Subscribe to the Largest Online Community of Students of virtual university of Pakistan

vuZs is a forum where students of Virtual University of Pakistan enlighten themselves. A place for the student to interact, exchange ideas in order to discuss issues, studying strategies, quality of education and above all Old papers ,Quizzes, assignments and related stuff is also provided on vuZs page. :::| Official Website: www.vuzs.info >

Translate

Saturday, January 2, 2010

MGT201 Solved MCQs Bond Prices and Yields 3

Solved MCQs

Bond Prices and Yields

http://groups.google.com/group/vuZs



 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

 


Google Groups
http://groups.google.com/group/vuZs
Visit this group

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.


 

    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:

 

 

Bond

Years to Maturity

Price

A

B

C

D

 

1

2

3

4

 

$909.09

$811.62

$711.78

$635.52

 

 

 

 

 

 

 

 


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%.

 

    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


 

    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).


 

    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 coupon 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.

  for more contents visit

http://groups.google.com/group/vuZs

    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.


 

    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


 

    59.   The yield to maturity of a 20-year zero coupon bond that is selling for $372.50 with a value at maturity of $1,000 is ________.

            A)   5.1%

            B)   8.8%

            C)   10.8%

            D)   13.4%

            E)   none of the above

 

Answer: A   Difficulty: Moderate  

            Rationale: [$1,000/($372.50]1/20 - 1 = 5.1%.

 

    60.   Which one of the following statements about convertibles is true?

            A)   The longer the call protection on a convertible, the less the security is worth.

            B)   The more volatile the underlying stock, the greater the value of the conversion feature.

            C)   The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth.

            D)   The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.

            E)   Convertibles are not callable.

 

Answer: B   Difficulty: Moderate  

            Rationale: The longer the call protection the more attractive the bond.  The smaller the spread (c), the less the bond is worth.  Convertibles are debentures (unsecured bonds).  All convertibles are callable at the option of the issuer.

 for more contents visit

http://groups.google.com/group/vuZs