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**Chapter 14 Bond Prices and Yields
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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

A is current yield and is quoted as such in the financial press.

Difficulty: Easy

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

70/975 = 7.18.

Difficulty: Easy

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3. If a 7.25% coupon bond is trading for $982.00, it has a current yield of ____________ percent. A. 7.38 B. 6.53 C. 7.25 D. 8.53 E. 7.18

72.50/982 = 7.38.

Difficulty: Easy

4. If a 6.75% coupon bond is trading for $1016.00, it has a current yield of ____________ percent. A. 7.38 B. 6.64 C. 7.25 D. 8.53 E. 7.18

67.50/1016 = 6.6437.

Difficulty: Easy

Chapter 14 - Bond Prices and Yields

5. If a 7.75% coupon bond is trading for $1019.00, it has a current yield of ____________ percent. A. 7.38 B. 6.64 C. 7.25 D. 7.61 E. 7.18

77.50/1019 = 7.605.

Difficulty: Easy

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A.8 B.3. 8.6 D. Difficulty: Easy . 7. it has a current yield of ____________ percent.00. If an 8% coupon bond is trading for $1025. Difficulty: Easy 7.6. 8.1 D. 6. 6.00.9 E. 6.6 60/950 = 6. 7.8.7 C.3 C. 6. 6. A.0 E. If a 6% coupon bond is trading for $950. 7.5 B.1 80/1025 = 7. it has a current yield of ____________ percent.

5% coupon bond is trading for $1050.Chapter 14 .4 C. 7.00.0 B.7 75/1050 = 7. 6. A.1. Difficulty: Easy 14-5 .1 D. 7. 6.9 E. If a 7. 7.Bond Prices and Yields 8. it has a current yield of ____________ percent.

A. has a coupon rate of 10%. 8.26 = 8. Difficulty: Moderate . i = 12. 10.36% E.26. and has a yield to maturity of 12%. 7.95% D.64.64%. PV = 987.65%.65% B. n = 4. The current yield on this bond is ___________. 10.52% E.25 = 10. n = 4. $82.45% C.000.95% D.65% B. matures in 4 years. $100 / $939. A coupon bond pays annual interest. none of the above FV = 1000.000. has a par value of $1. none of the above FV = 1000. A. matures in 4 years. 8. 8.25. i = 8. PMT = 100. Difficulty: Moderate 10. 10. 10. PMT = 82.25%. A coupon bond pays annual interest.9. and has a yield to maturity of 8. has a par value of $1. has a coupon rate of 8.45% C.36%.50 / $987. PV = 939.50. The current yield on this bond is ___________.

and has a yield to maturity of 12%. matures in 12 years. 10. PV = 938.58% D. has a par value of $1.06. A coupon bond pays annual interest. The current yield on this bond is ___________. Difficulty: Moderate 14-7 . A.66%.39% B. $100 / $938.Chapter 14 .Bond Prices and Yields 11. 10.06 = 10. PMT = 110. has a coupon rate of 11%. none of the above FV = 1000.000.43% C. 10. n = 12. 10. i = 12.66% E.

U.83% D. has a coupon rate of 8. has a par value of $1. and has a yield to maturity of 7.39% B.9%.S. the shorter-term the instrument. i = 8. The current yield on this bond is ___________. corporate bonds C. PV = 985. A. 8. $87 / $985.83%. none of the above FV = 1000. government. commercial paper B.000. Agency issues D.12.61. Difficulty: Moderate 13. A coupon bond pays annual interest. A. Treasury bills Only Treasury issues are insured by the U. 8. Of the following four investments.61 = 8. matures in 12 years. n = 12. Treasury bonds E. ________ is considered the safest.S.7%.9. 8.43% C. the safer the instrument. PMT = 87. Difficulty: Easy .66% E. 8.

corporate bonds C. U. A.S.S.Chapter 14 . the safer the instrument. Difficulty: Easy 14-9 . the shorter-term the instrument. Treasury bills B. Of the following four investments. commercial paper Only Treasury issues are insured by the U. Agency issues D. Treasury bonds E. ________ is considered the least risky.Bond Prices and Yields 14. government.

B and C E. A and C High values for the times interest and quick ratios and a low debt to equity ratio are desirable indicators of safety. A and C High values for the times interest and quick ratios and a low debt to equity ratio are desirable indicators of safety. a low times interest earned ratio B. a low times interest earned ratio B. a low quick ratio D.15. a low debt to equity ratio C. a low debt to equity ratio C. a high quick ratio D. A firm with a low rating from the bond rating agencies would have A. Difficulty: Easy . Difficulty: Easy 16. a firm should have A. B and C E. To earn a high rating from the bond rating agencies.

A. Difficulty: Easy 14-11 . at a value unrelated to par E. the bond will sell at or near par (unless interest rates have changed very dramatically and very quickly around the time of issuance).Bond Prices and Yields 17. at or near par value D. below par C. coupon bonds typically sell ________. At issue.Chapter 14 . none of the above If the investment banker has appraised the market and the quality of the bond correctly. above par value B.

E. C. B. C. Accrued interest A. Accrued interest must be paid by the buyer. the asked price plus accrued interest. Difficulty: Moderate 19. but is not included in the quotations page price. is quoted in the bond price in the financial press. The buyer of a bond will buy at the asked price and will also be invoiced for any accrued interest due to the seller. must be paid by the buyer of the bond and remitted to the seller of the bond. the bid price plus accrued interest. D. B. Difficulty: Easy . the bid price. the bid price less accrued interest. D. The invoice price of a bond that a buyer would pay is equal to A. E. A and B. must be paid to the broker for the inconvenience of selling bonds between maturity dates. the asked price less accrued interest. A and C.18.

S. An 8% coupon U.000) = $1.67/month * 2.000 face value of this note is _________. $983. Difficulty: Moderate 14-13 . $1. $800.5 months = 1. Approximation: .67.08/12 * 100.Chapter 14 . $491. none of the above 76/183($4.00 C.61 D.661.Bond Prices and Yields 20.661.67 per month.20 E.666.000 = 666. 666.20.80 B. The accrued interest on the $100. A. Treasury note pays interest on May 30 and November 30 and is traded for settlement on August 15.

$1. A coupon bond is reported as having an ask price of 113% of the $1.150 D. the invoice price of the bond will be ____________. none of the above $1.000 par value in the Wall Street Journal.080 + $7. $1.21. A coupon bond is reported as having an ask price of 108% of the $1. If the last interest payment was made one months ago and the coupon rate is 9%. $1.160. $1. A. $1.5 (accrued interest) = $1.000 par value in the Wall Street Journal.110 C.087.100 B. $1. $1.00 D. Difficulty: Moderate 22. the invoice price of the bond will be ____________. Difficulty: Moderate .110.50 B. $1.150. A.10 C. none of the above $1.160 E.150.25 E. If the last interest payment was made two months ago and the coupon rate is 12%.50.087.130 + $20 (accrued interest) = $1.

The "D" rating indicates A.Chapter 14 .Bond Prices and Yields 23. often called junk bonds (or high yield bonds by those marketing such bonds). The bonds of Ford Motor Company have received a rating of "D" by Moody's. the bonds are junk bonds C. the bonds are referred to as "high yield" bonds D. Difficulty: Easy 14-15 . A and B E. the bonds are insured B. B and C D ratings are risky bonds.

can be quite "thin". D. Difficulty: Easy 25. the price and yield on a bond are A. D. positively related. negatively related. primarily consists of a network of bond dealers in the over the counter market. The bond market A. B. B. B and C. The bond market. sometimes positively and sometimes negatively related. indefinitely related. E. A and B. C. consists of many investors on any given day. most bonds are traded by dealers. can be a very thinly traded market. Ceteris paribus. C. In addition. unlike the stock market. Difficulty: Easy . Bond prices and yields are inversely related. E. not related.24.

current yield B.Bond Prices and Yields 26. 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. A. yield to maturity E. P/E ratio D.Chapter 14 . discount yield The current yield is the annual interest as a percent of current market price. dividend yield C. Difficulty: Easy 14-17 .

none of the above A coupon bond will pay the coupon rate of interest on a semiannual basis unless the firm defaults on the bond. the price of bond as a straight bond provides the floor. A. can always be converted into a specific number of shares of common stock in the issuing company D. P/E ratio D. The other terms are not specifically relevant to convertible bonds. pays interest on a regular basis (typically every six months) B. conversion ratio B. The _________ gives the number of shares for which each convertible bond can be exchanged. Difficulty: Easy 28. conversion premium E. always sells at par E. does not pay interest on a regular basis but pays a lump sum at maturity C. convertible floor The conversion premium is the amount for which the bond sells above conversion value.27. current ratio C. Difficulty: Easy . Convertible bonds are specific types of bonds. A coupon bond is a bond that _________. A.

E. Callable bonds A. have a call price that declines as time passes. put D. are called when interest rates decline appreciably. are called when interest rates increase appreciably. B and C. callable B. B. The call price of the bond (approximately par and one year's coupon payment) declines to par as time passes and maturity is reached.Bond Prices and Yields 29. A and B. Difficulty: Easy 30. A. Treasury E. C. D. Difficulty: Easy 14-19 . Callable bonds often are refunded (called) when interest rates decline appreciably. coupon C. zero-coupon Any bond may be redeemed prior to maturity.Chapter 14 . 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. but all bonds other than put bonds are redeemed at a price determined by the prevailing interest rates.

5% E.7% and 1. 3. 1. A Treasury bond due in one year has a yield of 5.3% and 1. 1.4.7% C. are: A.6%. Difficulty: Moderate .6%.5. respectively.3% B. 0.8%. a bond issued by Shell Oil due in one year has a yield of 6.2% B. none of the above Shell: 6. 0. are A.7%.2% and 1.7% = . 1.6.3% E. 0. Difficulty: Moderate 32.5%.5% and .2% = 1.6% D.9% .5% C.8% and 1.3%. The default risk premiums on the bonds issued by Mobil and Lucent Technologies.3%.0% and 1.9%. A bond issued by Ford Motor Company due in 5 years has a yield of 7.2%. A Treasury bond due in one year has a yield of 4.31.6% and 3. a Treasury bond due in 5 years has a yield of 6.6% = 3. none of the above Mobil: 6.5% . 0.6% = 1.2% .7% and 0.5. A bond issued by Lucent Technologies due in 5 years has a yield of 8. Ford: 7.2%.0% D. The default risk premiums on the bonds issued by Shell and Ford.5% .5%.6%. Lucent Technologies: 8. a Treasury bond due in 5 years has a yield of 5. respectively. a bond issued by Mobil due in one year has a yield of 6.

9% .Bond Prices and Yields 33.2% = 1.06%. respectively.57%. A Treasury bond due in one year has a yield of 6.86%. A Treasury bond due in one year has a yield of 4.2% . 3. The default risk premiums on the bonds issued by Exxon and Xerox. are A.63%. Difficulty: Moderate 34.7% C. The default risk premiums on the bonds issued by Boeing and Caterpillar.5.2%.0% D. Xerox: 7. 0.7% = 1. a bond issued by Caterpillar due in one year has a yield of 7. a Treasury bond due in 5 years has a yield of 5. none of the above Boeing: 7.2%.0%. 2. Difficulty: Moderate 14-21 .7%.5% and .2% B.30% = 2.6.76% and 0. A bond issued by Boeing due in 5 years has a yield of 7. are A.2% and 1.7% and 0.63% .2%.0% D.Chapter 14 .06% = 2. 0.10% B.57% and 2.5% E.16%. Caterpillar: 7. 0. 1.0% and 1. A bond issued by Xerox due in 5 years has a yield of 7.47% E.2% and 1.4.9%. 1.6. 1. respectively. a bond issued by Exxon due in one year has a yield of 7.86% C.16% . none of the above Exxon: 7.33% and 2.3%. a Treasury bond due in 5 years has a yield of 6.

8. 8. the coupon rate is equal to the yield to maturity. Difficulty: Easy . and has a coupon rate of 9%. give the investor the ability to share in the price appreciation of the company's stock C. give the investor the ability to benefit from interest rate changes D. 10. A. thus negating one of the major disadvantages of fixed income investments.000. 9. Difficulty: Moderate 36. The yield to maturity on this bond is: A. Floating-rate bonds are designed to ___________ while convertible bonds are designed to __________. none of the above Floating rate bonds allow the investor to earn a rate of interest income tied to current interest rates.0% E. matures in 5 years. either by converting to stock or holding the bond. minimize the holders' interest rate risk.0% D. which will increase in price as the stock price increases. maximize the holders' interest rate risk. maximize the holders' interest rate risk. none of the above When a bond sells at par value.35. minimize the holders' interest rate risk.0% B.3% C. give the investor the ability to share in the price appreciation of the company's stock B. give investor the ability to share in the profits of the issuing company E. Convertible bonds allow the investor to benefit from the appreciation of the stock price. A coupon bond that pays interest annually is selling at par value of $1.

PV = 886. 9. and has a yield to maturity of 10%.99 B.000. i = 10. Difficulty: Easy 38.01 D. 8.6%.0% B. the coupon rate is equal to the yield to maturity.28. matures in 7 years. Difficulty: Moderate 14-23 . $1.28 E. $620. n = 5.Chapter 14 .00 FV = 1000. matures in 5 years. The yield to maturity on this bond is: A. A coupon bond that pays interest semi-annually is selling at par value of $1.0% E.123. The intrinsic value of the bond today will be ______ if the coupon rate is 7%. A coupon bond that pays interest annually has a par value of $1. $1.92 C.000. 10.000. A. $886. $712. and has a coupon rate of 8. none of the above When a bond sells at par value.0% D.6% C. 8.Bond Prices and Yields 37. PMT = 70.

$1. The intrinsic value of the bond today will be ______ if the coupon rate is 8. Difficulty: Moderate .3%.000.01 D. i = 9. and has a yield to maturity of 9.00 FV = 1000.39.138.3. $960. PV = 960.123.5%. matures in 7 years.28 E.14 C. A. n = 7. A coupon bond that pays interest annually has a par value of $1.000. PMT = 85. $886. $712. $1.99 B.

A coupon bond that pays interest annually. n = 5. $922.80 D. A.77 B. $924.077. i = 5. PV = 922. i = 10.82 D.82 Difficulty: Moderate 41.000.000. The intrinsic value of the bond today will be _________ if the coupon rate is 12%.16 C.20 E.Bond Prices and Yields 40. n = 10.075.16 C. matures in 5 years.20 E. $1. PMT = 120. PMT = 40. matures in 5 years. and has a yield to maturity of 10%. has a par value of $1. $924. and has a yield to maturity of 10%. A coupon bond that pays interest semi-annually has a par value of $1. $922.78 B. $1. $1. PV = 1075.077. A. $1. none of the above FV = 1000. none of the above FV = 1000.075.78 Difficulty: Moderate 14-25 .Chapter 14 . The intrinsic value of the bond today will be __________ if the coupon rate is 8%.

42. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 7 years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ________ if the coupon rate is 9.5%. A. $922.77 B. $1,010.12 C. $1,075.80 D. $1,077.22 E. none of the above

FV = 1000, PMT = 47.50, n = 14, i = 4.65, PV = 1,010.12

Difficulty: Moderate

Chapter 14 - Bond Prices and Yields

43. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ________ if the coupon rate is 12%. A. $922.77 B. $924.16 C. $1,075.80 D. $1,077.22 E. none of the above

FV = 1000, PMT = 60, n = 10, i = 5, PV = 1077.22

Difficulty: Moderate

44. A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in 5 years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is __________. A. 6.00% B. 8.33% C. 12.00% D. 60.00% E. none of the above

FV = 1000, PMT = 100, n = 5, PV = -928, i = 11.997%

Difficulty: Moderate

14-27

45. You purchased an annual interest coupon bond one year ago that now has 6 years remaining until maturity. The coupon rate of interest was 10% and par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. The amount you paid for this bond one year ago was A. $1,057.50. B. $1,075.50. C. $1,088.50. D. $1.092.46. E. $1,104.13.

FV = 1000, PMT = 100, n = 7, i = 8, PV = 1104.13

Difficulty: Moderate

46. You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at that time. The coupon interest rate was 10% and the par value was $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have been _________. A. 7.00% B. 7.82% C. 8.00% D. 11.95% E. none of the above

FV = 1000, PMT = 100, n = 6, i = 8, PV = 1092.46; FV = 1000, PMT = 100, n = 5, i = 8, PV = 1079.85; HPR = (1079.85 - 1092.46 + 100) / 1092.46 = 8%

Difficulty: Difficult

000/(1. $513. the greater the price change when interest rates change.Chapter 14 .000.41 B. ____________. $483.87 C. A. but bond A will increase more than bond B B. both bonds will decrease in value. Each pays interest of $120 annually. but bond B will decrease more than bond A E.16 D.09)8 = $501. If the bond matures in 8 years. both bonds will increase in value.49 E. but bond B will increase more than bond A C. If the yields to maturity on the two bonds change from 12% to 10%.000. 422. the bond should sell for a price of _______ today. none of the above The longer the maturity. Difficulty: Moderate 48. Consider two bonds. A zero-coupon bond has a yield to maturity of 9% and a par value of $1. $501. A and B. but bond A will decrease more than bond B D. Both bonds presently are selling at their par value of $1. Bond A will mature in 5 years while bond B will mature in 6 years.Bond Prices and Yields 47. both bonds will increase in value.87 Difficulty: Moderate 14-29 . A. none of the above $1. both bonds will decrease in value.

8% D.49.4% E. 1. $1.92. 13.000.$385. none of the above $1.54)/$385.11)9 = $390.4%. ($390.000/(1.92 . 10.00% B. You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1. A.42% C.000/(1.10)10 = $385. 20. 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.54 = 1. Difficulty: Moderate .54.

(1. 12. 12.961/$98.68%. none of the above $990/$99. A Treasury bill with a par value of $100.Chapter 14 .1. 12. 12. none of the above $1.Bond Prices and Yields 50. Difficulty: Moderate 14-31 . Difficulty: Moderate 51. The effective annual yield is __________. A. A.55% C. 12.039 = 0. 12.0 = 12.68% E.62%. (1.010 = 0. with an effective annual yield of _________.000 due one month from now is selling today for $99.62% D.55% C.68% E. 12.000 due two months from now is selling today for $98.01.02.039.010.02) 6 .62% D.01)12 .1 = 12.40% B. A Treasury bill with a par value of $100. 12.40% B.

12. 12. A Treasury bill with a par value of $100.68% E.087. Difficulty: Moderate .00 = 12. with an effective annual yield of _________.000 due three months from now is selling today for $97.52. A.087 = 0. 12. none of the above $2.913/$97. (1.62% D.1.55%.55% C.03. 12.40% B.03) 4 .

16 C. The current price of the issuing firm's stock is $29 and the conversion ratio is 30 shares. A.000 and a coupon rate of 12%.Bond Prices and Yields 53. $1. $1.20 E. FV = 1000. PMT = 60. A convertible bond has a par value of $1. $1. has a par value of $1. $729 B. $810 C. and an effective annual yield to maturity of 10. none of the above 30 shares X $29/share = $870.77 B. $924.22.1025)1/2 . $870 D. The bond's market conversion value is ______. Difficulty: Moderate 54. $922.000 E.1 = 5%.80 D. A coupon bond pays interest semi-annually. none of the above (1.077.000 and a current market price of $850. The price the bond should sell for today is ________. I = 5%.077.25%. Þ PV = 1.Chapter 14 . N = 10. A. Difficulty: Easy 14-33 .075. matures in 5 years.

Difficulty: Moderate . A. $190 D. The bond's conversion premium is _________. A convertible bond has a par value of $1.55. none of the above $850 . $40 B.$810 = $40. $200 E. The current price of the issuing firm's stock is $27 and the conversion ratio is 30 shares.000 and a current market value of $850. $150 C.

09 = 10%. 12% D.Chapter 14 . none of the above ($1. (1. 14% E.$909. A. Difficulty: Moderate 14-35 .2321) 1/2 . 14% E. 11% C. 10% B. 10% B.$811.Bond Prices and Yields Consider the following $1.09)/$909.000 par value zero-coupon bonds: 56.000 .62)/$811. The yield to maturity on bond B is _________. none of the above ($1. The yield to maturity on bond A is ____________.0 = 11%.1. A. 11% C.000 .62 = 0. 12% D. Difficulty: Moderate 57.2321.

0 = 12%. annual payments. 14% E. i = 13.573515) 1/4 . PV = -975.98% E. 10 years to maturity is callable in 3 years at a call price of $1. 12% D. 10. (1.000 .1. Difficulty: Moderate 60. A.573515. If the bond is selling today for $975. The yield to maturity on bond C is ____________.78)/$711. 12% D.25% D.100. A 10% coupon bond. A.0 = 12%. Difficulty: Moderate . 11% C.404928.$635.58.52 = 0.26% B. The yield to maturity on bond D is _______.52)/$635.404928) 1/3 . none of the above ($1. 10% B. n = 3. (1.1.$711. the yield to call is _________. none of the above ($1.98%.00% C. 13.78 = 0. Difficulty: Moderate 59. 10% B. 9. PMT = 100. 14% E.000 . 10. A. 11% C. none of the above FV = 1100.

10. if the bond is selling today for $1. 6.110m Þ i = 5. The call price is $1.68%. 10. PMT = 60.95 Difficulty: Moderate 62. What is the expected yield on this bond if the bond is purchased for $975? A. E.48 * 2 = 10. none of the above. A 12% coupon bond. PV = -1. 9. 5. semiannual payments.14%. E. but to pay only 50% of par value at maturity. is callable in 5 years. YTC = FV = 1120. n = 10. FV = 500. n = 10.03%. annual payments. is expected to make all coupon payments.95%.00%. what is the yield to call? A.86%. C. D. D.00%. bond maturing in 10 years. B. 12. i = 6. 10. A 10% coupon.68%. PV = -975. 11.120.110.Bond Prices and Yields 61. B.Chapter 14 .68% Difficulty: Moderate 14-37 . C. 8.48%. PMT = 100. none of the above.

95% D.46 = 11. A. 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 with 6 years remaining to maturity at the time of purchase. PMT = 100. 9. yield to call is sometimes the more appropriate calculation for the investor (if interest rates are expected to decrease). The coupon interest rate is 10% and par value is $1. the yield to maturity was 8%. n = 6. i = 7. n = 5. yield to call E.01 . 8.000. Difficulty: Easy . 7. yield to maturity D. current yield C. The ________ is used to calculate the present value of a bond.1092. At the time you purchased the bond.95%. HPR = (1123. none of the above FV = 1000. FV = 1000. i = 8. 11. A.01. For callable bonds.00% B.95% E.46 + 100) / 1092. PMT = 100. nominal yield B. none of the above Yield to maturity is the discount rate used in the bond valuation formula.46.63. Difficulty: Difficult 64. PV = 1123. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%.00% C. PV = 1092.

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.Bond Prices and Yields 65. B. A bond will sell at a discount when __________. The yield to maturity on a bond is ________. C. A.Chapter 14 . based on the assumption that any payments received are reinvested at the coupon rate. the coupon rate is less than the current yield and the current yield is greater than the yield to maturity D. In order for the investor to earn more than the current yield the bond must be selling for a discount. the coupon rate is greater than the current yield and the current yield is greater than yield to maturity B. the coupon rate is less than the current yield and the current yield is less than yield to maturity E. B. for C to be true payments must be reinvested at the yield to maturity. Difficulty: Easy 66. E. A. below the coupon rate when the bond sells at a discount. none of the above. and C. The reverse of A is true. the discount rate that will set the present value of the payments equal to the bond price. and equal to the coupon rate when the bond sells at a premium. D. Difficulty: Moderate 14-39 . A. none of the above are true. the coupon rate is greater than yield to maturity C.

67.4% E. lower C. if interest payments are reinvested at 10%. If interest rates remain constant. A bond has a par value of $1. However. If interest rates remain constant. B is the only possible answer. a time to maturity of 20 years. 12. Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. a coupon rate of 10% with interest paid annually.00% B. higher B.000 This bond is a premium bond as interest rates have declined since the bond was issued. the realized compound yield on this bond must be ________. a current price of $850 and a yield to maturity of 12%. the price of a premium bond declines as the bond approaches maturity. Intuitively and without the use calculations. 12.0% D. Therefore.000. cannot be determined E. Difficulty: Difficult . 10. one year from now the price of this bond will be _______. 10. as the bond is selling at discount the yield must be higher than the coupon rate.9% C. A. none of the above In order to earn yield to maturity. Difficulty: Moderate 68. A. the coupons must be reinvested at the yield to maturity. $1. the same D.

between 13% and 14% C.000/($372. 8.1%. n = 30. 5. PV = 308.50]1/20 .32 Difficulty: Moderate 71. A. Using semiannual compounding. A. $464 D.8% C.4% E.000 and a required return of 8% would be priced at approximately ______. between 12% and 13% D. 10.Bond Prices and Yields 69. over 14% B.8% D. A. between 10% and 12% E. I = 4. Difficulty: Moderate 14-41 . 10 years to maturity and selling at 88 has a yield to maturity of _______. $315 C. A bond with a 12% coupon.1% B. $308 B.1 = 5. Difficulty: Moderate 70.000 is ________. less than 12% YTM = 14.Chapter 14 . $555 E. none of the above [$1. a 15-year zero coupon bond that has a par value of $1.50 with a value at maturity of $1. The yield to maturity of a 20-year zero coupon bond that is selling for $372.33%. none of the above FV = 1000. 13.

C and D. D. C. Which one of the following statements about convertibles is true? A. The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. The longer the call protection the more attractive the bond.72. the less the security is worth. The longer the call protection the more attractive the bond. The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond. Difficulty: Moderate . E. Which one of the following statements about convertibles is false? A. the less the bond is worth. E. Difficulty: Moderate 73. All convertibles are callable at the option of the issuer. The smaller the spread (c). the more the convertible is worth. the greater the value of the conversion feature. The longer the call protection on a convertible. All convertibles are callable at the option of the issuer. The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. The more volatile the underlying stock. The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond. B. A. D. The more volatile the underlying stock. the greater the value of the conversion feature. the less the security is worth. Convertibles are debentures (unsecured bonds). B. the more the convertible is worth. the less the bond is worth. C. The longer the call protection on a convertible. Convertibles are debentures (unsecured bonds). The smaller the spread (c). Convertibles are not callable.

64. B. E.87. none of the above. C.64 = $14. $7.51. none of the above. the maturity date of the bond. $1. C. B. Difficulty: Easy 14-43 .000/(1.49 .10)19 = $163. $194. the imputed interest income for the first year of that bond is A. $1. all of the above. The bond indenture includes the coupon rate. D. $14. the coupon rate of the bond. Consider a $1. The bond indenture includes A.Bond Prices and Yields 74. D.85.000 par value 20-year zero coupon bond issued at a yield to maturity of 10%.Chapter 14 . Difficulty: Moderate 75. E.$148.000/(1. If you buy that bond when it is issued and continue to hold the bond as yields decline to 9%.44.87.10)20 = $148. $45. the par value of the bond. par value and maturity date of the bond as well as any other contractual features. zero.

$1.071. $107. $1.56 Treasury bonds are quoted as a percentage of par value ($1. $1.071.070. $1.071.00. A.075.60 E. $1.76.16.075.000) with the number after the colon representing the fractions of a point in 32nds.18 B.80 C. Difficulty: Moderate . A Treasury bond quoted at 107:16 107:18 has a bid price of _______ and an asked price of _____. $107. $1. $1.80.60.070. The bid price is quoted first and is the lower of the two.071.63 D. $1.50.

Tax authorities find registered bonds helpful in tax enforcement but not bearer bonds. They are rare in the United States today. Bearer bonds are A. D. rare in the United States today. Only a small proportion is traded on the New York Exchange.Chapter 14 . Bearer bonds are not registered so there is no record of ownership. Most corporate bonds are traded A. B. Difficulty: Moderate 14-45 . C. on a formal exchange operated by the New York Stock Exchange. helpful to tax authorities in the enforcement of tax collection. C. all of the above. bonds traded without any record of ownership. Difficulty: Moderate 78. on a formal exchange operated by the Philadelphia Stock Exchange. on a formal exchange operated by the American Stock Exchange. both A and C. Most corporate bonds are traded in a loosely organized network of bond dealers linked by a computer quote system.Bond Prices and Yields 77. D. over the counter by bond dealers linked by a computer quotation system. B. by the issuing corporation. E. E.

D.79. B. refunding. none of the above. deferral. The process of refunding refers to calling high-coupon bonds and issuing new. C. The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest payments is called A. reissue. repurchase. lower coupon debt. E. Difficulty: Moderate .

offer higher coupon rates than similar nonconvertible bonds. D. TIPS are A. C. 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. D. B. but not the stated coupon rate. B.Bond Prices and Yields 80. Treasury Inflation Protected Securities (TIPS) are bonds whose par value adjusts according to the general level of prices. offer lower coupon rates than similar nonconvertible bonds. both A and B are true. zero-coupon government bonds. E. both A and C are true. government bonds with coupon rate linked to the general level of prices. E. securities formed from the coupon payments only of government bonds. Convertible bonds A. Difficulty: Moderate 81. securities formed from the principal payments only of government bonds. This changes coupon payments. give their holders the ability to share in price appreciation of the underlying stock. C. government bonds with par value linked to the general level of prices. Difficulty: Moderate 14-47 .Chapter 14 .

B.82. the probability of a bond issue being called. bankruptcy risk. C. Z-scores are used to predict significant bankruptcy risk. Difficulty: Easy . E. the likelihood of a firm becoming a takeover target. none of the above. 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.

D. are sometimes referred to as "me-first" rules. Difficulty: Moderate 84. either by open market purchase or at a special call price from bondholders. none of the above are true. Subordination clauses in bond indentures A. D. both B and C are true. When a bond indenture includes a sinking fund provision A. bondholders always benefit. B. firms must establish a cash fund for future bond redemption.Bond Prices and Yields 83. E. B. bondholders may lose because their bonds can be repurchased by the corporation at belowmarket prices. A sinking fund provisions requires the firm to redeem bonds over several years. C. because principal repayment on the scheduled maturity date is guaranteed.Chapter 14 . E. C. may restrict the amount of additional borrowing the firm can undertake. All of the statements correctly describe subordination clauses. all of the above are true. This can result in repurchase in advance of scheduled maturity at below-market prices. both A and B are true. Difficulty: Easy 14-49 . provide higher priority to senior creditors in the event of bankruptcy.

B. all of the above are true. rely on the general earning power of the firm for the bond's safety. Collateralized bonds A. Collateralized bonds are considered the safest assets of the firm because they are backed by specific assets of the firm. C. rather than relying on the firm's general earning power. are considered the safest assets of the firm. E.85. D. are backed by specific assets of the issuing firm. Difficulty: Easy . both B and C are true.

Difficulty: Easy 87. B. It helps the student understand the nature of bonds. E. they promise either a fixed stream of income or a stream of income determined by a specific formula. rather than at a specified coupon rate. they pay a fixed amount at maturity. they were the first type of investment offered to the public. pays interest to the investor without requiring the actual coupon to be mailed to the corporation. is issued by state governments because they don't have to pay interest. C. E. D. C. B. Investors receive the face value at maturity. which allowed them to "fix" their income at a higher level by investing in bonds. is analyzed primarily by focusing ("zeroing in") on the coupon rate. A zero-coupon bond is one that A. D.Bond Prices and Yields 86. Debt securities are often called fixed-income securities because A. the government fixes the maximum rate that can be paid on bonds.Chapter 14 . Difficulty: Moderate 14-51 . effectively has a zero percent coupon rate. pays interest to the investor based on the general level of interest rates. This definition is given in the chapter's introduction. they are held predominantly by older people who are living on fixed incomes. Zero-coupon bonds pay no interest.

Inc. The average inflation rate over the year was 4.042 E. an incident bond E. The interest amount equals $1.2%.042 = $1. Difficulty: Easy 89. The firm just issued bonds with a final payment amount that depends on whether the Seine River floods. $62. $1.06 = $62. is a firm that has its main office on the Right Bank in Paris. $1.000 The bond price. an emergency bond D. which is indexed to the inflation rate.000 B.042 * . $60. a catastrophe bond C. $1.52.042. five years to maturity. What is the amount of the coupon payment you will receive and what is the current face value of the bond? A. $1. and a par value of $1. Difficulty: Moderate . One year ago.88. $60. you purchased a newly issued TIPS bond that has a 6% coupon rate.00. $42. an eventuality bond Catastrophe bonds are used to transfer risk from the firm to the capital markets.00.000. $102. This type of bond is known as A.00.52.00. $1.042 D. a contingency bond B. becomes $1.000 * 1.042 C. The interest payment is based on the coupon rate and the new face value. Swingin' Soiree.

At higher interest rates the firm is less likely to call and this option loses value. D. This is similar to an individual refinancing a home. interest rates are expected to fall. so the option is valuable. The straight bond's price will be lower than the callable bond's price for low interest rates. the investor only plans to hold the bond until its first call date. page 463. The straight bond's price will be higher than the callable bond's price for low interest rates. The firm is more likely to call the issue at low interest rates. Difficulty: Moderate 14-53 . the price difference is due to the value of the firm's option to call the bond at the call price. E. Bond analysts might be more interested in a bond's yield to call if A. There is no consistent relationship between the two types of bonds. the bond's yield to maturity is insufficient. The straight bond's price will change as interest rates change. For low interest rates. The straight bond and the callable bond will have the same price. the firm has called some of its bonds in the past. A graphical representation is shown in Figure 14. If interest rates fall the firm is more likely to call the issue and refinance at lower rates. What is the relationship between the price of a straight bond and the price of a callable bond? A. B.4. interest rates are expected to rise. E. D. The prices converge for high interest rates. but the callable bond's price will stay the same.Bond Prices and Yields 90. C.Chapter 14 . Difficulty: Difficult 91. B. The student has to think through each of the reasons given and make the connection between falling rates and the motivation to refinance. C.

13% The investment grows to a total future value of $80 * (1. 7.69. Elton bonds E. Difficulty: Easy . 8.0897.69 * (1+rcy)3 = $1. Yankee bonds.261.97% E. and a face value of $1.094) + $1. The realized compound yield is the yield that will compound the original investment to yield the same future value: $974. The bond had three years to maturity.96% C. (1+rcy)3 = 1.000. Difficulty: Difficult 93.29409.080 = $1.34. Samurai bonds B.261.072) * (1.34 over the three year period. rcy = 8. 1 + rcy = 1. What is your realized compound yield on the bond? A. and bulldog bonds are mentioned in the textbook. Three years ago you purchased a bond for $974. Today is the bond's maturity date. Samurai bonds.97%. 6. a coupon rate of 8%. Each year you reinvested all coupon interest at the prevailing reinvestment rate shown in the table below. Yankee bonds C.43% B. 9. bulldog bonds D.23% D.92. paid annually. 8. All of the above are international bonds. Which of the following is not a type of international bond? A.094) + $80 * (1.

96 Difficulty: Moderate 14-55 . i = 11.Bond Prices and Yields 94. $833. matures in 8 years. A.00 FV = 1000.01 D. A coupon bond that pays interest annually has a par value of $1.28 E. PV = 851. i = 9.123. $886.00 FV = 1000. and has a yield to maturity of 9%.92 C. $1. $886. The intrinsic value of the bond today will be ______ if the coupon rate is 7. $1.99 B. A.5%.93. $712.000. PMT = 60. A coupon bond that pays interest annually has a par value of $1.93 C.01 D. matures in 6 years.123. $851.Chapter 14 . $1.000.28 E. PV = 833. and has a yield to maturity of 11%. $620. n = 6. Difficulty: Moderate 95. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.000. $1.96 B.000. n = 8. PMT = 75.

80 D. A coupon bond that pays interest semi-annually has a par value of $1. PMT = 45.96. $1. none of the above FV = 1000.16 C.78 B.00 Difficulty: Moderate . The intrinsic value of the bond today will be __________ if the coupon rate is 9%. n = 12. i = 4.000.00 E. $924. matures in 6 years.000.075. $922.5. and has a yield to maturity of 9%. PV = 1000. A. $1.

11. $894. matures in 9 years.Chapter 14 .000.15% Difficulty: Moderate 14-57 . The intrinsic value of the bond today will be __________ if the coupon rate is 8.15% C. A coupon bond that pays interest of $90 annually has a par value of $1. 10.25% D. matures in 7 years.32% E. i = 5. A. none of the above FV = 1000. The yield to maturity on this bond is __________. $922.5. 9. PMT = 90.00% B.077.8%. PV = -934.20 E.075. 12. n = 14. $1. A. A coupon bond that pays interest semi-annually has a par value of $1.80 D. n = 9.Bond Prices and Yields 97.000. PMT = 44. and is selling today at a $66 discount from par value. $1. and has a yield to maturity of 11%. none of the above FV = 1000.78 B.51 C. PV = 894.51 Difficulty: Moderate 98. i = 10.

09% C.09% Difficulty: Moderate . A. A coupon bond that pays interest of $40 semi annually has a par value of $1. The yield to maturity on this bond is __________. 10. PMT = 40. matures in 4 years. PV = -964.000. n = 8. and is selling today at a $36 discount from par value.99. none of the above FV = 1000.69% B. 8.76% E. 9.43% D. 9. i = 9.

$1. $1. n = 9. PMT = 100. The coupon rate of interest was 11% and par value was $1. At the time you purchased the bond. You purchased an annual interest coupon bond one year ago that had 9 years remaining to maturity at that time.Bond Prices and Yields 100. 8. 7.50 B. i = 8. 11.95% E.057.65 D. FV = 1000. The coupon interest rate was 10% and the par value was $1.092.65 Difficulty: Moderate 101. At the time you purchased the bond. $1.000. PV = 1124.075.93 . PV = 1114.50 C. i = 10. A. 7. none of the above FV = 1000.000. $1.82% C. PMT = 110. the yield to maturity was 8%.13 FV = 1000. HPR = (1114.00% D. n = 8.083.Chapter 14 . PV = 1. You purchased an annual interest coupon bond one year ago that now has 18 years remaining until maturity. the yield to maturity was 10%. If you sold the bond after receiving the first interest payment and the yield to maturity continued to be 8%.94 = 8% Difficulty: Difficult 14-59 .94 + 100) / 1124.94.104.93. your annual total rate of return on holding the bond for that year would have been _________. The amount you paid for this bond one year ago was A.1124.083. $1.46 E.00% B. n = 19. i = 8. PMT = 100.

but bond G will increase more than bond F C. $130. A. both bonds will increase in value. $501. but bond F will decrease more than bond G D. but bond G will decrease more than bond F E.04 E. If the yields to maturity on the two bonds change from 9% to 10%.12)18 = $130. both bonds will decrease in value. F and G. Difficulty: Moderate 103.000/(1. $513.000. both bonds will increase in value.102. Each pays interest of $90 annually. but bond F will increase more than bond G B. If the bond matures in 18 years. the bond should sell for a price of _______ today. none of the above $1. none of the above The longer the maturity. 422.04 Difficulty: Moderate . Both bonds presently are selling at their par value of $1.000. A zero-coupon bond has a yield to maturity of 12% and a par value of $1. Bond F will mature in 15 years while bond G will mature in 26 years. ____________. A.16 D. both bonds will decrease in value. the greater the price change when interest rates change. Consider two bonds.87 C.41 B.

000/(1.74 B. A zero-coupon bond has a yield to maturity of 11% and a par value of $1.74 Difficulty: Moderate 14-61 .Bond Prices and Yields 104.87 C.Chapter 14 . $513. $59. A.16 D. none of the above $1.000. If the bond matures in 27 years. $501. $483. the bond should sell for a price of _______ today.49 E.11)27 = $59.

4% D. ($350. You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value of $1. 23. 1. 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. $1.000/(1.8% D.000/(1.8% C. You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of $1. 1.00% B.53. 10.00% B.53 = -1. A. ($596.27.4% E.11)7 = $481.09)6 = $596.$355. Difficulty: Moderate 106.66 = 23.42% C.000/(1.66.000/(1.49.66)/$481. 20.09)12 = $355. 13.$481. -1.4%. $1. none of the above $1.105.49 .10)11 = $350.000. 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.000. none of the above $1.53)/$355. 10.27 . Difficulty: Moderate .8%. A.4% E.

$729 B. $870 D. The current price of the issuing firm's stock is $42 and the conversion ratio is 22 shares.Bond Prices and Yields 107. $924 C. none of the above 22 shares X $42/share = $924. $1. Difficulty: Easy 14-63 .000 and a current market price of $975. The bond's market conversion value is ______. A convertible bond has a par value of $1.Chapter 14 .000 E. A.

A. Difficulty: Moderate . $700 B. $190 D. A convertible bond has a par value of $1. Difficulty: Easy 109. The bond's market conversion value is ______.$880 = $70. A convertible bond has a par value of $1. The bond's conversion premium is _________. The current price of the issuing firm's stock is $22 and the conversion ratio is 40 shares.000 E.000 and a current market price of $1105. none of the above 35 shares X $20/share = $700. $870 D.000 and a current market value of $950. $810 C. $70 C. $200 E. The current price of the issuing firm's stock is $20 and the conversion ratio is 35 shares. A. $40 B. $1. none of the above $950 .108.

$150 C. The bond's conversion premium is _________. The current price of the issuing firm's stock is $65 and the conversion ratio is 15 shares.000 and a current market value of $1150.Chapter 14 . $200 E. $175 D. $40 B.Bond Prices and Yields 110.$975 = $175. none of the above $1150 . A. Difficulty: Moderate 14-65 . A convertible bond has a par value of $1.

67 B. 6. 12.67 B.35 C. 26. 12.98 E.77 Difficulty: Easy 113.35 D.69 B.77 D. the accrued interest would be A. 11.69 Difficulty: Easy . 7.98 E. If a 7.15 $37. the accrued interest would be A.35 C.12 $35 * (32/182) = $6. If a 9% coupon bond that pays interest every 182 days paid interest 112 days ago. 27. 5. 27. 7. the accrued interest would be A.15 E.15 Difficulty: Easy 112.15 $45 * (112/182) = $27. 6. 28.35 C.77 D. 11. 12. If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago.5% coupon bond that pays interest every 182 days paid interest 62 days ago.5 * (62/182) = $12.111. 27.

000 + [45 * (112/182)] = $1. the invoice price of the bond would be A.15 E.98 E. 1. 1. A 7% coupon bond with an ask price of 100:00 pays interest every 182 days. 1. 1. 1.5 * (62/182)] = $1012.012.028.67 B.012.77 Difficulty: Easy 116. 1. 1. If the bond paid interest 32 days ago.69 Difficulty: Easy 14-67 .006.006. 1. A 7. 1. 1. 1.98 E.011.5% coupon bond with an ask price of 100:00 pays interest every 182 days. A 9% coupon bond with an ask price of 100:00 pays interest every 182 days.35 C. the invoice price of the bond would be A.Chapter 14 .027. 1.15 $1.35 C.35 D. If the bind paid interest 112 days ago.35 C.15 $1000 + [37. 1.007.026.005.007.69 B. 1.77 D. If the bond paid interest 62 days ago. the invoice price of the bond would be A.027.77 D. 1.Bond Prices and Yields 114.67 B.027.012.15 Difficulty: Easy 115.12 $1000 + [35 * (32/182)] = $1006.027.011.

00. Difficulty: Moderate 118.00. One year ago. The interest payment is based on the coupon rate and the new face value. $1.00. $41. $40. $1. One year ago. five years to maturity. $1. which is indexed to the inflation rate.000 B.60. becomes $1.000 * 1.00. $51. $1.00.000 * 1.44.04 = $41.032 The bond price.032 * .60.2%.050 E.040 E.05 = $51. you purchased a newly issued TIPS bond that has a 4% coupon rate.032 C. five years to maturity. $1.000. The average inflation rate over the year was 3. The interest amount equals $1. $76. $1. The interest payment is based on the coupon rate and the new face value.032 = $1.00. and a par value of $1. $1. $32. What is the amount of the coupon payment you will receive and what is the current face value of the bond? A. $36.032. $1. The interest amount equals $1.032 D.036 = $1. What is the amount of the coupon payment you will receive and what is the current face value of the bond? A.000 The bond price. $50. $1.00.44. $40. and a par value of $1. $50.117.036 C. $32. The average inflation rate over the year was 3. $1.000.036. which is indexed to the inflation rate.036 D. becomes $1.036 * .00. you purchased a newly issued TIPS bond that has a 5% coupon rate. Difficulty: Moderate .000 B.6%.

Command Duty Officer B. buy other forms of debt such as mortgages C. commercial debt originator D.Bond Prices and Yields 119. issuing short-term commercial paper. collateralized debenture originator E. Difficulty: Moderate 121. retire other forms of their debt B. semi-annual investment vehicles D.Chapter 14 . issuing short-term commercial paper. issuing long-term bonds. issuing long-term bonds. A and D SIVs raise funds by issuing short-term commercial paper and then use the proceeds to buy other forms of debt such as mortgages. SIVs raise funds by ______ and then use the proceeds to ______. structured insured variable rate instruments SIVs are structured interest rate vehicles. SIVs are A. structured investment vehicles B. A. riskless investments E. Difficulty: Easy 120. structured interest rate vehicles C. buy other forms of debt such as mortgages E. common debt officer A CDO is a collateralized debt obligation. Difficulty: Moderate 14-69 . collateralized debt obligation C. A CDO is a A. retire other forms of their debt D.

Mortgage-backed CDOs were a disaster in 2007 because A. Difficulty: Moderate . B. and D Mortgage-backed CDOs were a disaster in 2007 because they were formed by pooling subprime mortgages. the mortgages were variable rate loans and interest rates increased E. home prices stalled D. Difficulty: Moderate 123. and each tranch is given a different level of seniority in terms of its claims on the underlying pool C. and equity tranch is very low risk E. and none of the tranches are risky D. the mortgages were variable rate loans and interest rates increased. home prices stalled.122. they were formed by pooling sub-prime mortgages C. CDOs are divided in tranches A. C. that provide investors with securities with varying degrees of credit risk B. A and B Both A and B are correct. they were formed by pooling high quality fixed-rated loans with low interest rates B.

If you are buying a coupon bond between interest paying dates. If you are buying a bond between interest paying dates. However.Chapter 14 . zeros remain attractive to institutional investors not subject to income taxes. That interest belongs to the seller of the bond and will be remitted to the seller by the broker. When the next interest paying date arrives. Difficulty: Moderate 14-71 . you will receive the entire coupon payment. As a result. Discuss the taxation ramifications of zero coupon bonds. How has this taxation procedure changed over the years? How has this change affected the demand for these bonds? The only return on a zero coupon bond is the capital gain realized when the bond is sold. You will pay that price plus the interest that has accrued since the last interest paying date. Initially. you will pay more than the amount quoted in the financial pages. However. Difficulty: Easy 125. zero coupon bonds are no longer particularly attractive for individual investors and institutional investors subject to income tax. 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).Bond Prices and Yields Short Answer Questions 124. the investor was required to pay capital gains tax only when the bond was sold. such as pension plans and endowments. 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. Feedback: 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. Feedback: This question tests the depth of the student's understanding of the tax ramification of zero-coupon bonds.

also. Feedback: This question tests the student's understanding of callable bonds. not yield to maturity. the investor receives the call price (an amount greater than par value). Difficulty: Moderate . only the cash flows until the first call should be discounted. Interest rates must decline enough to offset the cost of floating a new issue. In return. for callable bonds. The bond valuation calculation should include the call price rather than the par value as the final amount received. 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.126. 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? Many bonds are callable to give the issuer the option of calling the bond in and refunding (reissuing) the bond if interest rates decline. the yields on callable bonds are usually slightly higher than the yields on noncallable bonds of equivalent risk. Bonds issued in a high interest rate environment will have the call feature. The result is that the investor should be looking at yield to first call. When the bond is called.

1%. You will sell the bond now.3%. Difficulty: Difficult 14-73 .Bond Prices and Yields 127.000. 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 Calculations are shown in the table below. You purchased a zero-coupon bond that has a face value of $1. five years to maturity and a yield to maturity of 7. You have a tax rate of 40% on regular income and 15% on capital gains. Feedback: This question tests the depth of the student's understanding of the concepts and mechanics of zero-coupon bonds. Calculate the following for this bond.Chapter 14 .

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