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# Chapter 14 Bond Prices and Yields

Multiple Choice Questions 1. The current yield on a bond is equal to ________. A) annual interest divided by the current market price B) the yield to maturity C) annual interest divided by the par value D) the internal rate of return E) none of the above Answer: A Difficulty: Easy Rationale: A is current yield and is quoted as such in the financial press. 2. If a 7% coupon bond is trading for $975.00, it has a current yield of ____________ percent. A) 7.00 B) 6.53 C) 7.24 D) 8.53 E) 7.18 Answer: E Difficulty: Easy Rationale: 70/975 = 7.18. 3. If a 6% coupon bond is trading for $950.00, it has a current yield of ____________ percent. A) 6.5 B) 6.3 C) 6.1 D) 6.0 E) 6.6 Answer: B Difficulty: Easy Rationale: 60/950 = 6.3.

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4. If an 8% coupon bond is trading for $1025.00, it has a current yield of ____________ percent. A) 7.8 B) 8.7 C) 7.6 D) 7.9 E) 8.1 Answer: A Difficulty: Easy Rationale: 80/1025 = 7.8. 5. If a 7.5% coupon bond is trading for $1050.00, it has a current yield of ____________ percent. A) 7.0 B) 7.4 C) 7.1 D) 6.9 E) 6.7 Answer: C Difficulty: Easy Rationale: 75/1050 = 7.1. 6. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is ___________. A) 10.65% B) 10.45% C) 10.95% D) 10.52% E) none of the above Answer: A Difficulty: Moderate Rationale: FV = 1000, n = 4, PMT = 100, i = 12, PV= 939.25; $100 / $939.25 = 10.65%.

**Chapter 14 Bond Prices and Yields
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7. A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of 11%, and has a yield to maturity of 12%. The current yield on this bond is ___________. A) 10.39% B) 10.43% C) 10.58% D) 10.66% E) none of the above Answer: D Difficulty: Moderate Rationale: FV = 1000, n = 12, PMT = 110, i = 12, PV= 938.06; $100 / $938.06 = 10.66%. 8. Of the following four investments, ________ is considered the safest. A) commercial paper B) corporate bonds C) U. S. Agency issues D) Treasury bonds E) Treasury bills Answer: E Difficulty: Easy Rationale: Only Treasury issues are insured by the U. S. government; the shorter-term the instrument, the safer the instrument. 9. To earn a high rating from the bond rating agencies, a firm should have A) a low times interest earned ratio B) a low debt to equity ratio C) a high quick ratio D) B and C E) A and C Answer: D Difficulty: Easy Rationale: High values for the times interest and quick ratios and a low debt to equity ratio are desirable indicators of safety.

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E) the bid price. B) the asked price less accrued interest. E) A and C. coupon bonds typically sell ________. . but is not included in the quotations page price. At issue. A) above par value B) below par C) at or near par value D) at a value unrelated to par E) none of the above Answer: C Difficulty: Easy Rationale: If the investment banker has appraised the market and the quality of the bond correctly. Answer: A Difficulty: Easy Rationale: The buyer of a bond will buy at the asked price and will also be invoiced for any accrued interest due to the seller. 11. Answer: B Difficulty: Moderate Rationale: Accrued interest must be paid by the buyer. Accrued interest A) is quoted in the bond price in the financial press.10. C) must be paid to the broker for the inconvenience of selling bonds between maturity dates. The invoice price of a bond that a buyer would pay is equal to A) the asked price plus accrued interest. the bond will sell at or near par (unless interest rates have changed very dramatically and very quickly around the time of issuance). D) A and B. D) the bid price less accrued interest. 12. C) the bid price plus accrued interest. B) must be paid by the buyer of the bond and remitted to the seller of the bond.

5 months = 1. 14.150. The "D" rating indicates A) the bonds are insured B) the bonds are junk bonds C) the bonds are referred to as "high yield" bonds D) A and B E) B and C Answer: E Difficulty: Easy Rationale: D ratings are risky bonds. Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15.110 C) $1.08/12*100. A) $491. A) $1. The accrued interest on the $100.20 E) none of the above Answer: D Difficulty: Moderate Rationale: 76/183($4.100 B) $1.20. An 8% coupon U.160 E) none of the above Answer: C Difficulty: Moderate Rationale: $1.Chapter 14 Bond Prices and Yields 13. often called junk bonds (or high yield bonds by those marketing such bonds).67.661.67 per month.000) = $1.67/month * 2.80 B) $800. Approximation: .130 + $20 (accrued interest) = $1.000=666. If the last interest payment was made two months ago and the coupon rate is 12%.661.61 D) $1. The bonds of Ford Motor Company have received a rating of "D" by Moody's. S. 301 .00 C) $983. 15.150 D) $1. 666.000 par value in the Wall Street Journal.666.000 face value of this note is _________. the invoice price of the bond will be ____________. A coupon bond is reported as having an ask price of 113% of the $1.

E) indefinitely related. B) primarily consists of a network of bond dealers in the over the counter market. In addition. The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity. the other choices do not apply to bonds. most bonds are traded by dealers. 18. unlike the stock market. can be a very thinly traded market. the price and yield on a bond are A) positively related. . Answer: B Difficulty: Easy Rationale: Bond prices and yields are inversely related. 17. A) current yield B) dividend yield C) P/E ratio D) yield to maturity E) discount yield Answer: D Difficulty: Easy Rationale: The current yield is the annual interest as a percent of current market price. E) not related. Ceteris paribus. D) A and B.16. E) B and C. C) sometimes positively and sometimes negatively related. The bond market A) can be quite "thin". B) negatively related. C) consists of many investors on any given day. Answer: D Difficulty: Easy Rationale: The bond market.

303 . A) pays interest on a regular basis (typically every six months) B) does not pay interest on a regular basis but pays a lump sum at maturity C) can always be converted into a specific number of shares of common stock in the issuing company D) always sells at par E) none of the above Answer: A Difficulty: Easy Rationale: A coupon bond will pay the coupon rate of interest on a semiannual basis unless the firm defaults on the bond. The other terms are not specifically relevant to convertible bonds.Chapter 14 Bond Prices and Yields 19. 21. A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date. 20. but all bonds other than put bonds are redeemed at a price determined by the prevailing interest rates. The _________ gives the number of shares for which each convertible bond can be exchanged. A) callable B) coupon C) put D) Treasury E) zero-coupon Answer: C Difficulty: Easy Rationale: Any bond may be redeemed prior to maturity. Convertible bonds are specific types of bonds. the price of bond as a straight bond provides the floor. A coupon bond is a bond that _________. A) conversion ratio B) current ratio C) P/E ratio D) conversion premium E) convertible floor Answer: A Difficulty: Easy Rationale: The conversion premium is the amount for which the bond sells above conversion value.

5% . .6% and 3. C) are called when interest rates increase appreciably. Lucent Technologies: 8.3% B) 0.2%. Callable bonds A) are called when interest rates decline appreciably.6%.7% and 0. a Treasury bond due in 5 years has a yield of 5.4. A Treasury bond due in one year has a yield of 5. a bond issued by Shell Oil due in one year has a yield of 6.2% B) 0.8%. A bond issued by Ford Motor Company due in 5 years has a yield of 7.2% = 1.3%. are: A) 1.9%.6% = 3.9% . Answer: D Difficulty: Easy Rationale: Callable bonds often are refunded (called) when interest rates decline appreciably. The call price of the bond (approximately par and one year's coupon payment) declines to par as time passes and maturity is reached.6%.5% .6%.5% and .5. The default risk premiums on the bonds issued by Mobil and Lucent Technologies. respectively. a bond issued by Mobil due in one year has a yield of 6.5% C) 1. 23.5%. A bond issued by Lucent Technologies due in 5 years has a yield of 8.5.6% D) 0.3%. The default risk premiums on the bonds issued by Shell and Ford. E) B and C.6.5% E) none of the above Answer: A Difficulty: Moderate Rationale: Mobil: 6.2%. B) have a call price that declines as time passes.0% D) 0.5%.3% E) none of the above Answer: D Difficulty: Moderate Rationale: Shell: 6.2% and 1. respectively. D) A and B.7% C) 3. 24. a Treasury bond due in 5 years has a yield of 6.7% = .2% .22. A Treasury bond due in one year has a yield of 4. Ford: 7.8% and 1.7% and 1.6% = 1.0% and 1. are A) 1.7%.3% and 1.

give investor the ability to share in the profits of the issuing company E) none of the above Answer: A Difficulty: Moderate Rationale: Floating rate bonds allow the investor to earn a rate of interest income tied to current interest rates.7%. and has a coupon rate of 9%. 26. 9% .2% and 1. A) minimize the holders' interest rate risk. 27.2%.000. either by converting to stock or holding the bond.2% .0% and 1. give the investor the ability to benefit from interest rate changes D) maximize the holders' interest rate risk.2% B) 0. The yield to maturity on this bond is: A) 8. respectively.6. Floating-rate bonds are designed to ___________ while convertible bonds are designed to __________. 305 . Xerox: 7. A coupon bond that pays interest annually is selling at par value of $1. thus negating one of the major disadvantages of fixed income investments.6. matures in 5 years.2%.Chapter 14 Bond Prices and Yields 25. The default risk premiums on the bonds issued by Exxon and Xerox.7% C) 1. the coupon rate is equal to the yield to maturity.3% C) 9. A bond issued by Xerox due in 5 years has a yield of 7. a Treasury bond due in 5 years has a yield of 6.0% E) none of the above Answer: C Difficulty: Easy Rationale: When a bond sells at par value. A Treasury bond due in one year has a yield of 6.5% and .9%. are A) 1.0% D) 0. a bond issued by Exxon due in one year has a yield of 7.0%.7% = 1.5% E) none of the above Answer: A Difficulty: Moderate Rationale: Exxon: 7. which will increase in price as the stock price increases.2%. give the investor the ability to share in the price appreciation of the company's stock C) minimize the holders' interest rate risk. Convertible bonds allow the investor to benefit from the appreciation of the stock price.0% D) 10.2% = 1.7% and 0. give the investor the ability to share in the price appreciation of the company's stock B) maximize the holders' interest rate risk.0% B) 8.

01 D) $886. PMT = 40.00 Answer: D Difficulty: Moderate Rationale: FV = 1000.80 D) $1.82 30. and has a yield to maturity of 10%.20 E) none of the above Answer: A Difficulty: Moderate Rationale: FV = 1000. A) $922. i = 5.20 E) none of the above Answer: C Difficulty: Moderate Rationale: FV = 1000. PMT = 70. and has a yield to maturity of 10%. n = 5.077. PV = 922.78 .28.99 B) $620.077.000.000.82 D) $1. A) $712. matures in 5 years. i = 10. i = 10. 29. n = 5. A coupon bond that pays interest annually has a par value of $1. matures in 5 years.92 C) $1. matures in 5 years.28.075. PMT = 120. A coupon bond that pays interest annually.000.16 C) $1. PV = 886.000. PV = 1075. The intrinsic value of the bond today will be _________ if the coupon rate is 12%. has a par value of $1.16 C) $1. A coupon bond that pays interest semi-annually has a par value of $1.77 B) $924. The intrinsic value of the bond today will be __________ if the coupon rate is 8%. n = 10. A) $922.075. and has a yield to maturity of 10%.78 B) $924. The intrinsic value of the bond today will be ______ if the coupon rate is 7%.28 E) $1.123.

i = 5. The yield to maturity on this bond is __________.00% D) 60. i = 8. and has a yield to maturity of 10%. You purchased an annual interest coupon bond one year ago that now has 6 years remaining until maturity.46.22 32.77 B) $924.00% B) 8.22 E) none of the above Answer: D Difficulty: Moderate Rationale: FV = 1000. PMT = 100.077. and is selling today at a $72 discount from par value.13. PV = -928. PMT = 100.000.075. n = 7. PV = 1077. n = 5. matures in 5 years. D) $1.50. C) $1.997% 33.092. E) $1. A) $922. A coupon bond that pays interest of $100 annually has a par value of $1.000. PMT = 60. n = 10.00% E) none of the above Answer: C Difficulty: Moderate Rationale: FV = 1000. The amount you paid for this bond one year ago was A) $1. The intrinsic value of the bond today will be ________ if the coupon rate is 12%.Chapter 14 Bond Prices and Yields 31.33% C) 12. The coupon rate of interest was 10% and par value was $1.16 C) $1. Answer: E Difficulty: Moderate Rationale: FV = 1000.088. matures in 5 years. the yield to maturity was 8%. A coupon bond that pays interest semi-annually has a par value of $1.50.075. A) 6.13 307 .104. B) $1. PV = 1104. i = 11.057. At the time you purchased the bond.80 D) $1.50.000.

PV = 1092. but bond B will decrease more than bond A E) none of the above Answer: B Difficulty: Moderate Rationale: The longer the maturity.09)8 = $501. At the time you purchased the bond. Both bonds presently are selling at their par value of $1. but bond B will increase more than bond A C) both bonds will decrease in value. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%.82% C) 8. HPR = (1079. PMT = 100. i = 8. You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at that time. your annual total rate of return on holding the bond for that year would have been _________. A and B.87 C) $513. the yield to maturity was 8%.1092.00% D) 11. the bond should sell for a price of _______ today. 36. If the bond matures in 8 years. Bond A will mature in 5 years while bond B will mature in 6 years.000. A) 422.000/(1. n = 6.000.49 E) none of the above Answer: B Difficulty: Moderate Rationale: $1. n = 5.85 .46 + 100) / 1092.95% E) none of the above Answer: C Difficulty: Difficult Rationale: FV = 1000.41 B) $501.85. ____________. but bond A will decrease more than bond B D) both bonds will decrease in value. the greater the price change when interest rates change. A) both bonds will increase in value.46 = 8% 35.34. PV = 1079. FV = 1000. PMT = 100.46.16 D) $483.000. If the yields to maturity on the two bonds change from 12% to 10%.00% B) 7. Consider two bonds. A zero-coupon bond has a yield to maturity of 9% and a par value of $1. i = 8.87 . The coupon interest rate was 10% and the par value was $1. but bond A will increase more than bond B B) both bonds will increase in value. Each pays interest of $120 annually. A) 7.

A) 10.8% D) 1. You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1.000 due one month from now is selling today for $99.62% D) 12.68% E) none of the above Answer: D Difficulty: Moderate Rationale: $990/$99.961/$98.11)9 = $390.68%. 39.01)12 . $1. ($390.54. A Treasury bill with a par value of $100.000.92 .55% C) 12.68% E) none of the above Answer: C Difficulty: Moderate Rationale: $1.54)/ $385.1.0 = 12.10)10 = $385. 309 .000/(1.42% C) 13. (1.00% B) 20.$385.4%.62% D) 12.55% C) 12.000 due two months from now is selling today for $98.Chapter 14 Bond Prices and Yields 37. A) 12.01.039.010 = 0.40% B) 12. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 11% at the time you sell. A) 12.000/(1. The effective annual yield is __________.010.92.62%. (1.4% E) none of the above Answer: D Difficulty: Moderate Rationale: $1. with an effective annual yield of _________.54 = 1. A Treasury bill with a par value of $100.02. 38.40% B) 12.1 = 12.02)6 .039 = 0.

68% E) none of the above Answer: B Difficulty: Moderate Rationale: $2.55%.1.075.22. A) $922.20 E) none of the above Answer: D Difficulty: Moderate Rationale: (1. matures in 5 years.16 C) $1.913/$97. and an effective annual yield to maturity of 10.087. (1. The price the bond should sell for today is ________.00 = 12.000 due three months from now is selling today for $97.03)4 .077. A convertible bond has a par value of $1. 42. A) 12.000 and a coupon rate of 12%. A coupon bond pays interest semi-annually. FV=1000.1 = 5%. with an effective annual yield of _________. 41.40% B) 12.62% D) 12.000 E) none of the above Answer: C Difficulty: Easy Rationale: 30 shares X $29/share = $870. has a par value of $1.087 = 0. . PMT=60.25%.40. PV=1. The current price of the issuing firm's stock is $29 and the conversion ratio is 30 shares.000 and a current market price of $850.77 B) $924. N=10.077.03.55% C) 12. I=5%. A) $729 B) $810 C) $870 D) $1.1025)1/2 .80 D) $1. A Treasury bill with a par value of $100. The bond's market conversion value is ______.

The yield to maturity on bond B is _________.$810 = $40.000 par value zero-coupon bonds: 44.000 .2321.62)/$811. The bond's conversion premium is _________.62 = 0. 311 . The yield to maturity on bond A is ____________. A) 10% B) 11% C) 12% D) 14% E) none of the above Answer: B Difficulty: Moderate Rationale: ($1.000 and a current market value of $850. A convertible bond has a par value of $1. Use the following to answer questions 44-47: Consider the following $1.2321)1/2 .000 .09 = 10%.$811. A) $40 B) $150 C) $190 D) $200 E) none of the above Answer: A Difficulty: Moderate Rationale: $850 . (1.0 = 11%.$909. The current price of the issuing firm's stock is $27 and the conversion ratio is 30 shares. 45.09)/$909. A) 10% B) 11% C) 12% D) 14% E) none of the above Answer: A Difficulty: Moderate Rationale: ($1.Chapter 14 Bond Prices and Yields 43.1.

404928.26% B) 10.14%. The yield to maturity on bond C is ____________.48%.$635. is callable in 5 years. PV = -975. i = 13. (1. PV = -1. Answer: C Difficulty: Moderate Rationale: YTC = FV = 1120.573515)1/4 . n = 3.98%.78 = 0.110. annual payments. 48. 10 years to maturity is callable in 3 years at a call price of $1. D) 9. E) none of the above. A) 10% B) 11% C) 12% D) 14% E) none of the above Answer: C Difficulty: Moderate Rationale: ($1. 5.$711.0 = 12%.98% E) none of the above Answer: D Difficulty: Moderate Rationale: FV = 1100. 47. PMT = 60. A 10% coupon bond. A) 10% B) 11% C) 12% D) 14% E) none of the above Answer: C Difficulty: Moderate Rationale: ($1. the yield to call is _________. If the bond is selling today for $975. n = 10. C) 10. if the bond is selling today for $1.0 = 12%. The call price is $1.573515. semiannual payments.00% C) 9. The yield to maturity on bond D is _______. B) 10.52 = 0. PMT = 100.000 . A 12% coupon bond.03%.95%.78)/$711. A) 10.404928)1/3 .1. 49.120.100.86%.52)/$635.1.48*2=10.95 .000 .110m i = 5.46. (1.25% D) 13. what is the yield to call? A) 12.

A 10% coupon. i = 6.46 = 11. 52.00%. PMT = 100. is expected to make all coupon payments. i = 8. i = 7.00%. but to pay only 50% of par value at maturity. n = 5. For callable bonds. D) 8.46. PMT = 100.Chapter 14 Bond Prices and Yields 50. E) none of the above. annual payments. HPR = (1123. yield to call is sometimes the more appropriate calculation for the investor (if interest rates are expected to decrease). What is the expected yield on this bond if the bond is purchased for $975? A) 10.95% E) none of the above Answer: D Difficulty: Difficult Rationale: FV = 1000.1092. PV = 1092.00% C) 9. At the time you purchased the bond. PV = 1123. PMT = 100. You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase. bond maturing in 10 years. B) 6. your annual total rate of return on holding the bond for that year would have been _________. n = 6. The coupon interest rate is 10% and par value is $1. The ________ is used to calculate the present value of a bond. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%. C) 11.00% B) 8. n = 10.68%.01. A) nominal yield B) current yield C) yield to maturity D) yield to call E) none of the above Answer: C Difficulty: Easy Rationale: Yield to maturity is the discount rate used in the bond valuation formula. PV = -975.68%.68% 51. the yield to maturity was 8%. FV = 1000.01 . Answer: B Difficulty: Moderate Rationale: FV = 500. A) 7.95% D) 11.000.46 + 100) / 1092. 313 .95%.

the price of a premium bond declines as the bond approaches maturity. E) A. B. Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. C) based on the assumption that any payments received are reinvested at the coupon rate. The yield to maturity on a bond is ________. If interest rates remain constant. A) below the coupon rate when the bond sells at a discount. D) none of the above. .53. A) higher B) lower C) the same D) cannot be determined E) $1. A) the coupon rate is greater than the current yield and the current yield is greater than yield to maturity B) the coupon rate is greater than yield to maturity C) the coupon rate is less than the current yield and the current yield is greater than the yield to maturity D) the coupon rate is less than the current yield and the current yield is less than yield to maturity E) none of the above is true. 54. and equal to the coupon rate when the bond sells at a premium. for C to be true payments must be reinvested at the yield to maturity. A bond will sell at a discount when __________. Yield to maturity will be greater than current yield as investor will have purchased the bond at discount and will be receiving the coupon payments over the life of the bond.000 Answer: B Difficulty: Moderate Rationale: This bond is a premium bond as interest rates have declined since the bond was issued. B) the discount rate that will set the present value of the payments equal to the bond price. Answer: B Difficulty: Easy Rationale: The reverse of A is true. Answer: D Difficulty: Moderate Rationale: In order for the investor to earn more than the current yield the bond must be selling for a discount. If interest rates remain constant. and C. 55. one year from now the price of this bond will be _______.

0% D) 12. n = 30.Chapter 14 Bond Prices and Yields 56. 10 years to maturity and selling at 88 has a yield to maturity of _______.000. B is the only possible answer. as the bond is selling at discount the yield must be higher than the coupon rate.33%. a current price of $850 and a yield to maturity of 12%. Using semiannual compounding. Intuitively and without the use calculations. the coupons must be reinvested at the yield to maturity. PV = 308. if interest payments are reinvested at 10%. 58. A) $308 B) $315 C) $464 D) $555 E) none of the above Answer: A Difficulty: Moderate Rationale: FV = 1000. A) 10. A bond has a par value of $1.9% C) 12. Therefore. A) over 14% B) between 13% and 14% C) between 12% and 13% D) between 10% and 12% E) less than 12% Answer: A Difficulty: Moderate Rationale: YTM = 14.32 315 . A bond with a 12% coupon.000 and a required return of 8% would be priced at approximately ______.00% B) 10. a coupon rate of 10% with interest paid annually. a time to maturity of 20 years.4% E) none of the above Answer: B Difficulty: Difficult Rationale: In order to earn yield to maturity. However. 57. the realized compound yield on this bond must be ________. a 15-year zero coupon bond that has a par value of $1. I = 4.

D) $7. The yield to maturity of a 20-year zero coupon bond that is selling for $372.87. $1.51.8% D) 13.000/(1.4% E) none of the above Answer: A Difficulty: Moderate Rationale: [$1. Consider a $1. the imputed interest income for the first year of that bond is A) zero.000/($372. the greater the value of the conversion feature.50]1/20 . A) 5. . the less the security is worth. B) $14. C) $45. E) none of the above. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%. B) The more volatile the underlying stock. The smaller the spread (c).000 is ________.87.85.10)20 = $148. Convertibles are debentures (unsecured bonds).49 . E) Convertibles are not callable.44.59. Answer: B Difficulty: Moderate Rationale: $1.8% C) 10.000/(1.10)19 = $163. All convertibles are callable at the option of the issuer.1 = 5.64. the more the convertible is worth.1%.50 with a value at maturity of $1. 61. $194. the less the bond is worth. C) The smaller the spread between the dividend yield on the stock and the yield-tomaturity on the bond. Answer: B Difficulty: Moderate Rationale: The longer the call protection the more attractive the bond.64 = $14. 60.000 par value 20-year zero coupon bond issued at a yield to maturity of 10%.1% B) 8.$148. Which one of the following statements about convertibles is true? A) The longer the call protection on a convertible. D) The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

071. A) $107. D) all of the above. Answer: E Difficulty: Moderate Rationale: Bearer bonds are not registered so there is no record of ownership.070.075.18 B) $1. The bid price is quoted first and is the lower of the two.075. $1.071. B) helpful to tax authorities in the enforcement of tax collection. C) the maturity date of the bond.60 E) $1. $1. $107.60. $1. E) both A and C. The bond indenture includes A) the coupon rate of the bond. They are rare in the United States today. $1.071. 64. Bearer bonds are A) bonds traded without any record of ownership. 317 . 63.56 Answer: C Difficulty: Moderate Rationale: Treasury bonds are quoted as a percentage of par value ($1.000) with the number after the colon representing the fractions of a point in 32nds.80. E) none of the above.00.63 D) $1.070.071. Tax authorities find registered bonds helpful in tax enforcement but not bearer bonds. Answer: D Difficulty: Easy Rationale: The bond indenture includes the coupon rate.Chapter 14 Bond Prices and Yields 62. par value and maturity date of the bond as well as any other contractual features.80 C) $1. A Treasury bond quoted at 107:16 107:18 has a bid price of _______ and an asked price of _____. D) all of the above. B) the par value of the bond.16.50. C) rare in the United States today.

The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called A) deferral. B) reissue. B) offer lower coupon rates than similar nonconvertible bonds. Convertible bonds A) give their holders the ability to share in price appreciation of the underlying stock.65. E) both A and C are true. . C) repurchase. E) on a formal exchange operated by the Philadelphia Stock Exchange. 66. D) both A and B are true. E) none of the above. Answer: C Difficulty: Moderate Rationale: Most corporate bonds are traded in a loosely organized network of bond dealers linked by a computer quote system. Only a small proportion is traded on the New York Exchange. B) by the issuing corporation. D) on a formal exchange operated by the American Stock Exchange. C) offer higher coupon rates than similar nonconvertible bonds. 67. D) refunding. Answer: D Difficulty: Moderate Rationale: Convertible bonds offer appreciation potential through the ability to share in price appreciation of the underlying stock but offer a lower coupon and yield than similar nonconvertible bonds. Answer: D Difficulty: Moderate Rationale: The process of refunding refers to calling high-coupon bonds and issuing new. lower coupon debt. C) over the counter by bond dealers linked by a computer quotation system. Most corporate bonds are traded A) on a formal exchange operated by the New York Stock Exchange.

because principal repayment on the scheduled maturity date is guaranteed. B) bankruptcy risk. D) both A and B are true. 69. D) government bonds with coupon rate linked to the general level of prices. E) none of the above is true. E) zero-coupon government bonds. C) bondholders may lose because their bonds can be repurchased by the corporation at below-market prices. When a bond indenture includes a sinking fund provision A) firms must establish a cash fund for future bond redemption. 70. This changes coupon payments.Chapter 14 Bond Prices and Yields 68. C) the likelihood of a firm becoming a takeover target. B) securities formed from the principal payments only of government bonds. TIPS are A) securities formed from the coupon payments only of government bonds. Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict A) required coupon rates for new bond issues. D) the probability of a bond issue being called. but not the stated coupon rate. Answer: C Difficulty: Moderate Rationale: Treasury Inflation Protected Securities (TIPS) are bonds whose par value adjusts according to the general level of prices. either by open market purchase or at a special call price from bondholders. Answer: B Difficulty: Easy Rationale: Z-scores are used to predict significant bankruptcy risk. B) bondholders always benefit. C) government bonds with par value linked to the general level of prices. 319 . Answer: C Difficulty: Moderate Rationale: A sinking fund provisions requires the firm to redeem bonds over several years. E) none of the above. This can result in repurchase in advance of scheduled maturity at below-market prices.

Answer: E Difficulty: Easy Rationale: Collateralized bonds are considered the safest assets of the firm because they are backed by specific assets of the firm. C) they pay a fixed amount at maturity. which allowed them to “fix” their income at a higher level by investing in bonds. E) both B and C are true. 72. . It helps the student understand the nature of bonds. Answer: D Difficulty: Easy Rationale: This definition is given in the chapter's introduction. E) both B and C are true. rather than relying on the firm's general earning power. B) are backed by specific assets of the issuing firm. D) they promise either a fixed stream of income or a stream of income determined by a specific formula. C) provide higher priority to senior creditors in the event of bankruptcy.71. 73. B) they are held predominantly by older people who are living on fixed incomes. C) are considered the safest assets of the firm. D) all of the above are true. D) all of the above are true. Subordination clauses in bond indentures A) may restrict the amount of additional borrowing the firm can undertake. E) they were the first type of investment offered to the public. Collateralized bonds A) rely on the general earning power of the firm for the bond's safety. Debt securities are often called fixed-income securities because A) the government fixes the maximum rate that can be paid on bonds. B) are sometimes referred to as "me-first" rules. Answer: D Difficulty: Easy Rationale: All of the statements correctly describe subordination clauses.

The interest amount equals $1. E) is analyzed primarily by focusing (“zeroing in”) on the coupon rate.00.06 = $62.000 Answer: D Difficulty: Moderate Rationale: The bond price. becomes $1. 321 . One year ago. and a par value of $1.042 = $1.042 D) $62.00. you purchased a newly issued TIPS bond that has a 6% coupon rate. is a firm that has its main office on the Right Bank in Paris. which is indexed to the inflation rate. 76. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. 75.00.000*1.042 E) $102. $1. C) pays interest to the investor without requiring the actual coupon to be mailed to the corporation.042*. The interest payment is based on the coupon rate and the new face value.042. The average inflation rate over the year was 4. rather than at a specified coupon rate. Investors receive the face value at maturity. This type of bond is known as A) a contingency bond B) a catastrophe bond C) an emergency bond D) an incident bond E) an eventuality bond Answer: B Difficulty: Easy Rationale: Catastrophe bonds are used to transfer risk from the firm to the capital markets.2%. A zero-coupon bond is one that A) effectively has a zero percent coupon rate.000.000 B) $42. Swingin' Soiree. Answer: A Difficulty: Moderate Rationale: Zero-coupon bonds pay no interest. Inc. $1.042 C) $60. What is the amount of the coupon payment you will receive and what is the current face value of the bond? A) $60. B) pays interest to the investor based on the general level of interest rates. five years to maturity.00. D) is issued by state governments because they don't have to pay interest. $1.52. $1. $1.Chapter 14 Bond Prices and Yields 74.52.

The prices converge for high interest rates. 78. so the option is valuable. C) the investor only plans to hold the bond until its first call date. Answer: E Difficulty: Difficult Rationale: If interest rates fall the firm is more likely to call the issue and refinance at lower rates. D) The straight bond and the callable bond will have the same price. The firm is more likely to call the issue at low interest rates. What is the relationship between the price of a straight bond and the price of a callable bond? A) The straight bond's price will be higher than the callable bond's price for low interest rates. C) The straight bond's price will change as interest rates change. The student has to think through each of the reasons given and make the connection between falling rates and the motivation to refinance. the price difference is due to the value of the firm's option to call the bond at the call price. At higher interest rates the firm is less likely to call and this option loses value. page 463. B) The straight bond's price will be lower than the callable bond's price for low interest rates.4. . but the callable bond's price will stay the same. B) the firm has called some of its bonds in the past. E) interest rates are expected to fall. D) interest rates are expected to rise. Bond analysts might be more interested in a bond's yield to call if A) the bond's yield to maturity is insufficient. A graphical representation is shown in Figure 14. This is similar to an individual refinancing a home. E) There is no consistent relationship between the two types of bonds. Answer: A Difficulty: Moderate Rationale: For low interest rates.77.

Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. 323 .29409. paid annually. 80.0897.13% Answer: D Difficulty: Difficult Rationale: The investment grows to a total future value of $80*(1.97%. Today is the bond's maturity date.34 over the three year period.261. 1+rcy = 1. Which of the following is not a type of international bond? A) Samurai bonds B) Yankee bonds C) bulldog bonds D) Elton bonds E) All of the above are international bonds. The realized compound yield is the yield that will compound the original investment to yield the same future value: $974. (1+rcy)3 = 1. Answer: D Difficulty: Easy Rationale: Samurai bonds.094) + $1.Chapter 14 Bond Prices and Yields 79. and a face value of $1.000. a coupon rate of 8%.080 = $1.261. What is your realized compound yield on the bond? A) B) C) D) E) 6.43% 7.97% 9. The bond had three years to maturity.69. Yankee bonds.69*(1+rcy)3 = $1.23% 8.072)*(1.96% 8. rcy = 8. and bulldog bonds are mentioned in the textbook.34. Three years ago you purchased a bond for $974.094) + $80*(1.

000. PMT = 45.28 E) $1. and has a yield to maturity of 9%. matures in 6 years.00 .5%.01 D) $886. A) $712. A) $922.00 E) none of the above Answer: D Difficulty: Moderate Rationale: FV = 1000. The intrinsic value of the bond today will be __________ if the coupon rate is 9%. n = 12.123. PMT = 60. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.000.78 B) $924. n = 6. A coupon bond that pays interest annually has a par value of $1. A coupon bond that pays interest semi-annually has a par value of $1.123.000. PV = 1000.96 83.99 B) $851.16 C) $1. and has a yield to maturity of 9%.01 D) $886.000. i = 4. and has a yield to maturity of 11%.000.81. The intrinsic value of the bond today will be ______ if the coupon rate is 7. A) $833. 82.93 C) $1. matures in 8 years.93.00 Answer: B Difficulty: Moderate Rationale: FV = 1000.5.075. PV = 851. n = 8.80 D) $1. PMT = 75. PV = 833. i = 9. i = 11.28 E) $1.92 C) $1. matures in 6 years.000.00 Answer: A Difficulty: Moderate Rationale: FV = 1000.96 B) $620. A coupon bond that pays interest annually has a par value of $1.

matures in 9 years. PMT = 90. A) 8.32% E) none of the above Answer: B Difficulty: Moderate Rationale: FV = 1000. PMT = 44. The yield to maturity on this bond is __________. matures in 7 years. n = 14.00% B) 10.000.000.15% C) 11. matures in 4 years. The yield to maturity on this bond is __________. A) $922.09% C) 10.20 E) none of the above Answer: B Difficulty: Moderate Rationale: FV = 1000. i = 10.80 D) $1.09% 325 .Chapter 14 Bond Prices and Yields 84. A coupon bond that pays interest semi-annually has a par value of $1.15% 86. PV = -934.78 B) $894. The intrinsic value of the bond today will be __________ if the coupon rate is 8.075.76% E) none of the above Answer: B Difficulty: Moderate Rationale: FV = 1000. PV = 894. and has a yield to maturity of 11%. and is selling today at a $36 discount from par value.077. A coupon bond that pays interest of $90 annually has a par value of $1. PV = -964.51 85.69% B) 9. n = 9.25% D) 12.51 C) $1. PMT = 40. i = 5.000. and is selling today at a $66 discount from par value. A coupon bond that pays interest of $40 semi annually has a par value of $1.43% D) 9.5. i = 9. n = 8. A) 9.8%.

A) 8.13 Answer: C Difficulty: Moderate Rationale: FV = 1000. n = 9. PV = 1114. PV = 1124. i = 8. At the time you purchased the bond. PMT = 110.65 D) $1.46 E) $1. PV = 1. i = 8. but bond G will increase more than bond F C) both bonds will decrease in value. your annual total rate of return on holding the bond for that year would have been _________. You purchased an annual interest coupon bond one year ago that now has 18 years remaining until maturity. but bond F will increase more than bond G B) both bonds will increase in value. HPR = (1114. If the yields to maturity on the two bonds change from 9% to 10%. the greater the price change when interest rates change. PMT = 100.083.50 C) $1. the yield to maturity was 8%. The coupon interest rate was 10% and the par value was $1. but bond F will decrease more than bond G D) both bonds will decrease in value. F and G. The amount you paid for this bond one year ago was A) $1. i = 10.1124.083. Consider two bonds.93. The coupon rate of interest was 11% and par value was $1. PMT = 100. Bond F will mature in 15 years while bond G will mature in 26 years.075.94 + 100) / 1124. A) both bonds will increase in value.93 .94. but bond G will decrease more than bond F E) none of the above Answer: D Difficulty: Moderate Rationale: The longer the maturity. You purchased an annual interest coupon bond one year ago that had 9 years remaining to maturity at that time. Each pays interest of $90 annually.104. . Both bonds presently are selling at their par value of $1. n = 8. ____________.87.000.82% C) 7. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%.65 88.00% B) 7. n = 19.057. At the time you purchased the bond.00% D) 11.50 B) $1.092. FV = 1000.94 = 8% 89.95% E) none of the above Answer: A Difficulty: Difficult Rationale: FV = 1000.000. the yield to maturity was 10%.000.

000/(1.42% C) -1.4% E) none of the above Answer: C Difficulty: Moderate Rationale: $1.4%. A) 422.04 E) none of the above Answer: D Difficulty: Moderate Rationale: $1.000/(1.$355.Chapter 14 Bond Prices and Yields 90. the bond should sell for a price of _______ today.000.04 91.10)11 = $350.74 92.53 = -1. the bond should sell for a price of _______ today. If the bond matures in 27 years.000/(1. ($350.00% B) 20. A zero-coupon bond has a yield to maturity of 12% and a par value of $1.000.000/(1.09)12 = $355.11)27 = $59.87 C) $513. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 10% at the time you sell. A) $59.000. A zero-coupon bond has a yield to maturity of 11% and a par value of $1. 327 .4% D) 1.16 D) $130.41 B) $501.12)18 = $130.49 .16 D) $483. A) 10. $1.53)/ $355. You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of $1.53.87 C) $513.49 E) none of the above Answer: A Difficulty: Moderate Rationale: $1. If the bond matures in 18 years.74 B) $501.49.

000. The current price of the issuing firm's stock is $20 and the conversion ratio is 35 shares.27 .000 and a current market price of $1105.66)/ $481. 95.4% E) none of the above Answer: B Difficulty: Moderate Rationale: $1.8%. A) $700 B) $810 C) $870 D) $1.8% D) 1. $1.$481. 94.27. A) 10. A convertible bond has a par value of $1. A) $729 B) $924 C) $870 D) $1. A convertible bond has a par value of $1.000 and a current market price of $975.000/(1. . The bond's market conversion value is ______.09)6 = $596.66 = 23.66.000 E) none of the above Answer: A Difficulty: Easy Rationale: 35 shares X $20/share = $700.8% C) 13.93.00% B) 23.11)7 = $481. The bond's market conversion value is ______. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 9% at the time you sell.000 E) none of the above Answer: B Difficulty: Easy Rationale: 22 shares X $42/share = $924. The current price of the issuing firm's stock is $42 and the conversion ratio is 22 shares.000/(1. You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value of $1. ($596.

the accrued interest would be A) 5. If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago. A) $40 B) $150 C) $175 D) $200 E) none of the above Answer: C Difficulty: Moderate Rationale: $1150 . A convertible bond has a par value of $1.67 B) 7.Chapter 14 Bond Prices and Yields 96. The bond's conversion premium is _________.15 E) 7. 98. The bond's conversion premium is _________.000 and a current market value of $950. A) $40 B) $70 C) $190 D) $200 E) none of the above Answer: B Difficulty: Moderate Rationale: $950 .15 329 . The current price of the issuing firm's stock is $22 and the conversion ratio is 40 shares.$975 = $175.35 D) 6.000 and a current market value of $1150. 97.35 C) 6. A convertible bond has a par value of $1. The current price of the issuing firm's stock is $65 and the conversion ratio is 15 shares.12 Answer: D Difficulty: Easy Rationale: $35*(32/182) = $6.$880 = $70.

012.67 B) 12.012.69 B) 27.011. If a 7.35 C) 12. If a 9% coupon bond that pays interest every 182 days paid interest 112 days ago.007.007.35 C) 1.15 E) 1.98 E) 12.69 101.15 Answer: A Difficulty: Easy Rationale: $45*(112/182) = $27.15 Answer: C Difficulty: Easy Rationale: $37.15 102.98 E) 28.35 D) 1. If the bond paid interest 32 days ago.77 D) 27.15 Answer: C Difficulty: Easy Rationale: $1000 + [37.67 B) 1.005.98 E) 1.35 C) 26.35 C) 1.5% coupon bond with an ask price of 100:00 pays interest every 182 days.77 D) 11.77 100.67 B) 1.99. the accrued interest would be A) 27. the accrued interest would be A) 11.011.5*(62/182)] = $1012.006. If the bond paid interest 62 days ago.5*(62/182) = $12.006.12 Answer: D Difficulty: Easy Rationale: $1000 + [35*(32/182)] = $1006. A 7.77 D) 1. the invoice price of the bond would be A) 1. A 7% coupon bond with an ask price of 100:00 pays interest every 182 days. the invoice price of the bond would be A) 1.012.5% coupon bond that pays interest every 182 days paid interest 62 days ago.77 .

000 B) $41.00.00. you purchased a newly issued TIPS bond that has a 5% coupon rate. $1. which is indexed to the inflation rate.036.027. The average inflation rate over the year was 3. One year ago. $1.000 Answer: B Difficulty: Moderate Rationale: The bond price.040 E) $76.04 = $41.69 104. $1.6%. What is the amount of the coupon payment you will receive and what is the current face value of the bond? A) $40. and a par value of $1. which is indexed to the inflation rate.44. five years to maturity. 105. $1. What is the amount of the coupon payment you will receive and what is the current face value of the bond? A) $50.050 E) $51.000 B) $32. $1.60.15 Answer: A Difficulty: Easy Rationale: $1.00.036 D) $36. The interest amount equals $1.000*1.Chapter 14 Bond Prices and Yields 103.00.036 = $1.028. $1.036 C) $40. $1.026. If the bind paid interest 112 days ago.032 C) $50.00. One year ago. becomes $1.69 B) 1.98 E) 1. The interest payment is based on the coupon rate and the new face value. A 9% coupon bond with an ask price of 100:00 pays interest every 182 days. The interest amount equals $1.032.00.2%. the invoice price of the bond would be A) 1.00.60. $1.000.05 = $51. five years to maturity. The interest payment is based on the coupon rate and the new face value.027.032 = $1.036*.000 + [45*(112/182)] = $1.027.35 C) 1. becomes $1. $1.00.027. The average inflation rate over the year was 3.032 Answer: E Difficulty: Moderate Rationale: The bond price. and a par value of $1.77 D) 1. $1. you purchased a newly issued TIPS bond that has a 4% coupon rate. 331 .032 D) $32.000.44.000*1.032*.

you will receive the entire coupon payment. How has this taxation procedure changed over the years? How has this change affected the demand for these bonds? Difficulty: Moderate Answer: The only return on a zero coupon bond is the capital gain realized when the bond is sold. That interest belongs to the seller of the bond and will be remitted to the seller by the broker. Difficulty: Easy Answer: If you are buying a bond between interest paying dates. The rationale for this question is be certain that the student understands the mechanism involved in the payment of interest on coupon bonds and the pricing of bonds.Essay Questions 106. You will pay that price plus the interest that has accrued since the last interest paying date. such as pension plans and endowments. As a result. Initially. However. Discuss the taxation ramifications of zero coupon bonds. When the next interest paying date arrives. If you are buying a coupon bond between interest paying dates. the investor was required to pay capital gains tax only when the bond was sold. the IRS later decided that part of this capital gain each year was really imputed interest and thus now one must pay tax on this imputed interest income (income that the investor has not yet received). you will pay more than the amount quoted in the financial pages. zero coupon bonds are no longer particularly attractive for individual investors and institutional investors subject to income tax. . 107. However. zeros remain attractive to institutional investors not subject to income taxes. is the amount you would pay to your broker for the bond more or less than the amount quoted in the financial quotation pages? Discuss the differences and how these differences arise.

the yields on callable bonds are usually slightly higher than the yields on noncallable bonds of equivalent risk. only the cash flows until the first call should be discounted. The bond valuation calculation should include the call price rather than the par value as the final amount received. Why are many bonds callable? What is the disadvantage to the investor of a callable bond? What does the investor receive in exchange for a bond being callable? How are bond valuation calculations affected if bonds are callable? Difficulty: Moderate Answer: Many bonds are callable to give the issuer the option of calling the bond in and refunding (reissuing) the bond if interest rates decline. not yield to maturity. When the bond is called. In return. for callable bonds. the investor receives the call price (an amount greater than par value). Interest rates must decline enough to offset the cost of floating a new issue. 333 . The result is that the investor should be looking at yield to first call. The disadvantage to the investor is that the investor will not receive that long stream of constant income that the bondholder would have received with a noncallable bond. also.Chapter 14 Bond Prices and Yields 108. Bonds issued in a high interest rate environment will have the call feature.

1 PMT=0 PMT=0 FV=1000 FV=1000 CPT PV=703.40 Change in price at original YTM = imputed interest income = $754.07)/$703.07 = $51.07=1.07=$29.1%.07=4.31-703.$703.07 CPT PV=732.09*.31 Imputed Interest Income Find price at original YTM N=4 I=7.31-754. You have a tax rate of 40% on regular income and 15% on capital gains.16% After-tax Rate of Return tax on imputed interest income=$51. It is one year later and similar bonds are offering a yield to maturity of 8. • the purchase price of the bond • the current price of the bond • the imputed interest income • the capital gain (or loss) on the bond • the before-tax rate of return on this investment • the after-tax rate of return on this investment Difficulty: Difficult Answer: Calculations are shown in the table below.3%.3 Current Price of the Bond N=4 I=8.109.71% This question tests the depth of the student's understanding of the concepts and mechanics of zero-coupon bonds.07-20.31)/$703. Calculate the following for this bond.33*.33 Capital Gain (Loss) Change in price due to interest rate change = $732.09 Before-tax Rate of Return ($732. .3 PMT=0 FV=1000 CPT PV=754.000. five years to maturity and a yield to maturity of 7. You will sell the bond now.33-22. You purchased a zero-coupon bond that has a face value of $1.53+3.31-703. Purchase Price of the Bond N=5 I=7.40=-$22.40 .15=-$3.24=$51.31-703.31 (savings due to capital loss) After-tax return=($732.09 Note: total change in price=imputed interest income + capital gain (loss) $732.53 tax on capital gain (loss)=-$22.4=$20.