FIN 3400 Chapter 07 Assignment Questions and Answers- Florida International University
Which of these statements is correct?
Multiple choice
... [Show More] question.
The value of the bond market is about half of the value of the stock
market.
The average daily trading volume of the U. S. bond market exceeds $800
billion.
The bond market is an insignificant source of funds for business firms.
The U. S. bond market consists of only government-issued bonds.
What is an indenture agreement?
Multiple choice question.
A legal contract between the issuer and the bondholders
An informal document which lists the key characteristics of a bond
A formal document with the sole purpose of outlining the rights of
bondholders in the case of default
An informal document which lists the basic characteristics of a bond
Select all that apply
Which of these are common features of a corporate bond? Select all that
apply.
Multiple select question.
Semi-annual interest payments
Currently issued as bearer bonds
Face value of $1,000
Publicly traded debt security
Which one of these terms indicates a bond is unsecured?
Multiple choice question.
Junk bonds
Senior bond
Debenture
Equipment trust certificate
Why are U. S. Treasury bonds considered to be safe?
Multiple choice question.
They provide income exempt from all forms of income taxes.
They are secured by the full-faith-and-credit of the U. S. government.
They are repaid from user fees.
They mature in one year or less.
Which statement related to bonds is true?
Multiple choice question.
Bonds have varying levels of risk.
Bonds are rarely traded.
Bonds that offer high potential returns are low-risk.
All bonds are considered to be low-risk.
Select all that apply
Which of the following may be financed with corporate bonds? Select all that
apply.
Multiple select question.
Public roads
Plant and equipment
Inventory
Research and development
Select all that apply
Which of the following are commonly included in an indenture agreement?
Select all that apply.
Multiple select question.
Coupon rate
Par value
Call premium
Bond price
Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon
and a face value at issuance of $1,000. The reference CPI is 202.34 and the
current CPI is 203.18. What do you know for certain about this bond?
Multiple choice question.
The current par value is $1,000.
The current semiannual interest payment is $10.
The current par value is $1,000 but the coupon rate is currently greater
than 2 percent.
The coupon rate is still 2 percent but the interest payments have
increased.
Which one of these correctly defines a bond feature?
Multiple choice question.
The annual interest expressed as a percentage of face value is called a
bond's yield to maturity.
Bonds are fixed-income equity securities.
The principal value of a bond is referred to as the par value, or face value.
The maturity date is the initial date a bond was issued.
What is the current face value of a $1,000 Treasury inflation-protected
security if the reference CPI is 203.19 and the current CPI is 205.47? The
coupon rate is 3 percent and the bond was issued two years ago.
Multiple choice question.
$1,011.22
$1,000.00
$1,060.90
$988.90
Speculative bonds are frequently referred to as which type of bonds?
Multiple choice question.
Junior bonds
Junk bonds
Debentures
Investment grade
A TIPS was issued with a par value of $1,000, a coupon rate of 2.5 percent,
and a reference CPI of 204.89. Which one of these is the correct calculation
of the current interest payment if the CPI is now 205.44?
Multiple choice question.
$1,000 × (204.89/205.44) × 0.025
$1,000 × (205.44/204.89) × 0.025
$1,000 × (205.44/204.89) × (0.025/2)
$1,000 × 0.025
What is the shortest maturity for a newly issued U. S. Treasury bond?
Multiple choice question.
10 years
30 years
20 years
5 years
Which one of these applies to agency bonds?
Multiple choice question.
Highly risky securities
Unique type of equity securities
Issued by state and local governments
Relatively safe securities
Why might a corporation issue bonds?
Multiple choice question.
Bonds provide a perpetual source of funds.
Bonds provide a steady stream of income to the issuer.
Bonds tend to maximize a firm's total capital costs.
Bonds may offer a lower aftertax cost than equity securities.
Which one of these characteristics designates a premium bond?
Multiple choice question.
Market price is less than par value
Coupon rate exceeds inflation rate
Market price exceeds par value
Coupon rate is lower than current rates
Which one of these descriptions defines a Treasury inflation-protection
security (TIPS)?
Multiple choice question.
U. S. government bond with an inflation-adjusted par value and varying
interest payments
U. S. government bond with inflation-adjusted interest payments and a
fixed par value
U.S. government bond with a variable coupon rate and a fixed par value
U.S. government bond with a fixed coupon rate and par value
Which of these represents the compensation earned by a bond dealer?
Multiple choice question.
Ask price
Bid price - ask price
Bid-ask spread
Bid price
A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89.
The current par value of this TIPS is $1,001.37. What is the current CPI?
Multiple choice question.
204.61
202.12
205.17
207.70
Select all that apply
Which of the following affect the coupon rate a firm must set on its bonds if
the bonds are to be sold at par? Select all that apply.
Multiple select question.
Face amount
Market rates of interest
Bond term
Default risk
A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent,
and a reference CPI of 201.42. The current CPI is 203.14. What is the current
interest payment?
Multiple choice question.
$75.64
$74.36
$151.28
$148.73
How much will you pay to purchase a $100,000 U. S. Treasury bond that is
quoted at 99.6250?
Multiple choice question.
$100,099.63
$99,625.00
$199,625.00
$99,000.63
Which one of these characteristics fits the definition of an agency bond?
Multiple choice question.
Generally provide a lower rate of return than comparable Treasury
securities
Issued to support a sector of the U. S. economy
Issued by the U. S. Treasury Department
Backed by the full-faith-and-credit of the U. S. government
Which one of the following bond quotes indicates a corporate bond is selling
at a premium?
Multiple choice question.
100.00
99.96
99.67
101.49
Select all that apply
Which of these characteristics apply to a discount bond? Select all that apply.
Multiple select question.
Market price is less than the principal amount of the loan
Coupon rate exceeds market rate
Selling for less than face value
Coupon rate equals the market rate
A typical municipal bond is selling at a price of $5,114.20. What is the price
quote for this bond?
Multiple choice question.
100.114
102.284
114.200
100.228
An investor buys bonds at the ___ price and sells them at the ___ price.
Multiple choice question.
bid; ask
ask; bid
bid; bid
ask; ask
True or false: The financial status of the issuer will affect the coupon rate that
issuer pays on its bonds.
True false question.
True
False
Select all that apply
The market rate of interest that is used to compute the present value of a
bond is affected by which of the following? Select all that apply.
Multiple select question.
Credit quality of the bond
Tax status of the bond
Bond's face value
Bond's coupon rate
What is the price of a $100,000 par value U. S. Treasury security if the price
quote is 102.1446?
Multiple choice question.
$100,214.46
$102,144.60
$102,000.15
$100,102.14
What is a zero coupon bond?
Multiple choice question.
A zero coupon bond is sold at par value and pays no regular interest
payments.
A zero coupon bond is sold at a steep discount and pays no semiannual
interest payments.
A zero coupon bond has a current value equal to its future maturity value.
A zero coupon bond is a bond that provides no interest income to its
holder.
A $1,000 corporate bond has an asked price of 97.82 and a bid price of
97.81. What price will you receive if you sell this bond now?
Multiple choice question.
$978.15
$1,000
$978.10
$978.20
Which one of these is the correct formula for computing the current value of
a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent?
Multiple choice question.
PV = $1,000/[1 + (0.08/2)]20
PV = $1,000 × [1 + (0.08/2)]20
PV = $1,000/1.0810
PV = $1,000 × (1.08)10
A municipal bond quote displays a price quote of 98.67. How is this quote
interpreted? Assume a typical face value for a municipal bond.
Multiple choice question.
The municipal bond is selling at a premium price of $986.70.
The municipal bond is selling at a discounted price of $4,933.50.
The municipal bond is selling at a discounted price of $986.70.
The municipal bond is selling at a premium price of $4,933.50.
You want to calculate the current value of a 7-year, 6 percent coupon,
corporate bond given the current discount rate of 8 percent. Which one of
these is correct given the present value formula for a bond?
Multiple choice question.
Par value = $5,000
N = 14
i = 0.08
PMT = $60
Which of these represents the compensation earned by a bond dealer?
Multiple choice question.
Bid price - ask price
Bid-ask spread
Ask price
Bid price
True or false: When computing the present value of a bond, both the par
value and the interest payment amount are input as positive values in a
financial calculator.
True false question.
True
False
Which of these best explains the current value of a bond?
Multiple choice question.
The current value equals the par value plus the present value of the
bond's expected future interest payments.
The current value is the present value of the bond's expected future
interest payments discounted at the coupon rate.
The current value is the future value of the bond's cash flows
compounded at the market rate of interest.
The current value is the present value of the bond's expected future cash
flows discounted at the market rate of interest.
Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate
bond B has a 6 percent coupon and matures in 15 years. The current interest
rate is 6 percent. By how much will Bond A and Bond B change in price if the
market rate increases to 6.5 percent? Assume both bonds are currently
selling at par which is $1,000.
Multiple choice question.
-$12.08; -$49.19
-$14.76; -$52.33
-$11.89; -$47.56
-$13.43; -$47.45
Which one of these is the best description of a 5-year zero coupon bond?
Multiple choice question.
A bond that will sell at par throughout the entire five years
A bond with a current value equal to its discounted par value
A bond that will make a total of 5 payments over its life
A bond that will make a total of 10 payments over its life
True or false: If you buy a bond today at par value and sell it one year from
today, also at par value, the rate of return you will earn will equal to current
yield.
True false question.
True
False
Select all that apply
You want to compute the value of a 5-year zero-coupon corporate bond given
a market rate of 5.5 percent. Which of these represent correct calculator
inputs? Select all that apply.
Multiple select question.
PV = 1,000
i = 5.5
N = 10
FV = 1,000
What is the definition of yield to maturity?
Multiple choice question.
The amount paid at maturity expressed as a percentage of the current
bond price
The annual rate of return from the interest earnings assuming a bond is
purchased today
The capital gain that will be earned if a bond is purchased today and held
until maturity
The rate that will be earned if a bond is purchased today and held until
maturity
Select all that apply
Which of these are basic assumptions that should be used when valuing a
corporate coupon bond unless the problem states otherwise?
Multiple select question.
Semiannual interest payments
Face value = $1,000
Face value = $10,000
Annual interest payments
Which one of these explains why issuers call bonds?
Multiple choice question.
To issue bonds at a higher rate
To refinance debt at a lower rate
To replace low-coupon bonds with high-coupon bonds
To benefit bondholders
Which one of these represents correct calculator input for computing the
current value of a 5 percent coupon compounded semi-annually? The
corporate bond matures in 12.5 years. The current discount rate is 6.5
percent. Assume the face value of the bond as $1,000.
Multiple choice question.
FV = 10,000
I = 6.5
PMT = 25
N = 12.5
Which one of these correctly defines equivalent taxable yield?
Multiple choice question.
The after-tax rate earned on either a taxable or nontaxable bond.
The pretax rate needed on a taxable bond to produce the same after-tax
rate as a muni bond
The after-tax rate needed on a corporate bond to equal the after-tax rate
on a muni bond
The pretax rate required on a taxable bond to yield the same rate as a
muni bond
Assume a corporate bond pays a 5 percent coupon and matures in ten years.
What will be the change in the current price of this bond if market interest
rates increase from 5 to 5.5 percent?
Multiple choice question.
-$38.07
+$19.04
+$38.07
-$19.04
Reason:
When the coupon rate matches the market rate, a bond sells at par, which is
assumed to be $1,000. Using a financial calculator, the price at 5.5 percent
is: N = 20; I = 2.75; PMT = 25; FV = 1,000, CPT PV; PV = -961.93 Change in
price = $961.93 - $1,000 = -$38.07
What are the taxable equivalent yields (ETY) at tax rates of 25 percent and
35 percent if the muni yield is 3.5 percent?
Multiple choice question.
4.67 percent; 5.38 percent
2.63 percent; 2.28 percent
4.38 percent; 4.73 percent
2.80 percent; 2.59 percent
Reason:
ETY = 0.035/(1 - 0.25) = 0.0467 = 4.67% ETY = 0.035/(1 - 0.35) = 0.0538 =
5.38%
What is the definition of current yield?
Multiple choice question.
The return provided by the annual interest expressed as a percentage of
the face value
The return that an investor would earn if the bond were purchased at the
current price and held until maturity
The return provided by the next semiannual interest payment if the bond
is purchased today
The return provided by the annual interest payments if the bond is
purchased at the current price
You need to select one of two premium bonds to purchase. You plan to hold
whichever bond you select until it matures in 10 years. Which bond should
you select and why?
Multiple choice question.
The bond with the highest yield to maturity as you prefer to earn the
highest rate of return over the 10 years.
The bond with the highest premium as it will provide the highest payment
at maturity.
The bond with the highest coupon rate because the bond is selling at a
premium.
The bond with the highest coupon rate because you plan to hold the bond
to maturity.
Which one of the following should be used to compare various corporate
bonds if you plan to purchase a bond today, hold it until maturity, and want
to select the bond with the highest rate of return?
Multiple choice question.
Yield to maturity
Coupon rate
Current price
Current yield
Which one of these is a key reason why issuers call bonds?
Multiple choice question.
Significant drop in market interest rates
Opportunity to repay debt for less than its face value
Opportunity to redeem bonds at their current market price
Significant increase in market interest rates
A 7.5 percent corporate bond matures in 16 years and has a price quote of
102.3. What is the yield to maturity?
Multiple choice question.
6.8309 percent
7.2547 percent
7.2524 percent
6.8414 percent
Reason:
N = 32; PV = -1,023; PMT = 37.50; FV = 1,000; CPT I; I = 3.62735, which is
the semiannual rate.
YTM = 2 × 3.62735% = 7.2547%
Which one of these formulas correctly computes the equivalent taxable
yield?
Multiple choice question.
Muni yield × (1 + Tax rate)
Muni yield/(1 - Tax rate)
Muni yield/(1 + Tax rate)
Muni yield × (1 - Tax rate)
Which of the following yields or rates are inversely related to a bond's market
price?
Multiple choice question.
Current yield, coupon rate, and yield to maturity
Yield to maturity only
Current yield and yield to maturity only
Current yield only
What rate does an investor need to earn on a corporate bond to earn the
same return as he can on a 3.5 percent muni if his tax rate is 28 percent?
Multiple choice question.
6.02 percent
4.48 percent
4.86 percent
2.73 percent
Reason:
Equivalent taxable yield = 0.035/(1 - 0.28) = 0.0486 = 4.86%
What does a bond rating measure?
Multiple choice question.
Credit quality, or default risk
Default risk and market risk
Interest rate and default risk
Credit quality and inflation risk
Which one of these is correct if a bond is selling at a premium?
Multiple choice question.
Current yield > Coupon rate >Yield to maturity
Yield to maturity > Coupon rate >Current yield
Coupon rate > Current yield > Yield to maturity
Yield to maturity > Current yield > Coupon rate
A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of
4.62 percent. A 10-year, A-rated corporate bond has a 4.5 percent coupon
and a yield to maturity of 5.98 percent. What is the yield spread between
these two bonds?
Multiple choice question.
0.50 percent
1.48 percent
1.36 percent
1.98 percent
What is the definition of yield to maturity?
Multiple choice question.
The annual rate of return from the interest earnings assuming a bond is
purchased today
The capital gain that will be earned if a bond is purchased today and held
until maturity
The amount paid at maturity expressed as a percentage of the current
bond price
The rate that will be earned if a bond is purchased today and held until
maturity
Most secondary trades in the U. S. bond market occur between which two
parties?
Multiple choice question.
Bond dealers and private individuals
Issuers and bond dealers
Bond dealers and large institutions
Large institutions and private individuals
A corporate bond has a current yield of 6.39 percent and a price quote of
97.8. What is the coupon rate?
Multiple choice question.
6.60 percent
6.50 percent
6.00 percent
6.25 percent
Reason:
0.0639 = Annual interest/$978; Annual interest = $62.49 Coupon rate =
$62.49/$1,000 = 0.0625 = 6.25%
Select all that apply
Which of the following are sources of information on the bond markets?
Select all that apply.
Multiple select question.
The Wall Street Journal
Foreign exchange market
Internet
Merrill Lynch
Select all that apply
Which of these statements is correct? Select all that apply.
Multiple select question.
A Treasury bond should have a higher yield to maturity than a
comparable muni bond.
If the market interest rate rises, bond prices will fall, and yields to
maturity will rise.
Investors should base their purchase decisions on the yield to call when
interest rates are rising.
A zero coupon bond has no yield to maturity.
What is the definition of credit quality risk?
Multiple choice question.
The chance that a bond issuer may repay a bond prior to maturity
The probability that a bond issuer will call a bond early
The probability that tax rates may change in the future affecting a bond's
yield
The chance that an issuer will either be late paying or will not pay an
interest or principal payment
What is the yield spread?
Multiple choice question.
Difference between the current yield and the yield to maturity on any
individual bond
Difference between the yields to maturity on bonds with differing levels of
credit risk
Difference between the coupon rate and the yield to maturity
Difference between the expected yield to maturity and the actual yield to
maturity
Where does the majority of trading volume in bonds in the secondary
markets occur?
Multiple choice question.
Direct placements
Over-the-counter
NASDAQ
NYSE
What is a common means of reporting the daily direction of overall bond
price movements?
Multiple choice question.
Reporting the average price change in all daily corporate bond trades
Reporting the yield-to-maturity on the 10-year Treasury bonds
Reporting the latest price of 10-year Treasury bonds
Reporting the average coupon rate for all bonds issued that day
Reason:
Since the rate of interest is the key factor that affects bond prices, it is
common practice to report the latest rate and daily yield change for the 10-
year Treasury. Remember, interest rates and bond prices are inversely
related.
A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of
4.62 percent. A 10-year, A-rated corporate bond has a 4.5 percent coupon
and a yield to maturity of 5.98 percent. What is the yield spread between
these two bonds?
Multiple choice question.
1.98 percent
1.36 percent
1.48 percent
0.50 percent
Reason:
Spread = 5.98% - 4.62% = 1.36% [Show Less]