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.
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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.
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%.
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.
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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
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
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
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%.
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%.
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