-hourglass
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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Chapter 14 Bond Prices and Yields
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 / $$939.25 = 10.65%.
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Chapter 14 Bond Prices
and Yields
7.
A coupon bond
pays annual interest, has a par value of $$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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Chapter 14 Bond
Prices and Yields
10.
At issue,
coupon bonds typically sell ________.
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, the bond will sell at or
near par (unless interest rates have changed very
dramatically and very quickly around
the time of issuance).
11.
Accrued interest
A)
is quoted in
the bond price in the financial press.
B)
must be paid
by the buyer of the bond and remitted to the
seller of the bond.
C)
must be paid to the broker for the
inconvenience of selling bonds between maturity
dates.
D)
A and B.
E)
A and C.
Answer: B Difficulty: Moderate
Rationale:
Accrued interest must be paid by the buyer, but is
not included in the
quotations page
price.
12.
The
invoice price
of a bond that a buyer would pay is equal to
A)
the asked
price plus accrued interest.
B)
the asked price less
accrued interest.
C)
the bid price plus accrued interest.
D)
the bid price
less accrued interest.
E)
the bid price.
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.
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Chapter 14 Bond Prices and Yields
13.
An 8% coupon U. S. Treasury note pays
interest on May 30 and November 30 and is
traded for settlement on August 15.
The accrued interest on the $$100,000 face value of
this note is _________.
A)
$$491.80
B)
$$800.00
C)
$$983.61
D)
$$1,661.20
E)
none of the above
Answer: D Difficulty:
Moderate
Rationale: 76/183($$4,000) = $$1,661.20.
Approximation: .08/12*100,000=666.67 per
month. 666.67/month * 2.5 months =
1.666.67.
14.
A coupon bond is reported as having an
ask price of 113% of the $$1,000 par value in the
Wall Street Journal. If the last
interest payment was made two months ago and the
coupon rate is 12%, the invoice price
of the bond will be ____________.
A)
$$1,100
B)
$$1,110
C)
$$1,150
D)
$$1,160
E)
none of the above
Answer: C Difficulty:
Moderate
Rationale: $$1,130 + $$20 (accrued
interest) = $$1,150.
15.
The bonds of Ford Motor
Company have received a rating of
rating indicates
A)
the bonds are insured
B)
the bonds are
junk bonds
C)
the bonds are referred to as
D)
A and B
E)
B and C
Answer: E Difficulty:
Easy
Rationale: D ratings are risky bonds,
often called junk bonds (or high yield bonds by
those marketing such bonds).
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Chapter 14 Bond Prices
and Yields
16.
The bond market
A)
can be quite
B)
primarily
consists of a network of bond dealers in the over
the counter market.
C)
consists of many investors on any given
day.
D)
A and
B.
E)
B and C.
Answer: D Difficulty:
Easy
Rationale: The bond market, unlike the
stock market, can be a very thinly traded market.
In addition, most bonds are traded by
dealers.
17.
Ceteris paribus, the price and yield on
a bond are
A)
positively related.
B)
negatively related.
C)
sometimes
positively and sometimes negatively related.
E)
not related.
E)
indefinitely
related.
Answer: B
Difficulty: Easy
Rationale: Bond prices and yields are
inversely related.
18.
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.
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;
the other
choices do not apply to bonds.
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Chapter 14 Bond Prices and Yields
19.
The _________ gives the number of
shares for which each convertible bond can be
exchanged.
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; the
price of bond as a straight bond provides the
floor. The other
terms are not
specifically relevant to convertible bonds.
20.
A coupon bond is a bond that _________.
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.
Convertible bonds are specific types of
bonds.
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.
A)
callable
B)
coupon
C)
put
D)
Treasury
E)
zero-coupon
Answer: C Difficulty: Easy
Rationale: Any
bond may be redeemed prior to maturity, but all
bonds other than put
bonds are redeemed
at a price determined by the prevailing interest
rates.
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Chapter 14 Bond Prices and Yields
22.
Callable bonds
A)
are called when interest
rates decline appreciably.
B)
have a call price that
declines as time passes.
C)
are called when interest
rates increase appreciably.
D)
A and B.
E)
B and C.
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.
23.
A Treasury bond due in one year has a
yield of 5.7%; a Treasury bond due in 5 years has
a yield of 6.2%. A bond issued by Ford
Motor Company due in 5 years has a yield of
7.5%; a bond issued by Shell Oil due in
one year has a yield of 6.5%. The default risk
premiums on the bonds issued by Shell
and Ford, respectively, are
A)
1.0% and 1.2%
B)
0.7% and 1.5%
C)
1.2% and 1.0%
D)
0.8% and 1.3%
E)
none of the
above
Answer: D
Difficulty: Moderate
Rationale: Shell: 6.5% - 5.7% = .8%;
Ford: 7.5% - 6.2% = 1.3%.
24.
A Treasury bond due in
one year has a yield of 4.6%; a Treasury bond due
in 5 years has
a yield of 5.6%. A bond
issued by Lucent Technologies due in 5 years has a
yield of
8.9%; a bond issued by Mobil
due in one year has a yield of 6.2%. The default
risk
premiums on the bonds issued by
Mobil and Lucent Technologies, respectively, are:
A)
1.6% and 3.3%
B)
0.5% and .7%
C)
3.3% and 1.6%
D)
0.7% and 0.5%
E)
none of the
above
Answer: A
Difficulty: Moderate
Rationale: Mobil: 6.2% - 4.6% = 1.6%;
Lucent Technologies: 8.9% - 5.6% = 3.3%.
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Chapter 14 Bond Prices
and Yields
25.
A Treasury bond due in
one year has a yield of 6.2%; a Treasury bond due
in 5 years has
a yield of 6.7%. A bond
issued by Xerox due in 5 years has a yield of
7.9%; a bond
issued by Exxon due in one
year has a yield of 7.2%. The default risk
premiums on the
bonds issued by Exxon
and Xerox, respectively, are
A)
1.0% and 1.2%
B)
0.5% and .7%
C)
1.2% and 1.0%
D)
0.7% and 0.5%
E)
none of the
above
Answer: A
Difficulty: Moderate
Rationale: Exxon: 7.2% - 6.2% = 1.0%;
Xerox: 7. 9% - 6.7% = 1.2%.
26.
Floating-
rate bonds are designed to ___________ while
convertible bonds are designed
to
__________.
A)
minimize the holders' interest rate
risk; give the investor the ability to share in
the
price appreciation of the company's
stock
B)
maximize the holders' interest rate
risk; give the investor the ability to share in
the
price appreciation of the company's
stock
C)
minimize the holders' interest rate
risk; give the investor the ability to benefit
from
interest rate changes
D)
maximize the holders'
interest rate risk; 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, thus
negating one of the major disadvantages of fixed
income
investments. Convertible bonds
allow the investor to benefit from the
appreciation of
the stock price, either
by converting to stock or holding the bond, which
will increase in
price as the stock
price increases.
27.
A coupon bond that pays
interest annually is selling at par value of
$$1,000, matures in 5
years, and has a
coupon rate of 9%. The yield to maturity on this
bond is:
A)
8.0%
B)
8.3%
C)
9.0%
D)
10.0%
E)
none of the above
Answer: C Difficulty: Easy
Rationale: When
a bond sells at par value, the coupon rate is
equal to the yield to
maturity.
305
Chapter 14 Bond Prices
and Yields
28.
A coupon bond that pays
interest annually has a par value of $$1,000,
matures in 5 years,
and has a yield to
maturity of 10%. The intrinsic value of the bond
today will be ______
if the coupon rate
is 7%.
A)
$$712.99
B)
$$620.92
C)
$$1,123.01
D)
$$886.28
E)
$$1,000.00
Answer: D Difficulty: Moderate
Rationale: FV =
1000, PMT = 70, n = 5, i = 10, PV = 886.28.
29.
A coupon bond that pays interest
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)
$$924.16
C)
$$1,075.82
D)
$$1,077.20
E)
none of the
above
Answer: C
Difficulty: Moderate
Rationale: FV = 1000, PMT = 120, n = 5,
i = 10, PV = 1075.82
30.
A coupon bond that pays
interest semi-annually has a par value of $$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 8%.
A)
$$922.78
B)
$$924.16
C)
$$1,075.80
D)
$$1,077.20
E)
none of the above
Answer: A Difficulty: Moderate
Rationale: FV =
1000, PMT = 40, n = 10, i = 5, PV = 922.78
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Chapter 14 Bond Prices
and Yields
31.
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)
$$1,077.22
E)
none of the above
Answer: D Difficulty: Moderate
Rationale: FV =
1000, PMT = 60, n = 10, i = 5, PV = 1077.22
32.
A coupon bond that pays interest of
$$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
Answer: C
Difficulty: Moderate
Rationale: FV = 1000, PMT = 100, n = 5,
PV = -928, i = 11.997%
33.
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.
Answer: E Difficulty:
Moderate
Rationale: FV = 1000, PMT = 100, n = 7,
i = 8, PV = 1104.13
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Chapter 14 Bond Prices and Yields
34.
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
$$1,000.
At the time you purchased the
bond, the yield to maturity was 8%. If you sold
the bond
after receiving the first
interest payment and the yield to maturity
continued to be 8%,
your annual total
rate of return on holding the bond for that year
would have been
_________.
A)
7.00%
B)
7.82%
C)
8.00%
D)
11.95%
E)
none of the above
Answer: C Difficulty:
Difficult
Rationale: FV = 1000, PMT = 100, n = 6,
i = 8, PV = 1092.46; FV = 1000, PMT = 100,
n = 5, i = 8, PV = 1079.85; HPR =
(1079.85 - 1092.46 + 100) / 1092.46 = 8%
35.
Consider two bonds, A and B. Both
bonds presently are selling at their par value of
$$1,000. Each pays interest of $$120
annually. Bond A will mature in 5 years while
bond
B will mature in 6 years. If the
yields to maturity on the two bonds change from
12% to
10%, ____________.
A)
both bonds will increase
in value, but bond A will increase more than bond
B
B)
both bonds will increase in value, but
bond B will increase more than bond A
C)
both bonds will decrease
in value, but bond A will decrease more than bond
B
D)
both bonds will decrease in value, but
bond B will decrease more than bond A
E)
none of the
above
Answer: B
Difficulty: Moderate
Rationale: The longer the maturity, the
greater the price change when interest rates
change.
36.
A zero-coupon bond has a
yield to maturity of 9% and a par value of $$1,000.
If the bond
matures in 8 years, the
bond should sell for a price of _______ today.
A)
422.41
B)
$$501.87
C)
$$513.16
D)
$$483.49
E)
none of the
above
Answer: B
Difficulty: Moderate
Rationale:
$$1,000/(1.09)
8
= $$501.87
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Chapter 14 Bond Prices
and Yields
37.
You have just purchased
a 10-year zero-coupon bond with a yield to
maturity of 10%
and a par value of
$$1,000. 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 11% at
the time you sell.
A)
10.00%
B)
20.42%
C)
13.8%
D)
1.4%
E)
none of the above
Answer: D Difficulty:
Moderate
Rationale:
$$1,000/(1.10)
10
= $$385.54;
$$1,000/(1.11)
9
= $$390.92;
($$390.92 -
$$385.54)/$$385.54 = 1.4%.
38.
A Treasury bill with a par value of
$$100,000 due one month from now is selling today
for $$99,010. The effective annual
yield is __________.
A)
12.40%
B)
12.55%
C)
12.62%
D)
12.68%
E)
none of the above
Answer: D Difficulty: Moderate
Rationale:
$$990/$$99,010 = 0.01;
(1.01)
12
- 1.0 = 12.68%.
39.
A Treasury bill with a par value of
$$100,000 due two months from now is selling today
for $$98,039, with an effective annual
yield of _________.
A)
12.40%
B)
12.55%
C)
12.62%
D)
12.68%
E)
none of the above
Answer: C Difficulty: Moderate
Rationale:
$$1,961/$$98,039 = 0.02;
(1.02)
6
- 1 = 12.62%.
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Chapter 14 Bond Prices
and Yields
40.
A Treasury bill with a
par value of $$100,000 due three months from now is
selling today
for $$97,087, with an
effective annual yield of _________.
A)
12.40%
B)
12.55%
C)
12.62%
D)
12.68%
E)
none of the above
Answer: B Difficulty:
Moderate
Rationale: $$2,913/$$97,087 = 0.03;
(1.03)
4
- 1.00 = 12.55%.
41.
A coupon bond pays interest semi-
annually, matures in 5 years, has a par value of
$$1,000 and a coupon rate of 12%, and an
effective annual yield to maturity of 10.25%.
The price the bond should sell for
today is ________.
A)
$$922.77
B)
$$924.16
C)
$$1,075.80
D)
$$1,077.20
E)
none of the above
Answer: D Difficulty: Moderate
Rationale:
(1.1025)
1/2
- 1 = 5%, N=10,
I=5%, PMT=60, FV=1000, PV=1,077.22.
42.
A
convertible bond has a par value of $$1,000 and a
current market price of $$850. The
current price of the issuing firm's
stock is $$29 and the conversion ratio is 30
shares. The
bond's market conversion
value is ______.
A)
$$729
B)
$$810
C)
$$870
D)
$$1,000
E)
none of the above
Answer: C Difficulty: Easy
Rationale: 30
shares X $$29/share = $$870.
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Chapter 14 Bond Prices and Yields
43.
A convertible bond has a par value of
$$1,000 and a current market value of $$850. The
current price of the issuing firm's
stock is $$27 and the conversion ratio is 30
shares. The
bond's conversion premium
is _________.
A)
$$40
B)
$$150
C)
$$190
D)
$$200
E)
none of the above
Answer: A Difficulty: Moderate
Rationale: $$850
- $$810 = $$40.
Use the
following to answer questions 44-47:
Consider the following $$1,000 par value
zero-coupon bonds:
44.
The yield to
maturity on bond A is ____________.
A)
10%
B)
11%
C)
12%
D)
14%
E)
none of the above
Answer: A Difficulty:
Moderate
Rationale: ($$1,000 - $$909.09)/$$909.09 =
10%.
45.
The yield to maturity on bond B is
_________.
A)
10%
B)
11%
C)
12%
D)
14%
E)
none of the above
Answer: B Difficulty: Moderate
Rationale:
($$1,000 - $$811.62)/$$811.62 = 0.2321;
(1.2321)
1/2
- 1.0 = 11%.
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Chapter 14
Bond Prices and Yields
46.
The yield to
maturity on bond C is ____________.
A)
10%
B)
11%
C)
12%
D)
14%
E)
none of the above
Answer: C Difficulty:
Moderate
Rationale: ($$1,000 - $$711.78)/$$711.78 =
0.404928; (1.404928)
1/3
-
1.0 = 12%.
47.
The yield to maturity on bond D is
_______.
A)
10%
B)
11%
C)
12%
D)
14%
E)
none of the
above
Answer: C
Difficulty: Moderate
Rationale: ($$1,000 - $$635.52)/$$635.52 =
0.573515; (1.573515)
1/4
-
1.0 = 12%.
48.
A 10% coupon bond, annual payments, 10
years to maturity is callable in 3 years at a
call price of $$1,100. If the bond is
selling today for $$975, the yield to call is
_________.
A)
10.26%
B)
10.00%
C)
9.25%
D)
13.98%
E)
none of the above
Answer: D Difficulty: Moderate
Rationale: FV =
1100, n = 3, PMT = 100, PV = -975, i = 13.98%.
49.
A 12% coupon bond, semiannual payments,
is callable in 5 years. The call price is
$$1,120; if the bond is selling today
for $$1,110, what is the yield to call?
A)
12.03%.
B)
10.86%.
C)
10.95%.
D)
9.14%.
E)
none of the
above.
Answer: C
Difficulty: Moderate
Rationale: YTC = FV = 1120, n = 10, PMT
= 60, PV = -1,110m i = 5.48%,
5.48*2=10.95
312
Chapter 14 Bond Prices and Yields
50.
A 10% coupon, annual payments, bond
maturing in 10 years, is expected to make all
coupon payments, but to pay only 50% of
par value at maturity. What is the expected
yield on this bond if the bond is
purchased for $$975?
A)
10.00%.
B)
6.68%.
C)
11.00%.
D)
8.68%.
E)
none of the above.
Answer: B Difficulty: Moderate
Rationale: FV =
500, PMT = 100, n = 10, PV = -975, i = 6.68%
51.
You purchased an annual interest coupon
bond one year ago with 6 years remaining to
maturity at the time of purchase. The
coupon interest rate is 10% and par value is
$$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 bond's yield to maturity
had
changed to 7%, your annual total
rate of return on holding the bond for that year
would
have been _________.
A)
7.00%
B)
8.00%
C)
9.95%
D)
11.95%
E)
none of the above
Answer: D Difficulty:
Difficult
Rationale: FV = 1000, PMT = 100, n = 6,
i = 8, PV = 1092.46; FV = 1000, PMT = 100,
n = 5, i = 7, PV = 1123.01; HPR =
(1123.01 - 1092.46 + 100) / 1092.46 = 11.95%.
52.
The ________ is used to calculate the
present value of a bond.
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.
For
callable bonds, yield to call is
sometimes the more appropriate calculation for the
investor (if interest rates are
expected to decrease).
313
Chapter 14 Bond Prices and Yields
53.
The yield to maturity on a bond is
________.
A)
below the coupon rate when the bond
sells at a discount, and equal to the coupon
rate when the bond sells at a premium.
B)
the discount
rate that will set the present value of the
payments equal to the bond
price.
C)
based on the
assumption that any payments received are
reinvested at the coupo
n
rate.
D)
none of the above.
E)
A, B, and C.
Answer: B Difficulty: Easy
Rationale: The
reverse of A is true; for C to be true payments
must be reinvested at the
yield to
maturity.
54.
A bond will sell at a discount when
__________.
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.
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. 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.
55.
Consider a 5-year bond
with a 10% coupon that has a present yield to
maturity of 8%. If
interest rates
remain constant, one year from now the price of
this bond will be _______.
A)
higher
B)
lower
C)
the same
D)
cannot be determined
E)
$$1,000
Answer: B Difficulty:
Moderate
Rationale: This bond is a premium bond
as interest rates have declined since the bond
was issued. If interest rates remain
constant, the price of a premium bond declines as
the bond approaches maturity.
314
Chapter 14 Bond Prices
and Yields
56.
A bond has a par value
of $$1,000, a time to maturity of 20 years, a
coupon rate of 10%
with interest paid
annually, a current price of $$850 and a yield to
maturity of 12%.
Intuitively and
without the use calculations, if interest payments
are reinvested at 10%,
the realized
compound yield on this bond must be ________.
A)
10.00%
B)
10.9%
C)
12.0%
D)
12.4%
E)
none of the
above
Answer: B
Difficulty: Difficult
Rationale: In order to earn yield to
maturity, the coupons must be reinvested at the
yield
to maturity. However, as the
bond is selling at discount the yield must be
higher than
the coupon rate.
Therefore, B is the only possible answer.
57.
A bond with a 12% coupon, 10 years to
maturity and selling at 88 has a yield to maturity
of _______.
A)
over 14%
B)
between 13% and 14%
C)
between 12% and 13%
D)
between 10%
and 12%
E)
less
than 12%
Answer: A
Difficulty: Moderate
Rationale: YTM = 14.33%.
58.
Using
semiannual compounding, a 15-year zero coupon bond
that has a par value of
$$1,000 and a
required return of 8% would be priced at
approximately ______.
A)
$$308
B)
$$315
C)
$$464
D)
$$555
E)
none of the above
Answer: A Difficulty: Moderate
Rationale: FV =
1000, n = 30, I = 4, PV = 308.32
315
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