Fixed Income Securities

Self-Test Questions (STQs)

Section 1: Indicate whether the statement is True (T) or False {F).

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I 1.
2.
A mortgage bond is secured by real assets or property owned by a firm.

A debenture is unsecured note or bond issued by a firm.

__Y-'--3. Floating-rate bonds are designed to minimize the holders' interest rate risk while
convertible bonds are designed to give the investor the ability to share in the price
appreciation of the company's stock.
/f._4.
__ Bond ratings measure default risk of an issue. Bonds rated BBB or better by Standard and
Poor's are considered investment grade.

--( 5. Two key determinants of bond ratings are: debt to total asset ratio and interest coverage
or times-interest-earned (TIE) ratio.
_, Bonds issued in the currency of one country but sold in another market with different
' 6. domestic currency are called Eurobonds.

-- ' 7.
A put bond is a bond where the bondholder has the right to cash in the bond before
maturity at a specific price after a specific date.

A bond will sell at a premium when its coupon rate is greater than its current yield 1 ; 1 ~
Ts.
it&£iiffiat yield ~~er tban i:ts yi J:el to 1T'ffflrri'ty,.

:L 9. A zero-coupon bond is a bond that pays no interest and provides compensation to

investors in the form of capital appreciation from the purchase price.

f 10. Junk bonds typically provide a lower yield to maturity than investment-grade bonds.

' 11. Floating rates can benefit issuers if rates decline, so a company that thinks rates are likely
to fall would want to issue such bonds.

T 12. The interest rate risk of a bond is the risk related to the change in bond prices as a result
of changes in market yields.

r-
___ 13. A call provision gives bondholders the right to demand, or "call for," repayment of a
bond.

--- I 14. The yield-to-maturity (YTM) assumes reinvestment of cash flows at YTM. This is
similar to the issue faced with IRR.

Dr. F. J. Seyyed/Fixed Income Securities 4

 Sinking funds are devices used to force companies to retire bonds on a scheduled basis
prior to their maturity.

/ 16. Bond refunding occurs when a firm redeems a callable bond issue typically selling at a
premium and replacing it with a new issue at lower coupon rate. In an era of particularly
low interest rates, coupon paying premium bonds are more likely to be called for
refunding.

---, Interest rate risk is a major concern for bond investors. Long term bonds have higher
- ~ - 17.
interest rate risk compared to short-term bonds.
-f 18. Duration is a concept that is useful in assessing a bond's interest rate risk. The duration of
a coupon bond increases at a decreasing rate with term to maturity and decreases with
coupon and YTM. The duration of a zero-coupon bond equals its term to maturity.

T 19. A low coupon and a long maturity bond will experience greater price volatility compared
to a high coupon bond with similar maturity.

-
- ~ '_20. A convertible bond gives its holder the option to convert the bond into common stock of
a company at the conversion price.

f 21. For bonds, convexity relates to the shape of the bond price-yield curve.

I 22. Maturity risk premiums could help to explain the yield curve's upward slope.

__-_1_23. The returns of a revenue or income bond are tied to the success of the project for which
the funds were raised.

T 24. The clean price (typically quoted in the press) is the price of a coupon bond not including
any accrued interest.

Section 2: Multiple Choice Questions (MCQ)

1. Und~r nonnal conditions, which of the following would be most likely to increase the coupon rate
reqmred to enable a bond to be issued at par?
@ Adding a call provision.
b. The rating agencies change the bond's rating from Baa to Aaa
c. Making the bond a first mortgage bond rather than a debentur~
d. Adding a sinking fund. ·
e. More than one of the above will increase the coupon rate required on a bond.

Dr. F. J. Seyyed/Fixed Income Securities

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 2.
A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16
years, it should sell for a price of _ _ _ _ today.
(a':) $458.oo I t::u
b, $641.00 ,l)(!)'O f V
C. $789.00 1-l N
d. $1,100.00 5 J fl
3. A coupon bond which pays interest semi-annually, has a par value of $1,000, matures in 5 years, and has
a yield to maturity of 8%. If the coupon rate is 10%, the intrinsic value of the bond today will be

I. ooo fl
a. $855.55 12 •• L--
l/'J..-
lJb,1 ;- So r YWI.
b. $1,000 rJ
(c.)
d.
$1,081
$1,10039_ S//x~ 4 J..jy err p·v- fo8 /
>7<.'J.... t0 _...

4. A coupon bond which pays interest of $50 annually, has a par value of $1,000, matures in 5 years, and is
selling today at a $84.52 discount from par value. The current yield on this bo~d is _ _ __
a. S% So -:: S•<t£/
b. 5.46% C'f ~,S~
~ll)tk

C. 5.94% CfiF1)CI
d. 6.00% Cf l5• lf9

5. A bond with a 10% coupon (paid semi-annually), 10 years to maturity, par value of $1,000 and a market
price of95 (i.e., 95% of par value) has a yield to maturity of _ _ __
a. 10.83% /t,0o f-\/
b. between 13% and 14% - a_so PV

~;=;:
c. between 12% and 13% - -,
d. 9.87% 1 Cu>t,d., J-/,::: S,1(t'?J{.'},;:;,lo,tf3
6. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable
in 10 years at a price of $1,100, and has a value today of$ 1055 .84. The yield to call on this bond is

a) 6.00% IJ /0-0 fv
b. 6.58% 6-o p4
c. 7.20% IoSS, ~y pv
d. 8.00% - lo~ ti'ei .... ~C
t (/}1,L,p Lf --:::-5, I I - J I
7.
Which of the following bonds ;;;;;uld \.ave ~e greatest percentage increase in value if all interest rates fall
b 1%? Hint: Bond with the longest duration. ""
20-year, zero coupon bond. __ -t --- )
c.
d.
i~;~:;,r,
1 :::~:
20-year, I 0% coupon bond.
b ~ .:: C (
1
) Te:<r'h I yrli
e. 10-year, zero coupon bond.

Dr. F. J. Seyyed/Fixed Income Securities

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