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Saturday, January 2, 2010

MGT201 Solved MCQs Bond Prices and Yields 1

Solved MCQs

Bond Prices and Yields

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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

 

            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.


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            A)   7.00

            B)   6.53

            C)   7.24

            D)   8.53

            E)   7.18

 

            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

 

            Rationale: 60/950 = 6.3.


 

      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

            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

            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

 

            Rationale: FV = 1000, n = 4, PMT = 100, i = 12, PV= 939.25; $100 / $939.25 = 10.65%.


 

      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

 

            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

 

            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

            Rationale: High values for the times interest and quick ratios and a low debt to equity ratio are desirable indicators of safety.


 

    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

 

            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.

            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.

            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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    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

 

            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. or

 

Interest .08, Per month interest = .08/12 = .006667  for 2.5 moths = (.006667*2.5)*100,000 = 1666.67

 

    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

 

            Rationale: $1,130 + $20 (accrued interest) = $1,150.

 

    15.   The bonds of Ford Motor Company have received a rating of "D" by Moody's.  The "D" rating indicates

            A)   the bonds are insured

            B)   the bonds are junk bonds

            C)   the bonds are referred to as "high yield" bonds

            D)   A and B

            E)   B and C

 

            Rationale: D ratings are risky bonds, often called junk bonds (or high yield bonds by those marketing such bonds).


 

    16.   The bond market

            A)   can be quite "thin".

            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.

 

            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.

 

            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

 

            Rationale: The current yield is the annual interest as a percent of current market price; the other choices do not apply to bonds.


 

    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

 

            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

 

            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.

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