'aturity in e8cess o$ 10 years
#. III only
B. I and III only
C. I and IV only
&. II and III only
(. II and IV only

1). # sin2in/ $und is 'ana/ed by a trustee $or which one o$ the $ollowin/ purposes"
#. payin/ interest pay'ents
B. early bond rede'ption
C. con%ertin/ bonds into e.uity securities
&. payin/ pre$erred di%idends
(. reducin/ coupon rates

7-,
1,. # bond that can be paid o$$ early at the issuer-s discretion is re$erred to as bein/ which one
o$ the $ollowin/"
#. 7ero coupon
B. callable
C. senior
&. collaterali7ed
(. unsecured

10. # $1+000 $ace %alue bond can be redee'ed early at the issuer-s discretion $or $1+0,0+ plus
any accrued interest. 1he additional $,0 is called which one o$ the $ollowin/"
#. dirty price
B. rede'ption %alue
C. call pre'iu'
&. ori/inal-issue discount
(. rede'ption discount

1*. # de$erred call pro%ision is which one o$ the $ollowin/"
#. re.uire'ent that a bond issuer pay the current 'ar2et price+ plus accrued interest+ should
the $ir' decide to call a bond
B. ability o$ a bond issuer to delay repayin/ a bond until a$ter the 'aturity date should the
issuer so opt
C. prohibition placed on an issuer which pre%ents that issuer $ro' e%er redee'in/ bonds prior
to 'aturity
&. prohibition which pre%ents bond issuers $ro' redee'in/ callable bonds prior to a speci$ied
date
(. re.uire'ent that a bond issuer pay a call pre'iu' which is e.ual to or /reater than one
year-s coupon should that issuer decide to call a bond

1. # call-protected bond is a bond that3
#. is /uaranteed to be called.
B. can ne%er be called.
C. is currently bein/ called.
&. is callable at any ti'e.
(. cannot be called durin/ a certain period o$ ti'e.

7-0
17. 1he ite's included in an indenture that li'it certain actions o$ the issuer in order to
protect bondholder-s interests are re$erred to as the3
#. trustee relationships.
B. bylaws.
C. le/al bounds.
&. 9plain %anilla9 conditions.
(. protecti%e co%enants.

14. # bond that has only one pay'ent+ which occurs at 'aturity+ de$ines which one o$ the
$ollowin/"
#. debenture
B. callable
C. $loatin/-rate
&. jun2
(. 7ero coupon

15. !hich one o$ the $ollowin/ is the price a dealer will pay to purchase a bond"
#. call price
B. as2ed price
C. bid price
&. bid-as2 spread
(. par %alue

)0. :ou want to buy a bond $ro' a dealer. !hich one o$ the $ollowin/ prices will you pay"
#. call price
B. auction price
C. bid price
&. as2ed price
(. bid-as2 spread

7-*
)1. 1he di$$erence between the price that a dealer is willin/ to pay and the price at which he
or she will sell is called the3
#. e.uilibriu'.
B. pre'iu'.
C. discount.
&. call price.
(. spread.

)). # bond is .uoted at a price o$ $545. 1his price is re$erred to as which one o$ the
$ollowin/"
#. call price
B. $ace %alue
C. clean price
&. dirty price
(. wholesale price

),. ;ete paid $1+0,) as his total cost o$ purchasin/ a bond. 1his price is re$erred to as the3
#. .uoted price.
B. spread price.
C. clean price.
&. dirty price.
(. call price.

)0. Real rates are de$ined as no'inal rates that ha%e been adjusted $or which o$ the
$ollowin/"
#. in$lation
B. de$ault ris2
C. accrued interest
&. interest rate ris2
(. both in$lation and interest rate ris2

7-
)*. Interest rates that include an in$lation pre'iu' are re$erred to as3
#. annual percenta/e rates.
B. stripped rates.
C. e$$ecti%e annual rates.
&. real rates.
(. no'inal rates.

). 1he <isher e$$ect is de$ined as the relationship between which o$ the $ollowin/ %ariables"
#. de$ault ris2 pre'iu'+ in$lation ris2 pre'iu'+ and real rates
B. no'inal rates+ real rates+ and interest rate ris2 pre'iu'
C. interest rate ris2 pre'iu'+ real rates+ and de$ault ris2 pre'iu'
&. real rates+ in$lation rates+ and no'inal rates
(. real rates+ interest rate ris2 pre'iu'+ and no'inal rates

)7. 1he pure ti'e %alue o$ 'oney is 2nown as the3
#. li.uidity e$$ect.
B. <isher e$$ect.
C. ter' structure o$ interest rates.
&. in$lation $actor.
(. interest rate $actor.

)4. !hich one o$ the $ollowin/ pre'iu's is co'pensation $or e8pected $uture in$lation"
#. de$ault ris2
B. ta8ability
C. li.uidity
&. in$lation
(. interest rate ris2

)5. 1he interest rate ris2 pre'iu' is the3
#. additional co'pensation paid to in%estors to o$$set risin/ prices.
B. co'pensation in%estors de'and $or acceptin/ interest rate ris2.
C. di$$erence between the yield to 'aturity and the current yield.
&. di$$erence between the 'ar2et interest rate and the coupon rate.
(. di$$erence between the coupon rate and the current yield.

7-7
,0. # 1reasury yield cur%e plots 1reasury interest rates relati%e to which one o$ the
$ollowin/"
#. 'ar2et rates
B. co'parable corporate bond rates
C. the ris2-$ree rate
&. in$lation
(. 'aturity

,1. !hich one o$ the $ollowin/ ris2 pre'iu's co'pensates $or the possibility o$ nonpay'ent
by the bond issuer"
#. de$ault ris2
B. ta8ability
C. li.uidity
&. in$lation

,). 1he ta8ability ris2 pre'iu' co'pensates bond holders $or which one o$ the $ollowin/"
#. yield decreases in response to 'ar2et chan/es
B. lac2 o$ coupon pay'ents
C. possibility o$ de$ault
&. a bond-s un$a%orable ta8 status
(. decrease in a 'unicipality-s credit ratin/

,,. 1he li.uidity pre'iu' is co'pensation to in%estors $or3
#. purchasin/ a bond in the secondary 'ar2et.
B. the lac2 o$ an acti%e 'ar2et wherein a bond can be sold $or its actual %alue.
C. ac.uirin/ a bond with an un$a%orable ta8 status.
&. redee'in/ a bond prior to 'aturity.
(. purchasin/ a bond that has de$aulted on its coupon pay'ents.

7-4
,0. #n 4 percent corporate bond that pays interest se'i-annually was issued last year. !hich
two o$ the $ollowin/ 'ost li2ely apply to this bond today i$ the current yield-to-'aturity is 7
percent"
I. a structure as an interest-only loan
II. a current yield that e.uals the coupon rate
III. a yield-to-'aturity e.ual to the coupon rate
IV. a 'ar2et price that di$$ers $ro' the $ace %alue
#. I and III only
B. I and IV only
C. II and III only
&. II and IV only
(. III and IV only

,*. # bond has a 'ar2et price that e8ceeds its $ace %alue. !hich o$ the $ollowin/ $eatures
currently apply to this bond"
I. discounted price
II. pre'iu' price
III. yield-to-'aturity that e8ceeds the coupon rate
IV. yield-to-'aturity that is less than the coupon rate
#. III only
B. I and III only
C. I and IV only
&. II and III only
(. II and IV only

,. #ll else constant+ a bond will sell at ===== when the coupon rate is ===== the yield to
'aturity.
#. a pre'iu'> less than
B. a pre'iu'> e.ual to
C. a discount> less than
&. a discount> hi/her than
(. par> less than

7-5
,7. 1he !althers Co'pany has a se'i-annual coupon bond outstandin/. #n increase in the
'ar2et rate o$ interest will ha%e which one o$ the $ollowin/ e$$ects on this bond"
#. increase the coupon rate
B. decrease the coupon rate
C. increase the 'ar2et price
&. decrease the 'ar2et price
(. increase the ti'e period

,4. !hich o$ the $ollowin/ are characteristics o$ a pre'iu' bond"
I. coupon rate ? yield-to-'aturity
II. coupon rate @ yield-to-'aturity
III. coupon rate ? current yield
IV. coupon rate @ current yield
#. I only
B. I and III only
C. I and IV only
&. II and III only
(. II and IV only

,5. !hich o$ the $ollowin/ relationships apply to a par %alue bond"
II. current yield A yield-to-'aturity
III. 'ar2et price A call price
IV. 'ar2et price A $ace %alue
#. I and II only
B. I and III only
C. II and IV only
&. I+ II+ and III only
(. II+ III+ and IV only

00. !hich one o$ the $ollowin/ relationships is stated correctly"
#. 1he coupon rate e8ceeds the current yield when a bond sells at a discount.
B. 1he call price 'ust e.ual the par %alue.
C. #n increase in 'ar2et rates increases the 'ar2et price o$ a bond.
&. &ecreasin/ the ti'e to 'aturity increases the price o$ a discount bond+ all else constant.
(. Increasin/ the coupon rate decreases the current yield+ all else constant.

7-10
01. Breen Roo$ Inns is preparin/ a bond o$$erin/ with a percent+ se'iannual coupon and a
$ace %alue o$ $1+000. 1he bonds will be repaid in 10 years and will be sold at par. Bi%en this+
which one o$ the $ollowin/ state'ents is correct"
#. 1he bonds will beco'e discount bonds i$ the 'ar2et rate o$ interest declines.
B. 1he bonds will pay 10 interest pay'ents o$ $0 each.
C. 1he bonds will sell at a pre'iu' i$ the 'ar2et rate is *.* percent.
&. 1he bonds will initially sell $or $1+0,0 each.
(. 1he $inal pay'ent will be in the a'ount o$ $1+00.

0). # newly issued bond has a 7 percent coupon with se'iannual interest pay'ents. 1he
bonds are currently priced at par %alue. 1he e$$ecti%e annual rate pro%ided by these bonds
'ust be3
#. ,.* percent.
B. /reater than ,.* percent but less than 7 percent.
C. 7 percent.
&. /reater than 7 percent.
(. #nswer cannot be deter'ined $ro' the in$or'ation pro%ided.

0,. !hich o$ the $ollowin/ increase the price sensiti%ity o$ a bond to chan/es in interest rates"
I. increase in ti'e to 'aturity
II. decrease in ti'e to 'aturity
III. increase in coupon rate
IV. decrease in coupon rate
#. II only
B. I and III only
C. I and IV only
&. II and III only
(. II and IV only

00. !hich one o$ the $ollowin/ bonds is the least sensiti%e to interest rate ris2"
#. ,-year> 0 percent coupon
B. ,-year> percent coupon
C. *-year> percent coupon
&. 7-year> percent coupon
(. 7-year> 0 percent coupon

7-11
0*. #s a bond-s ti'e to 'aturity increases+ the bond-s sensiti%ity to interest rate ris23
#. increases at an increasin/ rate.
B. increases at a decreasin/ rate.
C. increases at a constant rate.
&. decreases at an increasin/ rate.
(. decreases at a decreasin/ rate.

0. :ou own a bond that has a percent annual coupon and 'atures * years $ro' now. :ou
purchased this 10-year bond at par %alue when it was ori/inally issued. !hich one o$ the
$ollowin/ state'ents applies to this bond i$ the rele%ant 'ar2et interest rate is now *.4
percent"
#. 1he current yield-to-'aturity is /reater than percent.
B. 1he current yield is percent.
C. 1he ne8t interest pay'ent will be $,0.
&. 1he bond is currently %alued at one-hal$ o$ its issue price.
(. :ou will reali7e a capital /ain on the bond i$ you sell it today.

07. :ou e8pect interest rates to decline in the near $uture e%en thou/h the bond 'ar2et is not
indicatin/ any si/n o$ this chan/e. !hich one o$ the $ollowin/ bonds should you purchase
now to 'a8i'i7e your /ains i$ the rate decline does occur"
#. short-ter'> low coupon
B. short-ter'> hi/h coupon
C. lon/-ter'> 7ero coupon
&. lon/-ter'> low coupon
(. lon/-ter'> hi/h coupon

04. # percent+ annual coupon bond is currently sellin/ at a pre'iu' and 'atures in 7 years.
1he bond was ori/inally issued , years a/o at par. !hich one o$ the $ollowin/ state'ents is
accurate in respect to this bond today"
#. 1he $ace %alue o$ the bond today is /reater than it was when the bond was issued.
B. 1he bond is worth less today than when it was issued.
C. 1he yield-to-'aturity is less than the coupon rate.
&. 1he coupon rate is /reater than the current yield.
(. 1he yield-to-'aturity e.uals the current yield.

7-1)
05. !hich o$ the $ollowin/ state'ents concernin/ bonds are correct"
I. Bonds pro%ide ta8 bene$its to issuers.
II. 1he ris2 o$ a $ir' $inancially $ailin/ increases when the $ir' issues bonds.
III. Most lon/-ter' bond issues are re$erred to as un$unded debt.
IV. #ll bonds are treated e.ually in a ban2ruptcy proceedin/.
#. II and III only
B. I and II only
C. III and IV only
&. II and IV only
(. I+ II+ and III only

*0. 1e8as <oods has a percent bond issue outstandin/ that pays $,0 in interest e%ery March
and Cepte'ber. 1he bonds are in%est'ent /rade and sell at par. 1he bonds are callable at a
price e.ual to the present %alue o$ all $uture interest and principal pay'ents discounted at a
rate e.ual to the co'parable 1reasury rate plus 0.*0 percent. !hich o$ the $ollowin/ correctly
describe the $eatures o$ this bond"
I. bond ratin/ o$ B
II. 9'a2e whole9 call price
III. $1+000 $ace %alue
IV. o$$er price o$ $1+000
#. I and III only
B. III and IV only
C. I+ III+ and IV only
&. II+ III+ and IV only
(. I+ II+ III+ and IV

*1. 6ast year+ 6e8in/ton Do'es issued $1 'illion in unsecured+ non-callable debt. 1his debt
pays an annual interest pay'ent o$ $** and 'atures years $ro' now. 1he $ace %alue is
$1+000 and the 'ar2et price is $1+0)0. !hich one o$ these ter's correctly describes a $eature
o$ this debt"
#. se'i-annual coupon
B. discount bond
C. note
&. trust deed
(. collaterali7ed

7-1,
*). Callable bonds /enerally3
#. /rant the bondholder the option to call the bond anyti'e a$ter the de$er'ent period.
B. are callable at par as soon as the call-protection period ends.
C. are called when 'ar2et interest rates increase.
&. are called within the $irst three years a$ter issuance.
(. ha%e a sin2in/ $und pro%ision.

*,. !hich o$ the $ollowin/ are ne/ati%e co%enants that 'i/ht be $ound in a bond indenture"
I. 1he co'pany shall 'aintain a current ratio o$ 1.10 or better.
II. Eo debt senior to this issue can be issued.
III. 1he co'pany cannot lease any 'ajor assets without appro%al by the lender.
IV. 1he co'pany 'ust 'aintain the loan collateral in /ood wor2in/ order.
#. I and II only
B. II and III only
C. III and IV only

*0. ;rotecti%e co%enants3
#. apply to short-ter' debt issues but not to lon/-ter' debt issues.
B. only apply to pri%ately issued bonds.
C. are a $eature $ound only in /o%ern'ent-issued bond indentures.
&. only apply to bonds that ha%e a de$erred call pro%ision.
(. are pri'arily desi/ned to protect bondholders.

**. !hich one o$ the $ollowin/ state'ents concernin/ bond ratin/s is correct"
#. In%est'ent /rade bonds are rated BB or hi/her by Ctandard F ;oor-s.
B. Bond ratin/s assess both interest rate ris2 and de$ault ris2.
C. Cplit rated bonds are called crosso%er bonds.
&. 1he hi/hest ratin/ issued by Moody-s is ###.
(. # 9$allen an/el9 is a ter' applied to all 9jun29 bonds.

7-10
*. # 9$allen an/el9 is a bond that has 'o%ed $ro'3
#. bein/ publicly traded to bein/ pri%ately traded.
B. bein/ a lon/-ter' obli/ation to bein/ a short-ter' obli/ation.
C. ha%in/ a yield-to-'aturity in e8cess o$ the coupon rate to ha%in/ a yield-to- 'aturity that is
less than the coupon rate.
&. senior status to junior status $or li.uidation purposes.
(. in%est'ent /rade to speculati%e /rade.

*7. Bonds issued by the G.C. /o%ern'ent3
#. are considered to be $ree o$ interest rate ris2.
B. /enerally ha%e hi/her coupons than those issued by an indi%idual state.
C. are considered to be $ree o$ de$ault ris2.
&. pay interest that is e8e'pt $ro' $ederal inco'e ta8es.
(. are called 9'unis9.

*4. 1reasury bonds are3
#. issued by any /o%ern'ental a/ency in the G.C.
B. issued only on the $irst day o$ each $iscal year by the G.C. &epart'ent o$ 1reasury.
C. bonds that o$$er the best ta8 bene$its o$ any bonds currently a%ailable.
&. /enerally issued as se'i-annual coupon bonds.
(. totally ris2-$ree.

*5. Municipal bonds3
#. are totally ris2-$ree.
B. /enerally ha%e hi/her coupon rates than corporate bonds.
C. pay interest that is $ederally ta8-$ree.
&. are rarely callable.
(. are $ree o$ de$ault-ris2.

7-1*
0. 1he brea2-e%en ta8 rate between a ta8able corporate bond yieldin/ 7 percent and a
co'parable nonta8able 'unicipal bond yieldin/ * percent can be e8pressed as3
#. 0.0*HI1 - t
J
K A 0.07.
B. 0.0* - I1 - t
J
K A 0.07.
C. 0.07 L I1 - t
J
K A 0.0*.
&. 0.0* I1 - t
J
K A 0.07.
(. 0.0* I1 L t
J
K A 0.07.

1. # 7ero coupon bond3
#. is sold at a lar/e pre'iu'.
B. pays interest that is ta8 deductible to the issuer when paid.
C. can only be issued by the G.C. 1reasury.
&. has 'ore interest rate ris2 than a co'parable coupon bond.
(. pro%ides no ta8able inco'e to the bondholder until the bond 'atures.

). !hich one o$ the $ollowin/ ris2s would a $loatin/-rate bond tend to ha%e less o$ as
co'pared to a $i8ed-rate coupon bond"
#. real rate ris2
B. interest rate ris2
C. de$ault ris2
&. li.uidity ris2
(. ta8ability ris2

,. 1he collar o$ a $loatin/-rate bond re$ers to the 'ini'u' and 'a8i'u'3
#. call periods.
B. 'aturity dates.
C. 'ar2et prices.
&. coupon rates.
(. yields to 'aturity.

7-1
0. 6ast year+ you purchased a 91I;C9 at par. Cince that ti'e+ both 'ar2et interest rates and
the in$lation rate ha%e increased by 0.)* percent. :our bond has 'ost li2ely done which one
o$ the $ollowin/ since last year"
#. decreased in %alue due to the chan/e in in$lation rates
B. e8perienced an increase in its bond ratin/
C. 'aintained a $i8ed real rate o$ return
&. increased in %alue in response to the chan/e in 'ar2et rates
(. increased in %alue due to a decrease in ti'e to 'aturity

*. Recently+ you disco%ered a putable inco'e bond that is con%ertible. I$ you purchase this
bond+ you will ha%e the ri/ht to do which o$ the $ollowin/"
I. $orce the issuer to repurchase the bond prior to 'aturity
II. choose when you wish to recei%e interest pay'ents
III. con%ert the bond into a 1I;C
IV. con%ert the bond into e.uity shares
#. I and III only
B. I and IV only
C. II and III only
&. III and IV only
(. I+ II+ and IV only

. 9Cat9 bonds are pri'arily desi/ned to help3
#. 'unicipalities sur%i%e econo'ic recessions.
B. corporations respond to o%erseas co'petition.
C. the $ederal /o%ern'ent cope with hu/e de$icits.
&. corporations reco%er $ro' in%oluntary reor/ani7ations.
(. insurance co'panies $und e8cessi%e clai's.

7. Mary is a retired widow who is $inancially dependent upon the interest inco'e produced
by her bond port$olio. !hich one o$ the $ollowin/ bonds is the least suitable $or her to own"
#. -year+ putable+ hi/h coupon bond
B. *-year 1I;C
C. 10-year ### coupon bond
&. *-year $loatin/ rate bond
(. 7- year inco'e bond

7-17
4. #l is retired and enjoys his daily li$e. Dis one concern is that his bonds pro%ide a steady
strea' o$ inco'e that will continue to allow hi' to ha%e the 'oney he desires to continue his
acti%e li$estyle without lowerin/ his present standard o$ li%in/. #lthou/h he has su$$icient
principal to li%e on+ he only wants to spend the interest inco'e pro%ided by his holdin/s and
thus is concerned about the purchasin/ power o$ that inco'e. !hich one o$ the $ollowin/
bonds should best ease #l-s concerns"
B. *-year 1I;C
&. *-year 'unicipal bond

5. ;hil has researched 16M 1echnolo/ies and belie%es the $ir' is poised to %astly increase in
%alue. De wants to in%est in this co'pany. ;hil has decided to purchase 16M 1echnolo/ies
bonds so that he can ha%e a steady strea' o$ interest inco'e. Dowe%er+ he still wishes that he
could share in the $ir'-s success alon/ with 16M-s shareholders. !hich one o$ the $ollowin/
bond $eatures will help ;hil $ul$ill his wish"
#. put pro%ision
B. positi%e co%enant
C. warrant
&. crosso%er ratin/
(. call pro%ision

70. # G.C. 1reasury bond that is .uoted at 100311 is sellin/3
#. $or 11 percent 'ore than par %alue.
B. at an 11 percent discount.
C. $or 100.11 percent o$ $ace %alue.
&. at par and pays an 11 percent coupon.
(. $or 100 and 11H,)nds percent o$ $ace %alue.

7-14
71. !hich o$ the $ollowin/ correctly describe G.C. 1reasury bonds"
I. ha%e a 9tic29 si7e o$ 1H,)
II. hi/hly li.uid
III. .uoted in dollars and cents
IV. .uoted at the dirty price
#. I and II only
B. I and IV only
C. II and III only
&. II and IV only

7). # -year+ $1+000 $ace %alue bond issued by 1aylor 1ools pays interest se'iannually on
<ebruary 1 and #u/ust 1. #ssu'e today is Mctober 1. !hat will the di$$erence+ i$ any+ be
between this bond-s clean and dirty prices today"
#. no di$$erence
B. one 'onth-s interest
C. two 'onth-s interest
&. $our 'onth-s interest
(. $i%e 'onth-s interest

7,. 1oday+ Nune 1*+ you want to buy a bond with a .uoted price o$ 54.0. 1he bond pays
interest on Nanuary 1 and Nuly 1. !hich one o$ the $ollowin/ prices represents your total cost
o$ purchasin/ this bond today"
#. clean price
B. dirty price
C. as2ed price
&. .uoted price
(. bid price

70. !hich one o$ the $ollowin/ rates represents the chan/e+ i$ any+ in your purchasin/ power
as a result o$ ownin/ a bond"
#. ris2-$ree rate
B. reali7ed rate
C. no'inal rate
&. real rate
(. current rate

7-15
7*. !hich one o$ the $ollowin/ state'ents is correct"
#. 1he ris2-$ree rate represents the chan/e in purchasin/ power.
B. #ny return /reater than the in$lation rate represents the ris2 pre'iu'.
C. Distorical real rates o$ return 'ust be positi%e.
&. Eo'inal rates e8ceed real rates by the a'ount o$ the ris2-$ree rate.
(. 1he real rate 'ust be less than the no'inal rate /i%en a positi%e rate o$ in$lation.

7. 1he <isher ($$ect pri'arily e'phasi7es the e$$ects o$ ===== on an in%estor-s rate o$
return.
#. de$ault
B. 'ar2et
C. interest rate
&. in$lation
(. 'aturity

77. :ou are tryin/ to co'pare the present %alues o$ two separate strea's o$ cash $lows which
ha%e e.ui%alent ris2s. Mne strea' is e8pressed in no'inal %alues and the other strea' is
e8pressed in real %alues. :ou decide to discount the no'inal cash $lows usin/ a no'inal
annual rate o$ 4 percent. !hat rate should you use to discount the real cash $lows"
#. 4 percent
B. (#R o$ 4 percent co'pounded 'onthly
C. co'parable ris2-$ree rate
&. co'parable real rate
(. :ou cannot co'pare the present %alues o$ these two strea's o$ cash $lows.

7-)0
74. !hich o$ the $ollowin/ state'ents is correct concernin/ the ter' structure o$ interest
rates"
I. (8pectations o$ lower in$lation rates in the $uture tend to lower the slope o$ the ter'
structure o$ interest rates.
II. 1he ter' structure o$ interest rates includes both an in$lation pre'iu' and an interest rate
ris2 pre'iu'.
III. 1he real rate o$ return has 'ini'al+ i$ any+ a$$ect on the slope o$ the ter' structure o$
interest rates.
IV. 1he ter' structure o$ interest rates and the ti'e to 'aturity are always directly related.
#. I and II only
B. II and IV only
C. I+ II+ and III only

75. !hich two o$ the $ollowin/ $actors cause the yields on a corporate bond to di$$er $ro'
those on a co'parable 1reasury security"
I. in$lation ris2
II. interest rate ris2
III. ta8ability
IV. de$ault ris2
#. I and II only
B. III and IV only
C. I+ II+ and IV only

40. 1he bonds issued by Ctainless 1ubs bear a percent coupon+ payable se'iannually. 1he
bonds 'ature in 11 years and ha%e a $1+000 $ace %alue. Currently+ the bonds sell $or $545.
!hat is the yield to 'aturity"
#. *.47 percent
B. *.5) percent
C. .04 percent
&. .10 percent
(. .)0 percent

7-)1
41. Breenbrier Industrial ;roducts- bonds ha%e a 7.0 percent coupon and pay interest
annually. 1he $ace %alue is $1+000 and the current 'ar2et price is $1+0).*0 per bond. 1he
bonds 'ature in 1 years. !hat is the yield to 'aturity"
#. .50 percent
B. 7.)) percent
C. 7.0 percent
&. 7.71 percent
(. 7.40 percent

4). Collin/wood Do'es has a bond issue outstandin/ that pays an 4.* percent coupon and
'atures in 14.* years. 1he bonds ha%e a par %alue o$ $1+000 and a 'ar2et price o$ $50.)0.
Interest is paid se'iannually. !hat is the yield to 'aturity"
#. 4., percent
B. 4.0) percent
C. 4.1 percent
&. 4.70 percent
(. 4.50 percent

4,. Mil !ell Cupply o$$ers 7.* percent coupon bonds with se'iannual pay'ents and a yield to
'aturity o$ 7.4 percent. 1he bonds 'ature in years. !hat is the 'ar2et price per bond i$
the $ace %alue is $1+000"
#. $545.70
B. $551.07
C. $55.04
&. $1+00).0
(. $1+01,.04

40. Roadside Mar2ets has a .7* percent coupon bond outstandin/ that 'atures in 10.* years.
1he bond pays interest se'iannually. !hat is the 'ar2et price per bond i$ the $ace %alue is
$1+000 and the yield to 'aturity is .5 percent"
#. $555.40
B. $555.4*
C. $1+00,.0)
&. $1+000.07
(. $1+007.*)

7-))
4*. Brand #d%enture ;roperties o$$ers a 5.* percent coupon bond with annual pay'ents. 1he
yield to 'aturity is 11.) percent and the 'aturity date is 11 years $ro' today. !hat is the
'ar2et price o$ this bond i$ the $ace %alue is $1+000"
#. $45*.0,
B. $45.7
C. $501.)0
&. $50.14
(. $5*,.,0

4. Redesi/ned Co'puters has *.)* percent coupon bonds outstandin/ with a current 'ar2et
price o$ $*0.15. 1he yield to 'aturity is 1.)4 percent and the $ace %alue is $1+000. Interest
is paid se'iannually. Dow 'any years is it until these bonds 'ature"
#. .0 years
B. 7.04 years
C. 1).01 years
&. 10.1 years
(. )4.,) years

47. Blobal Co''unications has a 7 percent+ se'iannual coupon bond outstandin/ with a
current 'ar2et price o$ $1+0),.0. 1he bond has a par %alue o$ $1+000 and a yield to 'aturity
o$ .7) percent. Dow 'any years is it until this bond 'atures"
#. 1).) years
B. 1).*, years
C. 14.05 years
&. )0.,7 years
(. )*.0* years

44. :ou are purchasin/ a )*-year+ 7ero-coupon bond. 1he yield to 'aturity is 4.4 percent and
the $ace %alue is $1+000. !hat is the current 'ar2et price"
#. $10.7
B. $104.14
C. $115.*)
&. $1)1.*0
(. $1)4.07

7-),
45. 1oday+ you want to sell a $1+000 $ace %alue 7ero coupon bond you currently own. 1he
bond 'atures in 0.* years. Dow 'uch will you recei%e $or your bond i$ the 'ar2et yield to
'aturity is currently *.,, percent" I/nore any accrued interest.
#. $5.0
B. $54.05
C. $701.04
&. $7*.10
(. $745.))

50. 1he 7ero coupon bonds o$ &F6 Mo%ers ha%e a 'ar2et price o$ $,15.)0+ a $ace %alue o$
$1+000+ and a yield to 'aturity o$ 5.17 percent. Dow 'any years is it until these bonds
'ature"
#. 11.5) years
B. 1).)4 years
C. 1).7, years
&. 1,.01 years
(. 1,.07 years

51. # 1-year+ 0.* percent coupon bond pays interest annually. 1he bond has a $ace %alue o$
$1+000. !hat is the percenta/e chan/e in the price o$ this bond i$ the 'ar2et yield to 'aturity
rises to *.7 percent $ro' the current rate o$ *.* percent"
#. ).10 percent decrease
B. 1.57 percent decrease
C. 0.)1 percent increase
&. 1.57 percent increase
(. ).10 percent increase

5). 1he Corner Brocer has a 7-year+ percent annual coupon bond outstandin/ with a $1+000
par %alue. 1he bond has a yield to 'aturity o$ *.* percent. !hich one o$ the $ollowin/
state'ents is correct i$ the 'ar2et yield suddenly increases to .* percent"
#. 1he bond price will increase by $*7.10.
B. 1he bond price will increase by *.)5 percent.
C. 1he bond price will decrease by $*,.).
&. 1he bond price will decrease by *.0, percent.
(. 1he bond price will decrease by *., percent.

7-)0
5,. Blac2well bonds ha%e a $ace %alue o$ $1+000 and are currently .uoted at 54.0. 1he bonds
ha%e a * percent coupon rate. !hat is the current yield on these bonds"
#. 0.7 percent
B. 0.74 percent
C. *.04 percent
&. *.,, percent
(. *.*0 percent

50. 1he outstandin/ bonds o$ 1he Ri%er <ront <erry carry a .* percent coupon. 1he bonds
ha%e a $ace %alue o$ $1+000 and are currently .uoted at 101.. !hat is the current yield on
these bonds"
#. 1.0 percent
B. ).,7 percent
C. .00 percent
&. .05 percent
(. .44 percent

5*. 1he 7 percent+ se'i-annual coupon bonds o$$ered by Douse Reno%ators are callable in )
years at $1+0*0. !hat is the a'ount o$ the call pre'iu' on a $1+000 par %alue bond"
#. $*)
B. $*0
C. $7)
&. $40
(. $45

5. # corporate bond was .uoted yesterday at 10).1 while today-s .uote is 10).15. !hat is
the chan/e in the %alue o$ a bond that has a $ace %alue o$ $+000"
#. $0.,0
B. $1.40
C. $,.00
&. $14.00
(. $140.00

7-)*
57. # 10-year+ 0.* percent+ se'iannual coupon bond issued by 1yler Rentals has a $1+000 $ace
%alue. 1he bond is currently .uoted at 54.7. !hat is the clean price o$ this bond i$ the ne8t
interest pay'ent will occur ) 'onths $ro' today"
#. $547.00
B. $550.*0
C. $1+00).00
&. $1+011.)*
(. $1+0)).*0

54. # 1reasury bond is .uoted at a price o$ 10*31*. !hat is the 'ar2et price o$ this bond i$ the
$ace %alue is $*+000"
#. $*+00*.1*
B. $*+10*.1*
C. $*+)*7.*0
&. $*+)7,.00
(. $*+*1*.00

55. # 1reasury bond is .uoted at a price o$ 101310 with a current yield o$ 7.), percent. !hat
is the coupon rate"
#. 7.)0 percent
B. 7.)4 percent
C. 7.,0 percent
&. 7.,0 percent
(. 7.,5 percent

100. # corporate bond is .uoted at a price o$ 10,.1 and carries a .*0 percent coupon. 1he
bond pays interest se'iannually. !hat is the current yield on one o$ these bonds"
#. .)0 percent
B. .,0 percent
C. ., percent
&. .) percent
(. . percent

7-)
101. # 1reasury bond is .uoted at a price o$ 103), with a ,.*0 percent coupon. 1he bond
pays interest se'iannually. !hat is the current yield on one o$ these bonds"
#. ,.0 percent
B. ,.15 percent
C. ,.)4 percent
&. ,.,, percent
(. ,.,4 percent

10). # 1reasury bond is .uoted as 55311 as2ed and 55305 bid. !hat is the bid-as2 spread in
dollars on a $*+000 $ace %alue bond"
#. $0.0,
B. $0.,
C. $1.00
&. $,.1,
(. $.)*

10,. 1he se'iannual+ 4-year bonds o$ #lto Music are sellin/ at par and ha%e an e$$ecti%e
annual yield o$ 4.)4* percent. !hat is the a'ount o$ each interest pay'ent i$ the $ace %alue
o$ the bonds is $1+000"
#. $01.*0
B. $0).)*
C. $0,.1*
&. $4*.00
(. $4.)5

100. # bond that pays interest annually yielded 7.07 percent last year. 1he in$lation rate $or
the sa'e period was .10 percent. !hat was the actual real rate o$ return on this bond $or last
year"
#. 1.15 percent
B. 1.)* percent
C. 1.)5 percent
&. 1., percent
(. 1.01 percent

7-)7
10*. Betty Mar2ets has bonds outstandin/ that pay a * percent se'iannual coupon+ ha%e a
*.)4 percent yield to 'aturity+ and a $ace %alue o$ $1+000. 1he current rate o$ in$lation is 0.1
percent. !hat is the real rate o$ return on these bonds"
#. 0.4 percent
B. 0.50 percent
C. 1.00 percent
&. 1.1, percent
(. 1.15 percent

10. 1he outstandin/ bonds o$ !inter 1i'e ;roducts pro%ide a real rate o$ return o$ ,.0,
percent. 1he current rate o$ in$lation is 0.4 percent. !hat is the actual no'inal rate o$ return
on these bonds"
#. 7.*4 percent
B. 7.,, percent
C. 7.71 percent
&. 7.7 percent
(. 7.4* percent

107. 1he yield to 'aturity on a bond is currently 4.0 percent. 1he real rate o$ return is ,.))
percent. !hat is the rate o$ in$lation"
#. *.04 percent
B. *.0 percent
C. .)0 percent
&. .*, percent
(. .71 percent

104. # 7ero coupon bond with a $ace %alue o$ $1+000 is issued with an initial price o$ $)1).*.
1he bond 'atures in )* years. !hat is the i'plicit interest+ in dollars+ $or the $irst year o$ the
bond-s li$e"
#. $1).7)
B. $1,.*4
C. $1,.50
&. $1*.,
(. $1*.45

7-)4
105. Eorthern !arehouses wants to raise $11.0 'illion to e8pand its business. 1o acco'plish
this+ it plans to sell 00-year+ $1+000 $ace %alue+ 7ero-coupon bonds. 1he bonds will be priced
to yield 4.7* percent. !hat is the 'ini'u' nu'ber o$ bonds it 'ust sell to raise the $11.0
'illion it needs"
#. )10+011
B. ),5+400
C. )*0+507
&. ,)+0)5
(. ,*0+004

110. :ou ha%e won a contest and will recei%e $)+*00 a year in real ter's $or the ne8t , years.
(ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent occurrin/ one
year $ro' today. 1he rele%ant no'inal discount rate is ., percent and the in$lation rate is 0.*
percent. !hat are your winnin/s worth today"
#. $7+)05
B. $7+,7
C. $7+001
&. $7+*00
(. $7+4,4

111. :ou purchased an in%est'ent which will pay you $4+000+ in real dollars+ a year $or the
ne8t three years. (ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent
occurrin/ one year $ro' today. 1he no'inal discount rate is 7.* percent and the in$lation rate
is ).5 percent. !hat is the present %alue o$ these pay'ents"
#. $)1+7)0
B. $))+000
C. $))+*11
&. $),+00
(. $),+*)5

Essay Questions

7-)5
11). &e$ine li.uidity ris2+ de$ault ris2+ and ta8ability ris2 and e8plain how these ris2s relate to
bonds and bond yields.

11,. In$lation has re'ained low $or the past three years but you ha%e co'e to the conclusion
that trend is endin/ and in$lation will increase si/ni$icantly o%er the ne8t 14 'onths. #ssu'e
you ha%e reached this conclusion prior to other in%estors reachin/ the sa'e conclusion. !hat
adjust'ents should you 'a2e to your bond port$olio in li/ht o$ your conclusions"

110. (8plain the conditions that would need to e8ist $or the 1reasury yield cur%e to be
downward slopin/.

11*. &escribe the relationships that e8ist between the coupon rate+ the yield to 'aturity+ and
the current yield $or both a discount bond and a pre'iu' bond.

7-,0


11. Cyl%an 1rees has a 7 percent coupon bond on the 'ar2et with ten years le$t to 'aturity.
1he bond 'a2es annual pay'ents and currently sells $or $41.)0. !hat is the yield-to-
'aturity"
#. 4.*0 percent
B. 4.4 percent
C. 4.5) percent
&. 5.14 percent
(. 5.)7 percent

117. Oaiser Industries has bonds on the 'ar2et 'a2in/ annual pay'ents+ with 10 years to
'aturity+ and sellin/ $or $1+,4).01. #t this price+ the bonds yield 7.* percent. !hat is the
coupon rate"
#. 4.00 percent
B. 4.*0 percent
C. 5.00 percent
&. 10.*0 percent
(. 1).00 percent

114. &e8ter Mills issued )0-year bonds a year a/o at a coupon rate o$ 11.0 percent. 1he bonds
'a2e se'iannual pay'ents. 1he yield-to-'aturity on these bonds is 5.) percent. !hat is the
current bond price"
#. $54*.**
B. $551.50
C. $1+15).1
&. $1+15*.40
(. $1+154.00

7-,1
115. Coo 6ee I'ports issued 17-year bonds ) years a/o at a coupon rate o$ 10., percent. 1he
bonds 'a2e se'iannual pay'ents. 1hese bonds currently sell $or 10) percent o$ par %alue.
!hat is the yield-to-'aturity"
#. 5.54 percent
B. 10.00 percent
C. 10.1, percent
&. 10.)7 percent
(. 10.0) percent

1)0. Bryceton+ Inc. has bonds on the 'ar2et with 1, years to 'aturity+ a yield-to-'aturity o$
5.) percent+ and a current price o$ $45*.05. 1he bonds 'a2e se'iannual pay'ents. !hat is
the coupon rate"
#. 7.40 percent
B. 4.00 percent
C. 4.)* percent
&. 4.00 percent
(. 4.* percent

1)1. Cuppose the real rate is 5.* percent and the in$lation rate is 1.4 percent. !hat rate would
you e8pect to see on a 1reasury bill"
#. 5.*0 percent
B. 11.,0 percent
C. 11.07 percent
&. 11.* percent
(. 11.0 percent

1)). #n in%est'ent o$$ers a 10.* percent total return o%er the co'in/ year. Ca' Bernan2e
thin2s the total real return on this in%est'ent will be only 0.* percent. !hat does Ca' belie%e
the in$lation rate will be $or the ne8t year"
#. *.0 percent
B. *.7 percent
C. *.70 percent
&. .00 percent
(. .)1 percent

7-,)
1),. Bond C is a 0 percent coupon bond. Bond 1 is a 10 percent coupon bond. Both bonds
ha%e 11 years to 'aturity+ 'a2e se'iannual pay'ents+ and ha%e a yield-to-'aturity o$ 7
percent. I$ interest rates suddenly rise by ) percent+ what will the percenta/e chan/e in the
price o$ Bond 1 be"
#. -1*.1 percent
B. -10.47 percent
C. -1,.* percent
&. -1).5) percent
(. -1).7 percent

1)0. 1echnical Cales+ Inc. has . percent coupon bonds on the 'ar2et with 5 years le$t to
'aturity. 1he bonds 'a2e se'iannual pay'ents and currently sell $or 44.75 percent o$ par.
!hat is the e$$ecti%e annual yield"
#. 4.,0 percent
B. 4.00 percent
C. 4.*) percent
&. 4.*4 percent
(. 4.0 percent

1)*. Bonner Metals wants to issue new 14-year bonds $or so'e 'uch-needed e8pansion
projects. 1he co'pany currently has 11 percent bonds on the 'ar2et that sell $or $1+0*5.*1+
'a2e se'iannual pay'ents+ and 'ature in 14 years. !hat should the coupon rate be on the
new bonds i$ the $ir' wants to sell the' at par"
#. *.7* percent
B. .), percent
C. .01 percent
&. .0 percent
(. .75 percent

1). :ou purchase a bond with an in%oice price o$ $1+00. 1he bond has a coupon rate o$ 5.0
percent+ and there are , 'onths to the ne8t se'iannual coupon date. !hat is the clean price o$
this bond"
#. $1+0,.*0
B. $1+0*).17
C. $1+00.00
&. $1+07.4,
(. $1+04,.*0

7-,,
1)7. Cuppose the $ollowin/ bond .uote $or the Beta Co'pany appears in the $inancial pa/e o$
today-s newspaper. #ssu'e the bond has a $ace %alue o$ $1+000 and the current date is #pril
1*+ )005. !hat is the yield to 'aturity on this bond"

#. .0 percent
B. 4.5 percent
C. 10.), percent
&. 1).07 percent
(. 1,.)7 percent

1)4. :ou want to ha%e $1.00 'illion in real dollars in an account when you retire in 0 years.
1he no'inal return on your in%est'ent is 4 percent and the in$lation rate is ,.* percent. !hat
is the real a'ount you 'ust deposit each year to achie%e your /oal"
#. $+7.7
B. $+474.05
C. $7+0,,.0)
&. $7+*1*.05
(. $7+700.1)

1)5. 1he yield-to-'aturity on a bond is the interest rate you earn on your in%est'ent i$
interest rates do not chan/e. I$ you actually sell the bond be$ore it 'atures+ your reali7ed
return is 2nown as the holdin/ period yield. Cuppose that today+ you buy a 1) percent annual
coupon bond $or $1+000. 1he bond has 1, years to 'aturity. 1wo years $ro' now+ the yield-
to-'aturity has declined to 11 percent and you decide to sell. !hat is your holdin/ period
yield"
#. 4.40 percent
B. 5.05 percent
C. 1).00 percent
&. 1,.01 percent
(. 10.45 percent

7-,0
Chapter 07 Interest Rates and Bond Valuation #nswer Oey


1. Mary just purchased a bond which pays $0 a year in interest. !hat is this $0 called"
A. coupon
B. $ace %alue
C. discount
&. call pre'iu'
(. yield
Re$er to section 7.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#$
Section: "%$
&o'ic: Cou'on

). Bert owns a bond that will pay hi' $7* each year in interest plus a $1+000 principal
pay'ent at 'aturity. !hat is the $1+000 called"
#. coupon
B. $ace %alue
C. discount
&. yield
(. dirty price

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: (ace !alue

7-,*
,. # bond-s coupon rate is e.ual to the annual interest di%ided by which one o$ the $ollowin/"
#. call price
B. current price
C. $ace %alue
&. clean price
(. dirty price

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: Cou'on rate

0. 1he speci$ied date on which the principal a'ount o$ a bond is payable is re$erred to as
which one o$ the $ollowin/"
#. coupon date
B. yield date
C. 'aturity
&. dirty date
(. clean date

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: )aturity

7-,
*. Currently+ the bond 'ar2et re.uires a return o$ 11. percent on the 10-year bonds issued by
!inston Industries. 1he 11. percent is re$erred to as which one o$ the $ollowin/"
#. coupon rate
B. $ace rate
C. call rate
D. yield to 'aturity
(. interest rate

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: *ield to maturity

. 1he current yield is de$ined as the annual interest on a bond di%ided by which one o$ the
$ollowin/"
#. coupon
B. $ace %alue
C. 'ar2et price
&. call price
(. dirty price

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: Current yield

7-,7
7. #n indenture is3
#. another na'e $or a bond-s coupon.
B. the written record o$ all the holders o$ a bond issue.
C. a bond that is past its 'aturity date but has yet to be repaid.
&. a bond that is secured by the in%entory held by the bond-s issuer.
E. the le/al a/ree'ent between the bond issuer and the bondholders.
Re$er to section 7.)

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: ,ndenture

4. #tlas (ntertain'ent has 1*-year bonds outstandin/. 1he interest pay'ents on these bonds
are sent directly to each o$ the indi%idual bondholders. 1hese direct pay'ents are a clear
indication that the bonds can accurately be de$ined as bein/ issued3
#. at par.
B. in re/istered $or'.
C. in street $or'.
&. as debentures.
(. as callable.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: -egistered form

7-,4
5. # bond that is payable to who'e%er has physical possession o$ the bond is said to be in3
#. new-issue condition.
B. re/istered $or'.
C. bearer $or'.
&. debenture status.
(. collateral status.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Bearer form

10. 1he 6eeward Co'pany just issued 1*-year+ 4 percent+ unsecured bonds at par. 1hese
bonds $it the de$inition o$ which one o$ the $ollowin/ ter's"
#. note
B. discounted
C. 7ero-coupon
&. callable
E. debenture

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Debenture

7-,5
11. !hich o$ the $ollowin/ de$ines a note"
I. secured
II. unsecured
III. 'aturity less than 10 years
IV. 'aturity in e8cess o$ 10 years
#. III only
B. I and III only
C. I and IV only
D. II and III only
(. II and IV only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Note

1). # sin2in/ $und is 'ana/ed by a trustee $or which one o$ the $ollowin/ purposes"
#. payin/ interest pay'ents
B. early bond rede'ption
C. con%ertin/ bonds into e.uity securities
&. payin/ pre$erred di%idends
(. reducin/ coupon rates

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Sin.ing fund

7-00
1,. # bond that can be paid o$$ early at the issuer-s discretion is re$erred to as bein/ which one
o$ the $ollowin/"
#. 7ero coupon
B. callable
C. senior
&. collaterali7ed
(. unsecured

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Call 'ro!ision

10. # $1+000 $ace %alue bond can be redee'ed early at the issuer-s discretion $or $1+0,0+ plus
any accrued interest. 1he additional $,0 is called which one o$ the $ollowin/"
#. dirty price
B. rede'ption %alue
C. call pre'iu'
&. ori/inal-issue discount
(. rede'ption discount

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Call 'remium

7-01
1*. # de$erred call pro%ision is which one o$ the $ollowin/"
#. re.uire'ent that a bond issuer pay the current 'ar2et price+ plus accrued interest+ should
the $ir' decide to call a bond
B. ability o$ a bond issuer to delay repayin/ a bond until a$ter the 'aturity date should the
issuer so opt
C. prohibition placed on an issuer which pre%ents that issuer $ro' e%er redee'in/ bonds prior
to 'aturity
D. prohibition which pre%ents bond issuers $ro' redee'in/ callable bonds prior to a speci$ied
date
(. re.uire'ent that a bond issuer pay a call pre'iu' which is e.ual to or /reater than one
year-s coupon should that issuer decide to call a bond

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Deferred call 'ro!ision

1. # call-protected bond is a bond that3
#. is /uaranteed to be called.
B. can ne%er be called.
C. is currently bein/ called.
&. is callable at any ti'e.
E. cannot be called durin/ a certain period o$ ti'e.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Call#'rotected bond

7-0)
17. 1he ite's included in an indenture that li'it certain actions o$ the issuer in order to
protect bondholder-s interests are re$erred to as the3
#. trustee relationships.
B. bylaws.
C. le/al bounds.
&. 9plain %anilla9 conditions.
E. protecti%e co%enants.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: /rotecti!e co!enants

14. # bond that has only one pay'ent+ which occurs at 'aturity+ de$ines which one o$ the
$ollowin/"
#. debenture
B. callable
C. $loatin/-rate
&. jun2
E. 7ero coupon

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: 1ero#cou'on bond

7-0,
15. !hich one o$ the $ollowin/ is the price a dealer will pay to purchase a bond"
#. call price
B. as2ed price
C. bid price
&. bid-as2 spread
(. par %alue
Re$er to section 7.*

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#+
Section: "%2
&o'ic: Bid 'rice

)0. :ou want to buy a bond $ro' a dealer. !hich one o$ the $ollowin/ prices will you pay"
#. call price
B. auction price
C. bid price
D. as2ed price
(. bid-as2 spread

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%2
&o'ic: As.ed 'rice

7-00
)1. 1he di$$erence between the price that a dealer is willin/ to pay and the price at which he
or she will sell is called the3
#. e.uilibriu'.
B. pre'iu'.
C. discount.
&. call price.
E. spread.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%2
&o'ic: Bid#as. s'read

)). # bond is .uoted at a price o$ $545. 1his price is re$erred to as which one o$ the
$ollowin/"
#. call price
B. $ace %alue
C. clean price
&. dirty price
(. wholesale price

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%2
&o'ic: Clean 'rice

7-0*
),. ;ete paid $1+0,) as his total cost o$ purchasin/ a bond. 1his price is re$erred to as the3
#. .uoted price.
B. spread price.
C. clean price.
D. dirty price.
(. call price.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%2
&o'ic: Dirty 'rice

)0. Real rates are de$ined as no'inal rates that ha%e been adjusted $or which o$ the
$ollowin/"
A. in$lation
B. de$ault ris2
C. accrued interest
&. interest rate ris2
(. both in$lation and interest rate ris2
Re$er to section 7.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Obecti!e: "#0
Section: "%3
&o'ic: -eal rate

7-0
)*. Interest rates that include an in$lation pre'iu' are re$erred to as3
#. annual percenta/e rates.
B. stripped rates.
C. e$$ecti%e annual rates.
&. real rates.
E. no'inal rates.
Re$er to section 7.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%3
&o'ic: Nominal rate

). 1he <isher e$$ect is de$ined as the relationship between which o$ the $ollowin/ %ariables"
#. de$ault ris2 pre'iu'+ in$lation ris2 pre'iu'+ and real rates
B. no'inal rates+ real rates+ and interest rate ris2 pre'iu'
C. interest rate ris2 pre'iu'+ real rates+ and de$ault ris2 pre'iu'
D. real rates+ in$lation rates+ and no'inal rates
(. real rates+ interest rate ris2 pre'iu'+ and no'inal rates
Re$er to section 7.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%3
&o'ic: (is4er effect

7-07
)7. 1he pure ti'e %alue o$ 'oney is 2nown as the3
#. li.uidity e$$ect.
B. <isher e$$ect.
C. ter' structure o$ interest rates.
&. in$lation $actor.
(. interest rate $actor.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: &erm structure of interest rates

)4. !hich one o$ the $ollowin/ pre'iu's is co'pensation $or e8pected $uture in$lation"
#. de$ault ris2
B. ta8ability
C. li.uidity
D. in$lation

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: ,nflation 'remium

7-04
)5. 1he interest rate ris2 pre'iu' is the3
#. additional co'pensation paid to in%estors to o$$set risin/ prices.
B. co'pensation in%estors de'and $or acceptin/ interest rate ris2.
C. di$$erence between the yield to 'aturity and the current yield.
&. di$$erence between the 'ar2et interest rate and the coupon rate.
(. di$$erence between the coupon rate and the current yield.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: ,nterest rate ris. 'remium

,0. # 1reasury yield cur%e plots 1reasury interest rates relati%e to which one o$ the
$ollowin/"
#. 'ar2et rates
B. co'parable corporate bond rates
C. the ris2-$ree rate
&. in$lation
E. 'aturity

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: &reasury yield cur!e

7-05
,1. !hich one o$ the $ollowin/ ris2 pre'iu's co'pensates $or the possibility o$ nonpay'ent
by the bond issuer"
A. de$ault ris2
B. ta8ability
C. li.uidity
&. in$lation

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: Default ris. 'remium

,). 1he ta8ability ris2 pre'iu' co'pensates bond holders $or which one o$ the $ollowin/"
#. yield decreases in response to 'ar2et chan/es
B. lac2 o$ coupon pay'ents
C. possibility o$ de$ault
D. a bond-s un$a%orable ta8 status
(. decrease in a 'unicipality-s credit ratin/

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: &a5ability 'remium

7-*0
,,. 1he li.uidity pre'iu' is co'pensation to in%estors $or3
#. purchasin/ a bond in the secondary 'ar2et.
B. the lac2 o$ an acti%e 'ar2et wherein a bond can be sold $or its actual %alue.
C. ac.uirin/ a bond with an un$a%orable ta8 status.
&. redee'in/ a bond prior to 'aturity.
(. purchasin/ a bond that has de$aulted on its coupon pay'ents.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%"
&o'ic: Li6uidity 'remium

,0. #n 4 percent corporate bond that pays interest se'i-annually was issued last year. !hich
two o$ the $ollowin/ 'ost li2ely apply to this bond today i$ the current yield-to-'aturity is 7
percent"
I. a structure as an interest-only loan
II. a current yield that e.uals the coupon rate
III. a yield-to-'aturity e.ual to the coupon rate
IV. a 'ar2et price that di$$ers $ro' the $ace %alue
#. I and III only
B. I and IV only
C. II and III only
&. II and IV only
(. III and IV only

AACSB: N/A
Bloom's: Com're4ension
Difficulty: Basic
Section: "%$
&o'ic: Bond features

7-*1
,*. # bond has a 'ar2et price that e8ceeds its $ace %alue. !hich o$ the $ollowin/ $eatures
currently apply to this bond"
I. discounted price
II. pre'iu' price
III. yield-to-'aturity that e8ceeds the coupon rate
IV. yield-to-'aturity that is less than the coupon rate
#. III only
B. I and III only
C. I and IV only
&. II and III only
E. II and IV only

AACSB: N/A
Difficulty: Basic
Section: "%$
&o'ic: /remium bonds

,. #ll else constant+ a bond will sell at ===== when the coupon rate is ===== the yield to
'aturity.
#. a pre'iu'> less than
B. a pre'iu'> e.ual to
C. a discount> less than
&. a discount> hi/her than
(. par> less than

AACSB: N/A
Difficulty: Basic
Section: "%$
&o'ic: Discount bond

7-*)
,7. 1he !althers Co'pany has a se'i-annual coupon bond outstandin/. #n increase in the
'ar2et rate o$ interest will ha%e which one o$ the $ollowin/ e$$ects on this bond"
#. increase the coupon rate
B. decrease the coupon rate
C. increase the 'ar2et price
D. decrease the 'ar2et price
(. increase the ti'e period

AACSB: N/A
Difficulty: Basic
Section: "%$
&o'ic: ,nterest rate ris.

,4. !hich o$ the $ollowin/ are characteristics o$ a pre'iu' bond"
II. coupon rate @ yield-to-'aturity
III. coupon rate ? current yield
IV. coupon rate @ current yield
#. I only
B. I and III only
C. I and IV only
&. II and III only
E. II and IV only

AACSB: N/A
Difficulty: ,ntermediate
Section: "%$
&o'ic: Bond yields

7-*,
,5. !hich o$ the $ollowin/ relationships apply to a par %alue bond"
II. current yield A yield-to-'aturity
III. 'ar2et price A call price
IV. 'ar2et price A $ace %alue
#. I and II only
B. I and III only
C. II and IV only
&. I+ II+ and III only
(. II+ III+ and IV only
Re$er to sections 7.1 and 7.)

AACSB: N/A
Section: "%$ and "%+
&o'ic: Bond c4aracteristics

00. !hich one o$ the $ollowin/ relationships is stated correctly"
#. 1he coupon rate e8ceeds the current yield when a bond sells at a discount.
B. 1he call price 'ust e.ual the par %alue.
C. #n increase in 'ar2et rates increases the 'ar2et price o$ a bond.
D. &ecreasin/ the ti'e to 'aturity increases the price o$ a discount bond+ all else constant.
(. Increasin/ the coupon rate decreases the current yield+ all else constant.
Re$er to sections 7.1 and 7.)

AACSB: N/A
Section: "%$ and "%+
&o'ic: Bond c4aracteristics

7-*0
01. Breen Roo$ Inns is preparin/ a bond o$$erin/ with a percent+ se'iannual coupon and a
$ace %alue o$ $1+000. 1he bonds will be repaid in 10 years and will be sold at par. Bi%en this+
which one o$ the $ollowin/ state'ents is correct"
#. 1he bonds will beco'e discount bonds i$ the 'ar2et rate o$ interest declines.
B. 1he bonds will pay 10 interest pay'ents o$ $0 each.
C. 1he bonds will sell at a pre'iu' i$ the 'ar2et rate is *.* percent.
&. 1he bonds will initially sell $or $1+0,0 each.
(. 1he $inal pay'ent will be in the a'ount o$ $1+00.

AACSB: N/A
Section: "%$
&o'ic: Bond !alues

0). # newly issued bond has a 7 percent coupon with se'iannual interest pay'ents. 1he
bonds are currently priced at par %alue. 1he e$$ecti%e annual rate pro%ided by these bonds
'ust be3
#. ,.* percent.
B. /reater than ,.* percent but less than 7 percent.
C. 7 percent.
D. /reater than 7 percent.
(. #nswer cannot be deter'ined $ro' the in$or'ation pro%ided.

AACSB: N/A
Difficulty: Basic
Section: "%$
&o'ic: 7ffecti!e annual rate

7-**
0,. !hich o$ the $ollowin/ increase the price sensiti%ity o$ a bond to chan/es in interest rates"
I. increase in ti'e to 'aturity
II. decrease in ti'e to 'aturity
III. increase in coupon rate
IV. decrease in coupon rate
#. II only
B. I and III only
C. I and IV only
&. II and III only
(. II and IV only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$
&o'ic: ,nterest rate sensiti!ity

00. !hich one o$ the $ollowin/ bonds is the least sensiti%e to interest rate ris2"
#. ,-year> 0 percent coupon
B. ,-year> percent coupon
C. *-year> percent coupon
&. 7-year> percent coupon
(. 7-year> 0 percent coupon

AACSB: N/A
Difficulty: Basic
Section: "%$
&o'ic: ,nterest rate sensiti!ity

7-*
0*. #s a bond-s ti'e to 'aturity increases+ the bond-s sensiti%ity to interest rate ris23
#. increases at an increasin/ rate.
B. increases at a decreasin/ rate.
C. increases at a constant rate.
&. decreases at an increasin/ rate.
(. decreases at a decreasin/ rate.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%$

0. :ou own a bond that has a percent annual coupon and 'atures * years $ro' now. :ou
purchased this 10-year bond at par %alue when it was ori/inally issued. !hich one o$ the
$ollowin/ state'ents applies to this bond i$ the rele%ant 'ar2et interest rate is now *.4
percent"
#. 1he current yield-to-'aturity is /reater than percent.
B. 1he current yield is percent.
C. 1he ne8t interest pay'ent will be $,0.
&. 1he bond is currently %alued at one-hal$ o$ its issue price.
E. :ou will reali7e a capital /ain on the bond i$ you sell it today.

AACSB: N/A
Section: "%$
&o'ic: ,nterest rate effects

7-*7
07. :ou e8pect interest rates to decline in the near $uture e%en thou/h the bond 'ar2et is not
indicatin/ any si/n o$ this chan/e. !hich one o$ the $ollowin/ bonds should you purchase
now to 'a8i'i7e your /ains i$ the rate decline does occur"
#. short-ter'> low coupon
B. short-ter'> hi/h coupon
C. lon/-ter'> 7ero coupon
&. lon/-ter'> low coupon
(. lon/-ter'> hi/h coupon

AACSB: N/A
Difficulty: Basic
Section: "%$

04. # percent+ annual coupon bond is currently sellin/ at a pre'iu' and 'atures in 7 years.
1he bond was ori/inally issued , years a/o at par. !hich one o$ the $ollowin/ state'ents is
accurate in respect to this bond today"
#. 1he $ace %alue o$ the bond today is /reater than it was when the bond was issued.
B. 1he bond is worth less today than when it was issued.
C. 1he yield-to-'aturity is less than the coupon rate.
&. 1he coupon rate is /reater than the current yield.
(. 1he yield-to-'aturity e.uals the current yield.

AACSB: N/A
Bloom's: Analysis
Section: "%$
&o'ic: Bond yields

7-*4
05. !hich o$ the $ollowin/ state'ents concernin/ bonds are correct"
I. Bonds pro%ide ta8 bene$its to issuers.
II. 1he ris2 o$ a $ir' $inancially $ailin/ increases when the $ir' issues bonds.
III. Most lon/-ter' bond issues are re$erred to as un$unded debt.
IV. #ll bonds are treated e.ually in a ban2ruptcy proceedin/.
#. II and III only
B. I and II only
C. III and IV only
&. II and IV only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+

*0. 1e8as <oods has a percent bond issue outstandin/ that pays $,0 in interest e%ery March
and Cepte'ber. 1he bonds are in%est'ent /rade and sell at par. 1he bonds are callable at a
price e.ual to the present %alue o$ all $uture interest and principal pay'ents discounted at a
rate e.ual to the co'parable 1reasury rate plus 0.*0 percent. !hich o$ the $ollowin/ correctly
describe the $eatures o$ this bond"
I. bond ratin/ o$ B
II. 9'a2e whole9 call price
III. $1+000 $ace %alue
IV. o$$er price o$ $1+000
#. I and III only
B. III and IV only
C. I+ III+ and IV only
D. II+ III+ and IV only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+

7-*5
*1. 6ast year+ 6e8in/ton Do'es issued $1 'illion in unsecured+ non-callable debt. 1his debt
pays an annual interest pay'ent o$ $** and 'atures years $ro' now. 1he $ace %alue is
$1+000 and the 'ar2et price is $1+0)0. !hich one o$ these ter's correctly describes a $eature
o$ this debt"
#. se'i-annual coupon
B. discount bond
C. note
&. trust deed
(. collaterali7ed

AACSB: N/A
Difficulty: Basic
Section: "%+

*). Callable bonds /enerally3
#. /rant the bondholder the option to call the bond anyti'e a$ter the de$er'ent period.
B. are callable at par as soon as the call-protection period ends.
C. are called when 'ar2et interest rates increase.
&. are called within the $irst three years a$ter issuance.
E. ha%e a sin2in/ $und pro%ision.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Callable bonds

7-0
*,. !hich o$ the $ollowin/ are ne/ati%e co%enants that 'i/ht be $ound in a bond indenture"
I. 1he co'pany shall 'aintain a current ratio o$ 1.10 or better.
II. Eo debt senior to this issue can be issued.
III. 1he co'pany cannot lease any 'ajor assets without appro%al by the lender.
IV. 1he co'pany 'ust 'aintain the loan collateral in /ood wor2in/ order.
#. I and II only
B. II and III only
C. III and IV only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: Negati!e co!enants

*0. ;rotecti%e co%enants3
#. apply to short-ter' debt issues but not to lon/-ter' debt issues.
B. only apply to pri%ately issued bonds.
C. are a $eature $ound only in /o%ern'ent-issued bond indentures.
&. only apply to bonds that ha%e a de$erred call pro%ision.
E. are pri'arily desi/ned to protect bondholders.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%+
&o'ic: /rotecti!e co!enants

7-1
**. !hich one o$ the $ollowin/ state'ents concernin/ bond ratin/s is correct"
#. In%est'ent /rade bonds are rated BB or hi/her by Ctandard F ;oor-s.
B. Bond ratin/s assess both interest rate ris2 and de$ault ris2.
C. Cplit rated bonds are called crosso%er bonds.
&. 1he hi/hest ratin/ issued by Moody-s is ###.
(. # 9$allen an/el9 is a ter' applied to all 9jun29 bonds.
Re$er to section 7.,

AACSB: N/A
Bloom's: Knowledge
Section: "%8
&o'ic: Bond ratings

*. # 9$allen an/el9 is a bond that has 'o%ed $ro'3
#. bein/ publicly traded to bein/ pri%ately traded.
B. bein/ a lon/-ter' obli/ation to bein/ a short-ter' obli/ation.
C. ha%in/ a yield-to-'aturity in e8cess o$ the coupon rate to ha%in/ a yield-to- 'aturity that is
less than the coupon rate.
&. senior status to junior status $or li.uidation purposes.
E. in%est'ent /rade to speculati%e /rade.
Re$er to section 7.,

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%8
&o'ic: (allen angel

7-)
*7. Bonds issued by the G.C. /o%ern'ent3
#. are considered to be $ree o$ interest rate ris2.
B. /enerally ha%e hi/her coupons than those issued by an indi%idual state.
C. are considered to be $ree o$ de$ault ris2.
&. pay interest that is e8e'pt $ro' $ederal inco'e ta8es.
(. are called 9'unis9.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: 9o!ernment bonds

*4. 1reasury bonds are3
#. issued by any /o%ern'ental a/ency in the G.C.
B. issued only on the $irst day o$ each $iscal year by the G.C. &epart'ent o$ 1reasury.
C. bonds that o$$er the best ta8 bene$its o$ any bonds currently a%ailable.
D. /enerally issued as se'i-annual coupon bonds.
(. totally ris2-$ree.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: &reasury bonds

7-,
*5. Municipal bonds3
#. are totally ris2-$ree.
B. /enerally ha%e hi/her coupon rates than corporate bonds.
C. pay interest that is $ederally ta8-$ree.
&. are rarely callable.
(. are $ree o$ de$ault-ris2.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: )unici'al bonds

0. 1he brea2-e%en ta8 rate between a ta8able corporate bond yieldin/ 7 percent and a
co'parable nonta8able 'unicipal bond yieldin/ * percent can be e8pressed as3
A. 0.0*HI1 - t
J
K A 0.07.
B. 0.0* - I1 - t
J
K A 0.07.
C. 0.07 L I1 - t
J
K A 0.0*.
&. 0.0* I1 - t
J
K A 0.07.
(. 0.0* I1 L t
J
K A 0.07.

AACSB: N/A
Difficulty: Basic
Section: "%0
&o'ic: Brea.#e!en ta5 rate

7-0
1. # 7ero coupon bond3
#. is sold at a lar/e pre'iu'.
B. pays interest that is ta8 deductible to the issuer when paid.
C. can only be issued by the G.C. 1reasury.
D. has 'ore interest rate ris2 than a co'parable coupon bond.
(. pro%ides no ta8able inco'e to the bondholder until the bond 'atures.

AACSB: N/A
Section: "%0

). !hich one o$ the $ollowin/ ris2s would a $loatin/-rate bond tend to ha%e less o$ as
co'pared to a $i8ed-rate coupon bond"
#. real rate ris2
B. interest rate ris2
C. de$ault ris2
&. li.uidity ris2
(. ta8ability ris2

AACSB: N/A
Section: "%0
&o'ic: (loating#rate bond

7-*
,. 1he collar o$ a $loatin/-rate bond re$ers to the 'ini'u' and 'a8i'u'3
#. call periods.
B. 'aturity dates.
C. 'ar2et prices.
D. coupon rates.
(. yields to 'aturity.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: (loating#rate bond

0. 6ast year+ you purchased a 91I;C9 at par. Cince that ti'e+ both 'ar2et interest rates and
the in$lation rate ha%e increased by 0.)* percent. :our bond has 'ost li2ely done which one
o$ the $ollowin/ since last year"
#. decreased in %alue due to the chan/e in in$lation rates
B. e8perienced an increase in its bond ratin/
C. 'aintained a $i8ed real rate o$ return
&. increased in %alue in response to the chan/e in 'ar2et rates
(. increased in %alue due to a decrease in ti'e to 'aturity

AACSB: N/A
Bloom's: Analysis
Section: "%0
&o'ic: &,/S

7-
*. Recently+ you disco%ered a putable inco'e bond that is con%ertible. I$ you purchase this
bond+ you will ha%e the ri/ht to do which o$ the $ollowin/"
I. $orce the issuer to repurchase the bond prior to 'aturity
II. choose when you wish to recei%e interest pay'ents
III. con%ert the bond into a 1I;C
IV. con%ert the bond into e.uity shares
#. I and III only
B. I and IV only
C. II and III only
&. III and IV only

AACSB: N/A
Difficulty: Basic
Section: "%0
&o'ic: Bond ty'es

. 9Cat9 bonds are pri'arily desi/ned to help3
#. 'unicipalities sur%i%e econo'ic recessions.
B. corporations respond to o%erseas co'petition.
C. the $ederal /o%ern'ent cope with hu/e de$icits.
&. corporations reco%er $ro' in%oluntary reor/ani7ations.
E. insurance co'panies $und e8cessi%e clai's.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0
&o'ic: :Cat: bonds

7-7
7. Mary is a retired widow who is $inancially dependent upon the interest inco'e produced
by her bond port$olio. !hich one o$ the $ollowin/ bonds is the least suitable $or her to own"
B. *-year 1I;C
&. *-year $loatin/ rate bond
E. 7- year inco'e bond

AACSB: N/A
Bloom's: Analysis
Section: "%0

4. #l is retired and enjoys his daily li$e. Dis one concern is that his bonds pro%ide a steady
strea' o$ inco'e that will continue to allow hi' to ha%e the 'oney he desires to continue his
acti%e li$estyle without lowerin/ his present standard o$ li%in/. #lthou/h he has su$$icient
principal to li%e on+ he only wants to spend the interest inco'e pro%ided by his holdin/s and
thus is concerned about the purchasin/ power o$ that inco'e. !hich one o$ the $ollowin/
bonds should best ease #l-s concerns"
B. *-year 1I;C
&. *-year 'unicipal bond

AACSB: N/A
Bloom's: Analysis
Section: "%0

7-4
5. ;hil has researched 16M 1echnolo/ies and belie%es the $ir' is poised to %astly increase in
%alue. De wants to in%est in this co'pany. ;hil has decided to purchase 16M 1echnolo/ies
bonds so that he can ha%e a steady strea' o$ interest inco'e. Dowe%er+ he still wishes that he
could share in the $ir'-s success alon/ with 16M-s shareholders. !hich one o$ the $ollowin/
bond $eatures will help ;hil $ul$ill his wish"
#. put pro%ision
B. positi%e co%enant
C. warrant
&. crosso%er ratin/
(. call pro%ision

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%0

70. # G.C. 1reasury bond that is .uoted at 100311 is sellin/3
#. $or 11 percent 'ore than par %alue.
B. at an 11 percent discount.
C. $or 100.11 percent o$ $ace %alue.
&. at par and pays an 11 percent coupon.
E. $or 100 and 11H,)nds percent o$ $ace %alue.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%2
&o'ic: &reasury bond 6uote

7-5
71. !hich o$ the $ollowin/ correctly describe G.C. 1reasury bonds"
I. ha%e a 9tic29 si7e o$ 1H,)
II. hi/hly li.uid
III. .uoted in dollars and cents
IV. .uoted at the dirty price
A. I and II only
B. I and IV only
C. II and III only
&. II and IV only

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%2
&o'ic: &reasury bonds

7). # -year+ $1+000 $ace %alue bond issued by 1aylor 1ools pays interest se'iannually on
<ebruary 1 and #u/ust 1. #ssu'e today is Mctober 1. !hat will the di$$erence+ i$ any+ be
between this bond-s clean and dirty prices today"
#. no di$$erence
B. one 'onth-s interest
C. two 'onth-s interest
&. $our 'onth-s interest
(. $i%e 'onth-s interest

AACSB: N/A
Difficulty: Basic
Section: "%2
&o'ic: Clean and dirty 'rices

7-70
7,. 1oday+ Nune 1*+ you want to buy a bond with a .uoted price o$ 54.0. 1he bond pays
interest on Nanuary 1 and Nuly 1. !hich one o$ the $ollowin/ prices represents your total cost
o$ purchasin/ this bond today"
#. clean price
B. dirty price
C. as2ed price
&. .uoted price
(. bid price

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%2
&o'ic: Dirty 'rice

70. !hich one o$ the $ollowin/ rates represents the chan/e+ i$ any+ in your purchasin/ power
as a result o$ ownin/ a bond"
#. ris2-$ree rate
B. reali7ed rate
C. no'inal rate
D. real rate
(. current rate
Re$er to section 7.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%3
&o'ic: -eal rate

7-71
7*. !hich one o$ the $ollowin/ state'ents is correct"
#. 1he ris2-$ree rate represents the chan/e in purchasin/ power.
B. #ny return /reater than the in$lation rate represents the ris2 pre'iu'.
C. Distorical real rates o$ return 'ust be positi%e.
&. Eo'inal rates e8ceed real rates by the a'ount o$ the ris2-$ree rate.
E. 1he real rate 'ust be less than the no'inal rate /i%en a positi%e rate o$ in$lation.
Re$er to section 7.

AACSB: N/A
Section: "%3
&o'ic: Bond yields

7. 1he <isher ($$ect pri'arily e'phasi7es the e$$ects o$ ===== on an in%estor-s rate o$
return.
#. de$ault
B. 'ar2et
C. interest rate
D. in$lation
(. 'aturity
Re$er to section 7.

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Section: "%3

7-7)
77. :ou are tryin/ to co'pare the present %alues o$ two separate strea's o$ cash $lows which
ha%e e.ui%alent ris2s. Mne strea' is e8pressed in no'inal %alues and the other strea' is
e8pressed in real %alues. :ou decide to discount the no'inal cash $lows usin/ a no'inal
annual rate o$ 4 percent. !hat rate should you use to discount the real cash $lows"
#. 4 percent
B. (#R o$ 4 percent co'pounded 'onthly
C. co'parable ris2-$ree rate
D. co'parable real rate
(. :ou cannot co'pare the present %alues o$ these two strea's o$ cash $lows.
Re$er to section 7.

AACSB: N/A
Difficulty: Basic
Section: "%3
&o'ic: Nominal and real rates

74. !hich o$ the $ollowin/ state'ents is correct concernin/ the ter' structure o$ interest
rates"
I. (8pectations o$ lower in$lation rates in the $uture tend to lower the slope o$ the ter'
structure o$ interest rates.
II. 1he ter' structure o$ interest rates includes both an in$lation pre'iu' and an interest rate
ris2 pre'iu'.
III. 1he real rate o$ return has 'ini'al+ i$ any+ a$$ect on the slope o$ the ter' structure o$
interest rates.
IV. 1he ter' structure o$ interest rates and the ti'e to 'aturity are always directly related.
#. I and II only
B. II and IV only
C. I+ II+ and III only

AACSB: N/A
Section: "%"
&o'ic: &erm structure of interest rates

7-7,
75. !hich two o$ the $ollowin/ $actors cause the yields on a corporate bond to di$$er $ro'
those on a co'parable 1reasury security"
I. in$lation ris2
II. interest rate ris2
III. ta8ability
IV. de$ault ris2
#. I and II only
B. III and IV only
C. I+ II+ and IV only
Re$er to sections 7.0 and 7.7

AACSB: N/A
Difficulty: Basic
Section: "%0 and "%"
&o'ic: Determinants of bond yields

7-70
40. 1he bonds issued by Ctainless 1ubs bear a percent coupon+ payable se'iannually. 1he
bonds 'ature in 11 years and ha%e a $1+000 $ace %alue. Currently+ the bonds sell $or $545.
!hat is the yield to 'aturity"
#. *.47 percent
B. *.5) percent
C. .04 percent
D. .10 percent
(. .)0 percent
1his cannot be sol%ed directly+ so it-s easiest to just use the calculator 'ethod to /et an
answer. :ou can then use the calculator answer as the rate in the $or'ula just to %eri$y that
your answer is correct.

AACSB: Analytic
Bloom's: A''lication
Difficulty: Basic
Section: "%$

7-7*
41. Breenbrier Industrial ;roducts- bonds ha%e a 7.0 percent coupon and pay interest
annually. 1he $ace %alue is $1+000 and the current 'ar2et price is $1+0).*0 per bond. 1he
bonds 'ature in 1 years. !hat is the yield to 'aturity"
A. .50 percent
B. 7.)) percent
C. 7.0 percent
&. 7.71 percent
(. 7.40 percent

AACSB: Analytic
Difficulty: Basic
Section: "%$

7-7
4). Collin/wood Do'es has a bond issue outstandin/ that pays an 4.* percent coupon and
'atures in 14.* years. 1he bonds ha%e a par %alue o$ $1+000 and a 'ar2et price o$ $50.)0.
Interest is paid se'iannually. !hat is the yield to 'aturity"
#. 4., percent
B. 4.0) percent
C. 4.1 percent
&. 4.70 percent
E. 4.50 percent

AACSB: Analytic
Difficulty: Basic
Section: "%$

7-77
4,. Mil !ell Cupply o$$ers 7.* percent coupon bonds with se'iannual pay'ents and a yield to
'aturity o$ 7.4 percent. 1he bonds 'ature in years. !hat is the 'ar2et price per bond i$
the $ace %alue is $1+000"
#. $545.70
B. $551.07
C. $55.04
&. $1+00).0
(. $1+01,.04

AACSB: Analytic
Difficulty: Basic
Section: "%$
&o'ic: Bond 'rice

7-74
40. Roadside Mar2ets has a .7* percent coupon bond outstandin/ that 'atures in 10.* years.
1he bond pays interest se'iannually. !hat is the 'ar2et price per bond i$ the $ace %alue is
$1+000 and the yield to 'aturity is .5 percent"
#. $555.40
B. $555.4*
C. $1+00,.0)
D. $1+000.07
(. $1+007.*)

AACSB: Analytic
Difficulty: Basic
Section: "%$
&o'ic: Bond 'rice

7-75
4*. Brand #d%enture ;roperties o$$ers a 5.* percent coupon bond with annual pay'ents. 1he
yield to 'aturity is 11.) percent and the 'aturity date is 11 years $ro' today. !hat is the
'ar2et price o$ this bond i$ the $ace %alue is $1+000"
A. $45*.0,
B. $45.7
C. $501.)0
&. $50.14
(. $5*,.,0

AACSB: Analytic
Difficulty: Basic
Section: "%$
&o'ic: Bond 'rice

7-40
4. Redesi/ned Co'puters has *.)* percent coupon bonds outstandin/ with a current 'ar2et
price o$ $*0.15. 1he yield to 'aturity is 1.)4 percent and the $ace %alue is $1+000. Interest
is paid se'iannually. Dow 'any years is it until these bonds 'ature"
#. .0 years
B. 7.04 years
C. 1).01 years
&. 10.1 years
(. )4.,) years
It-s easiest to sol%e this proble' usin/ a $inancial calculator. :ou can then use the calculator
answer as the ti'e period in the $or'ula just to %eri$y that your answer is correct.
1he nu'ber o$ si8-'onth periods is 10.1. 1he nu'ber o$ years is 7.04 years.

AACSB: Analytic
Difficulty: Basic
Section: "%$
&o'ic: &ime to maturity

7-41
47. Blobal Co''unications has a 7 percent+ se'iannual coupon bond outstandin/ with a
current 'ar2et price o$ $1+0),.0. 1he bond has a par %alue o$ $1+000 and a yield to 'aturity
o$ .7) percent. Dow 'any years is it until this bond 'atures"
#. 1).) years
B. 1).*, years
C. 14.05 years
&. )0.,7 years
(. )*.0* years
It-s easiest to sol%e this proble' usin/ $inancial calculator. :ou can then use the calculator
answer as the ti'e period in the $or'ula just to %eri$y that your answer is correct.
1he nu'ber o$ si8-'onth periods is )*.0*). 1he nu'ber o$ years is 1).*, years.

AACSB: Analytic
Bloom's: Analysis
Difficulty: Basic
Section: "%$

7-4)
44. :ou are purchasin/ a )*-year+ 7ero-coupon bond. 1he yield to 'aturity is 4.4 percent and
the $ace %alue is $1+000. !hat is the current 'ar2et price"
#. $10.7
B. $104.14
C. $115.*)
&. $1)1.*0
(. $1)4.07

AACSB: Analytic
Difficulty: Basic
Section: "%$ and "%0
&o'ic: 1ero bond 'rice

7-4,
45. 1oday+ you want to sell a $1+000 $ace %alue 7ero coupon bond you currently own. 1he
bond 'atures in 0.* years. Dow 'uch will you recei%e $or your bond i$ the 'ar2et yield to
'aturity is currently *.,, percent" I/nore any accrued interest.
#. $5.0
B. $54.05
C. $701.04
&. $7*.10
E. $745.))

AACSB: Analytic
Difficulty: Basic
&o'ic: 1ero bond 'rice

7-40
50. 1he 7ero coupon bonds o$ &F6 Mo%ers ha%e a 'ar2et price o$ $,15.)0+ a $ace %alue o$
$1+000+ and a yield to 'aturity o$ 5.17 percent. Dow 'any years is it until these bonds
'ature"
#. 11.5) years
B. 1).)4 years
C. 1).7, years
&. 1,.01 years
(. 1,.07 years

AACSB: Analytic

7-4*
51. # 1-year+ 0.* percent coupon bond pays interest annually. 1he bond has a $ace %alue o$
$1+000. !hat is the percenta/e chan/e in the price o$ this bond i$ the 'ar2et yield to 'aturity
rises to *.7 percent $ro' the current rate o$ *.* percent"
A. ).10 percent decrease
B. 1.57 percent decrease
C. 0.)1 percent increase
&. 1.57 percent increase
(. ).10 percent increase

AACSB: Analytic
Bloom's: Analysis
Section: "%$

7-4
5). 1he Corner Brocer has a 7-year+ percent annual coupon bond outstandin/ with a $1+000
par %alue. 1he bond has a yield to 'aturity o$ *.* percent. !hich one o$ the $ollowin/
state'ents is correct i$ the 'ar2et yield suddenly increases to .* percent"
#. 1he bond price will increase by $*7.10.
B. 1he bond price will increase by *.)5 percent.
C. 1he bond price will decrease by $*,.).
D. 1he bond price will decrease by *.0, percent.
(. 1he bond price will decrease by *., percent.
&i$$erence in prices A $57).*4 - $1+0)4.01 A -$**.4,
;ercenta/e di$$erence in prices A

AACSB: Analytic
Bloom's: Analysis
Section: "%$

7-47
5,. Blac2well bonds ha%e a $ace %alue o$ $1+000 and are currently .uoted at 54.0. 1he bonds
ha%e a * percent coupon rate. !hat is the current yield on these bonds"
#. 0.7 percent
B. 0.74 percent
C. *.04 percent
&. *.,, percent
(. *.*0 percent

AACSB: Analytic
Difficulty: Basic
Section: "%$

50. 1he outstandin/ bonds o$ 1he Ri%er <ront <erry carry a .* percent coupon. 1he bonds
ha%e a $ace %alue o$ $1+000 and are currently .uoted at 101.. !hat is the current yield on
these bonds"
#. 1.0 percent
B. ).,7 percent
C. .00 percent
&. .05 percent
(. .44 percent

AACSB: Analytic
Difficulty: Basic
Section: "%$

7-44
5*. 1he 7 percent+ se'i-annual coupon bonds o$$ered by Douse Reno%ators are callable in )
years at $1+0*0. !hat is the a'ount o$ the call pre'iu' on a $1+000 par %alue bond"
#. $*)
B. $*0
C. $7)
&. $40
(. $45
Call pre'iu' A $1+0*0 - $1+000 A $*0

AACSB: Analytic
Difficulty: Basic
Section: "%+
&o'ic: Call 'remium

5. # corporate bond was .uoted yesterday at 10).1 while today-s .uote is 10).15. !hat is
the chan/e in the %alue o$ a bond that has a $ace %alue o$ $+000"
#. $0.,0
B. $1.40
C. $,.00
&. $14.00
(. $140.00
Mar2et price A I1.0)15 - 1.0)1K $+000 A $1.40

AACSB: Analytic
Difficulty: Basic
Section: "%2
&o'ic: Bond 6uote

7-45
57. # 10-year+ 0.* percent+ se'iannual coupon bond issued by 1yler Rentals has a $1+000 $ace
%alue. 1he bond is currently .uoted at 54.7. !hat is the clean price o$ this bond i$ the ne8t
interest pay'ent will occur ) 'onths $ro' today"
A. $547.00
B. $550.*0
C. $1+00).00
&. $1+011.)*
(. $1+0)).*0
Clean price A 0.547 $1+000 A $547

AACSB: Analytic
Difficulty: Basic
Section: "%2
&o'ic: Clean 'rice

54. # 1reasury bond is .uoted at a price o$ 10*31*. !hat is the 'ar2et price o$ this bond i$ the
$ace %alue is $*+000"
#. $*+00*.1*
B. $*+10*.1*
C. $*+)*7.*0
D. $*+)7,.00
(. $*+*1*.00
;rice A 10*31* A 10* and 1*H,) percent o$ $ace A 1.0*047* $*+000 A $*+)7,.00

AACSB: Analytic
Difficulty: Basic
Section: "%2
&o'ic: &reasury bond 6uote

7-50
55. # 1reasury bond is .uoted at a price o$ 101310 with a current yield o$ 7.), percent. !hat
is the coupon rate"
#. 7.)0 percent
B. 7.)4 percent
C. 7.,0 percent
D. 7.,0 percent
(. 7.,5 percent
;rice A 101 and 10H,) percent o$ $ace A 1.010,7* $1+000 A $1+010.,7*
#nnual interest A 0.07), $1+010.,7* A $7,.00
Coupon rate A $7,.00H$1+000 A 7.,0 percent

AACSB: Analytic
Section: "%$
&o'ic: Bond yields

100. # corporate bond is .uoted at a price o$ 10,.1 and carries a .*0 percent coupon. 1he
bond pays interest se'iannually. !hat is the current yield on one o$ these bonds"
#. .)0 percent
B. .,0 percent
C. ., percent
&. .) percent
(. . percent
Current yield A I0.0* $1+000KHI1.0,1 $1+000K A .,0 percent

AACSB: Analytic
Difficulty: Basic
Section: "%$

7-51
101. # 1reasury bond is .uoted at a price o$ 103), with a ,.*0 percent coupon. 1he bond
pays interest se'iannually. !hat is the current yield on one o$ these bonds"
#. ,.0 percent
B. ,.15 percent
C. ,.)4 percent
&. ,.,, percent
(. ,.,4 percent
Current price A 10 and ),H,)nds percent o$ $ace A 1.07147* $1+000 A $1+07.147*
Current yield A I0.0,* $1+000KH$1+07.147* A ,.)4 percent

AACSB: Analytic
Difficulty: Basic
&o'ic: &reasury yield

10). # 1reasury bond is .uoted as 55311 as2ed and 55305 bid. !hat is the bid-as2 spread in
dollars on a $*+000 $ace %alue bond"
#. $0.0,
B. $0.,
C. $1.00
D. $,.1,
(. $.)*
Bid-as2 spread A 55311 - 55305 A )H,) o$ 1 percent o$ $*+000 A $,.1,

AACSB: Analytic
Difficulty: Basic
Section: "%2
&o'ic: Bid#as. s'read

7-5)
10,. 1he se'iannual+ 4-year bonds o$ #lto Music are sellin/ at par and ha%e an e$$ecti%e
annual yield o$ 4.)4* percent. !hat is the a'ount o$ each interest pay'ent i$ the $ace %alue
o$ the bonds is $1+000"
#. $01.*0
B. $0).)*
C. $0,.1*
&. $4*.00
(. $4.)5

AACSB: Analytic
Bloom's: Analysis
Section: "%$
&o'ic: Bond yields and 'ayments

100. # bond that pays interest annually yielded 7.07 percent last year. 1he in$lation rate $or
the sa'e period was .10 percent. !hat was the actual real rate o$ return on this bond $or last
year"
#. 1.15 percent
B. 1.)* percent
C. 1.)5 percent
&. 1., percent
(. 1.01 percent

AACSB: Analytic
Difficulty: Basic
Section: "%3
&o'ic: -eal return

7-5,
10*. Betty Mar2ets has bonds outstandin/ that pay a * percent se'iannual coupon+ ha%e a
*.)4 percent yield to 'aturity+ and a $ace %alue o$ $1+000. 1he current rate o$ in$lation is 0.1
percent. !hat is the real rate o$ return on these bonds"
#. 0.4 percent
B. 0.50 percent
C. 1.00 percent
D. 1.1, percent
(. 1.15 percent

AACSB: Analytic
Difficulty: Basic
Section: "%3
&o'ic: -eal rate

10. 1he outstandin/ bonds o$ !inter 1i'e ;roducts pro%ide a real rate o$ return o$ ,.0,
percent. 1he current rate o$ in$lation is 0.4 percent. !hat is the actual no'inal rate o$ return
on these bonds"
#. 7.*4 percent
B. 7.,, percent
C. 7.71 percent
&. 7.7 percent
E. 7.4* percent
I1 L 0.0,0,K I1 L 0.004K - 1 A 7.4* percent

AACSB: Analytic
Difficulty: Basic
Section: "%3

7-50
107. 1he yield to 'aturity on a bond is currently 4.0 percent. 1he real rate o$ return is ,.))
percent. !hat is the rate o$ in$lation"
A. *.04 percent
B. *.0 percent
C. .)0 percent
&. .*, percent
(. .71 percent

AACSB: Analytic
Difficulty: Basic
Section: "%3

104. # 7ero coupon bond with a $ace %alue o$ $1+000 is issued with an initial price o$ $)1).*.
1he bond 'atures in )* years. !hat is the i'plicit interest+ in dollars+ $or the $irst year o$ the
bond-s li$e"
#. $1).7)
B. $1,.*4
C. $1,.50
&. $1*.,
(. $1*.45
I'plicit interest A $)).10 - $)1).* A $1,.*4

AACSB: Analytic
Section: "%0
&o'ic: ,m'licit interest

7-5*
105. Eorthern !arehouses wants to raise $11.0 'illion to e8pand its business. 1o acco'plish
this+ it plans to sell 00-year+ $1+000 $ace %alue+ 7ero-coupon bonds. 1he bonds will be priced
to yield 4.7* percent. !hat is the 'ini'u' nu'ber o$ bonds it 'ust sell to raise the $11.0
'illion it needs"
#. )10+011
B. ),5+400
C. )*0+507
&. ,)+0)5
E. ,*0+004

AACSB: Analytic
Difficulty: Basic
Section: "%0

7-5
110. :ou ha%e won a contest and will recei%e $)+*00 a year in real ter's $or the ne8t , years.
(ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent occurrin/ one
year $ro' today. 1he rele%ant no'inal discount rate is ., percent and the in$lation rate is 0.*
percent. !hat are your winnin/s worth today"
A. $7+)05
B. $7+,7
C. $7+001
&. $7+*00
(. $7+4,4

AACSB: Analytic
Section: "%3
&o'ic: -eal cas4 flows

7-57
111. :ou purchased an in%est'ent which will pay you $4+000+ in real dollars+ a year $or the
ne8t three years. (ach pay'ent will be recei%ed at the end o$ the period with the $irst pay'ent
occurrin/ one year $ro' today. 1he no'inal discount rate is 7.* percent and the in$lation rate
is ).5 percent. !hat is the present %alue o$ these pay'ents"
#. $)1+7)0
B. $))+000
C. $))+*11
&. $),+00
(. $),+*)5

AACSB: Analytic
Section: "%3

Essay Questions

7-54
11). &e$ine li.uidity ris2+ de$ault ris2+ and ta8ability ris2 and e8plain how these ris2s relate to
bonds and bond yields.
6i.uidity ris2 is the inability to .uic2ly sell a bond $or its $ull %alue. 1his ris2 e8ists pri'arily
in thinly traded issues. &e$ault ris2 is the li2elihood the issuer will de$ault on its bond
obli/ations and is the basis $or bond ratin/s. 1a8ability ris2 re$lects the $act that bond interest
can be ta8ed di$$erently at the $ederal+ state+ and local le%els and that these ta8 rates can
chan/e. (ach o$ these ris2s increase bond yields as in%estors re.uire co'pensation in
e8chan/e $or ris2 acceptance.
<eedbac23 Re$er to section 7.7

AACSB: -eflecti!e t4in.ing
Bloom's: Analysis
Section: "%"
&o'ic: Determinants of bond yields

11,. In$lation has re'ained low $or the past three years but you ha%e co'e to the conclusion
that trend is endin/ and in$lation will increase si/ni$icantly o%er the ne8t 14 'onths. #ssu'e
you ha%e reached this conclusion prior to other in%estors reachin/ the sa'e conclusion. !hat
adjust'ents should you 'a2e to your bond port$olio in li/ht o$ your conclusions"
Increases in in$lation will increase interest rates accordin/ to the ter' structure o$ interest
rates. 1here$ore+ you should sell any lon/-ter' bonds you own and replace the' with short-
ter' bonds. :ou should also replace lower coupon bonds with hi/her coupon bonds. 1hese
chan/es should be done pro'ptly be$ore other in%estors co''ence ta2in/ the sa'e actions.

Bloom's: Analysis
Section: "%"
&o'ic: &erm structure and interest rate ris.

7-55
110. (8plain the conditions that would need to e8ist $or the 1reasury yield cur%e to be
downward slopin/.
# downward slopin/ 1reasury yield cur%e e8ists when current in$lation rates are hi/h but are
e8pected to decline in the $uture. 1he decline in the in$lation pre'iu' 'ust be si/ni$icant
enou/h to o%erco'e the risin/ interest rate ris2 pre'iu' as the ti'e to 'aturity increases.

Bloom's: Analysis
Section: "%"
&o'ic: &reasury yield cur!e

11*. &escribe the relationships that e8ist between the coupon rate+ the yield to 'aturity+ and
the current yield $or both a discount bond and a pre'iu' bond.
&iscount bond3 :ield to 'aturity @ Current yield @ Coupon rate
;re'iu' bond3 :ield to 'aturity ? Current yield ? Coupon rate

Bloom's: Analysis
Section: "%$
&o'ic: Bond yields


7-100
11. Cyl%an 1rees has a 7 percent coupon bond on the 'ar2et with ten years le$t to 'aturity.
1he bond 'a2es annual pay'ents and currently sells $or $41.)0. !hat is the yield-to-
'aturity"
#. 4.*0 percent
B. 4.4 percent
C. 4.5) percent
D. 5.14 percent
(. 5.)7 percent

AACSB: Analytic
Difficulty: Basic
7OC ;: "#0
Section: "%$

7-101
117. Oaiser Industries has bonds on the 'ar2et 'a2in/ annual pay'ents+ with 10 years to
'aturity+ and sellin/ $or $1+,4).01. #t this price+ the bonds yield 7.* percent. !hat is the
coupon rate"
#. 4.00 percent
B. 4.*0 percent
C. 5.00 percent
&. 10.*0 percent
E. 1).00 percent
Coupon rate A $1)0H$1+000 A 1) percent

AACSB: Analytic
Difficulty: Basic
7OC ;: "#2
Section: "%$
&o'ic: Cou'on rate

7-10)
114. &e8ter Mills issued )0-year bonds a year a/o at a coupon rate o$ 11.0 percent. 1he bonds
'a2e se'iannual pay'ents. 1he yield-to-'aturity on these bonds is 5.) percent. !hat is the
current bond price"
#. $54*.**
B. $551.50
C. $1+15).1
D. $1+15*.40
(. $1+154.00

AACSB: Analytic
Difficulty: Basic
7OC ;: "#3
Section: "%$
&o'ic: Bond 'rice

7-10,
115. Coo 6ee I'ports issued 17-year bonds ) years a/o at a coupon rate o$ 10., percent. 1he
bonds 'a2e se'iannual pay'ents. 1hese bonds currently sell $or 10) percent o$ par %alue.
!hat is the yield-to-'aturity"
#. 5.54 percent
B. 10.00 percent
C. 10.1, percent
&. 10.)7 percent
(. 10.0) percent

AACSB: Analytic
Difficulty: Basic
7OC ;: "#"
Section: "%$

7-100
1)0. Bryceton+ Inc. has bonds on the 'ar2et with 1, years to 'aturity+ a yield-to-'aturity o$
5.) percent+ and a current price o$ $45*.05. 1he bonds 'a2e se'iannual pay'ents. !hat is
the coupon rate"
A. 7.40 percent
B. 4.00 percent
C. 4.)* percent
&. 4.00 percent
(. 4.* percent
Coupon rate A I$,5 )KH$1+000 A 7.40 percent

AACSB: Analytic
Difficulty: Basic
7OC ;: "#<
Section: "%$
&o'ic: Cou'on rate

7-10*
1)1. Cuppose the real rate is 5.* percent and the in$lation rate is 1.4 percent. !hat rate would
you e8pect to see on a 1reasury bill"
#. 5.*0 percent
B. 11.,0 percent
C. 11.07 percent
&. 11.* percent
(. 11.0 percent
I1 L RK A I1 L 0.05*K I1 L 0.014K> R A 11.07 percent

AACSB: Analytic
Difficulty: Basic
7OC ;: "#$=
Section: "%3
&o'ic: Nominal rate

1)). #n in%est'ent o$$ers a 10.* percent total return o%er the co'in/ year. Ca' Bernan2e
thin2s the total real return on this in%est'ent will be only 0.* percent. !hat does Ca' belie%e
the in$lation rate will be $or the ne8t year"
#. *.0 percent
B. *.7 percent
C. *.70 percent
&. .00 percent
(. .)1 percent
I1 L 0.10*K A I1 L 0.00*K I1 L hK> h A *.70 percent

AACSB: Analytic
Difficulty: Basic
7OC ;: "#$$
Section: "%3
&o'ic: ,nflation rate

7-10
1),. Bond C is a 0 percent coupon bond. Bond 1 is a 10 percent coupon bond. Both bonds
ha%e 11 years to 'aturity+ 'a2e se'iannual pay'ents+ and ha%e a yield-to-'aturity o$ 7
percent. I$ interest rates suddenly rise by ) percent+ what will the percenta/e chan/e in the
price o$ Bond 1 be"
#. -1*.1 percent
B. -10.47 percent
C. -1,.* percent
D. -1).5) percent
(. -1).7 percent
;ercenta/e chan/e in price A I$1+04.5) - $1+))7.*1KH$1+))7.*1 A -1).5) percent

AACSB: Analytic
7OC ;: "#$"
Section: "%$

7-107
1)0. 1echnical Cales+ Inc. has . percent coupon bonds on the 'ar2et with 5 years le$t to
'aturity. 1he bonds 'a2e se'iannual pay'ents and currently sell $or 44.75 percent o$ par.
!hat is the e$$ecti%e annual yield"
#. 4.,0 percent
B. 4.00 percent
C. 4.*) percent
D. 4.*4 percent
(. 4.0 percent
($$ecti%e annual rate A P1 L I0.0400H)KQ
)
- 1 A 4.*4 percent

AACSB: Analytic
Bloom's: Analysis
7OC ;: "#$<
Section: "%$
&o'ic: 7ffecti!e bond yield

7-104
1)*. Bonner Metals wants to issue new 14-year bonds $or so'e 'uch-needed e8pansion
projects. 1he co'pany currently has 11 percent bonds on the 'ar2et that sell $or $1+0*5.*1+
'a2e se'iannual pay'ents+ and 'ature in 14 years. !hat should the coupon rate be on the
new bonds i$ the $ir' wants to sell the' at par"
#. *.7* percent
B. .), percent
C. .01 percent
D. .0 percent
(. .75 percent
1o sell a bond at par+ the coupon rate 'ust be set e.ual to the re.uired return.

AACSB: Analytic
Bloom's: Analysis
7OC ;: "#$>
Section: "%$
&o'ic: Bond yields

7-105
1). :ou purchase a bond with an in%oice price o$ $1+00. 1he bond has a coupon rate o$ 5.0
percent+ and there are , 'onths to the ne8t se'iannual coupon date. !hat is the clean price o$
this bond"
A. $1+0,.*0
B. $1+0*).17
C. $1+00.00
&. $1+07.4,
(. $1+04,.*0
#ccrued interest A I0.050 $1+000K I,H1)K A $),.*0
Clean price A $1+00 - $),.*0 A $1+0,.*0

AACSB: Analytic
7OC ;: "#+=
Section: "%2
&o'ic: Accrued interest

7-110
1)7. Cuppose the $ollowin/ bond .uote $or the Beta Co'pany appears in the $inancial pa/e o$
today-s newspaper. #ssu'e the bond has a $ace %alue o$ $1+000 and the current date is #pril
1*+ )005. !hat is the yield to 'aturity on this bond"

#. .0 percent
B. 4.5 percent
C. 10.), percent
&. 1).07 percent
E. 1,.)7 percent

AACSB: Analytic
Bloom's: Analysis
7OC ;: "#+8
Section: "%"
&o'ic: ?sing bond 6uotes

7-111
1)4. :ou want to ha%e $1.00 'illion in real dollars in an account when you retire in 0 years.
1he no'inal return on your in%est'ent is 4 percent and the in$lation rate is ,.* percent. !hat
is the real a'ount you 'ust deposit each year to achie%e your /oal"
#. $+7.7
B. $+474.05
C. $7+0,,.0)
&. $7+*1*.05
(. $7+700.1)
I1 L 0.04K A I1 L rK I1 L 0.0,*K> r A 0.,074) percent

AACSB: Analytic
Bloom's: Analysis
7OC ;: "#+<
Section: "%3

7-11)
1)5. 1he yield-to-'aturity on a bond is the interest rate you earn on your in%est'ent i$
interest rates do not chan/e. I$ you actually sell the bond be$ore it 'atures+ your reali7ed
return is 2nown as the holdin/ period yield. Cuppose that today+ you buy a 1) percent annual
coupon bond $or $1+000. 1he bond has 1, years to 'aturity. 1wo years $ro' now+ the yield-
to-'aturity has declined to 11 percent and you decide to sell. !hat is your holdin/ period
yield"
#. 4.40 percent
B. 5.05 percent
C. 1).00 percent
&. 1,.01 percent
E. 10.45 percent
1he yield-to-'aturity at the ti'e o$ purchase 'ust be 1) percent+ which is the coupon rate+
because the bond was purchased at par %alue.
:ield-to-'aturity in ) years A 1) percent - 1 percent A 11 percent

AACSB: Analytic
Bloom's: Analysis
Difficulty: C4allenge
7OC ;: "#8=
Section: "%$
&o'ic: @olding 'eriod yield

7-11,

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Chapter 07 - Interest Rates and Bond Valuation

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