1. Assume that a $1,000 bond with an 8% coupon, payable semiannually has the following years to maturity: two years, 10 years, 20 years. If interest rates move up to 10%, the following bond prices would occur: $828.36, $964.54, $875.39. Which term goes with which price?

a. two years/$875.39, 10 years/$964.54, 20 years/$828.36

b. two years/$964.54, 10 years/$875.39, 20 years/$828.36

c. two years/$875.39, 10 years/$828.36, 20 years/$964.54

d. two years/$964.54, 10 years/$828.36, 20 years/$875.36

2. Three types of yields relate to the investor's return on a bond:

a. the market yield, the yield to maturity, and the current yield

b. the coupon rate, the yield to maturity, and the bond yield

c. the coupon rate, the yield to maturity, and the current yield

d. all of the above

3. A company has issued a $10,000 bond with zero coupon. It has 20 years remaining to its original 30-year maturity and the market is seeking a yield of 8%. The price of the bond today is:

a. $2,145

b. $2,840

c. $6,667

d. none of the above

4. Although the maturity value of a bond is fixed, changes in current interest rates will:

a. influence the amount of the semiannual coupon payment required

b. affect the bond's yield

c. affect inversely the market price of the bond

d. b and c

5. Which of the following statements is not correct?

a. Bond prices and interest rates are inversely related

b. When a bond's yield to maturity equals the coupon rate, the bond sells for par

c. When a bond's yield to maturity is greater than the coupon rate, the bond sells above par

d. When a bond's yield to maturity is less than the coupon rate, the bond sells above par

6. If a 30-year bond with a quoted price of $810, paid $40 interest semiannually, its current yield would be about:

a. 8.00%

b. 4.00%

c. 5.00%

d. 10.00%

7. Maturity risk is defined as risk that arises from:

a. the term of the bond

b. both interest rate risk and price risk

c. the changes in the price of the bond due to interest rate changes

d. all of the above

8. Bonds are referred to as non-amortizable debt, which means:

a. interest is paid regularly during the term, usually semiannually whereas repayments of principal are annual

b. interest is paid regularly during the term, usually semiannually, and repayments of principal are semiannual

c. interest is paid regularly during the term, usually semiannually, whereas repayment of principal does not occur until the maturity date

d. interest and principal are paid regularly during the term, usually annually

9. If a bond is selling at par value, the required return sought by the market must be:

a. higher than the coupon rate

b. equal to the coupon rate

c. below the coupon rate

d. none of the above

10. If two bonds are identical in risk, maturity date, and face value, but one coupon rate is 10% and the other is 8%, with a market yield requirement of 9% applicable to both bonds:

a. the 10% coupon bond would be selling at a premium and the 8% coupon bond would be selling at a discount

b. the 10% coupon bond would be selling at a discount and the 8% coupon bond would be selling at a premium

c. at the maturity date, both bonds would be selling at face value

d. a and c

11. As interest rates move in one direction and the longer the bond's duration:

a. the bond's price moves in a similar direction

b. the more drastic the movement of the bond's price in a similar direction

c. the more drastic the movement of the bond's price in an opposite direction

d. a and b

12. A bond is available for purchase that has a face value of $10,000, an 8% coupon, payable semiannually, and 20 years of its original 25 years left to maturity. Approximately how much would you pay for the bond today if the market's required yield is 10%?

a. $8,184.60

b. $8,296.88

c. $8,283.64

d. $8,174.36

13. In valuing bonds, the most important thing that matters in today's valuation is:

a. the bond's past and future cash flows

b. the bond's future cash flows

c. the bonds past cash flows

d. whether coupon payments are annual or semiannual

14. A 6% coupon bond with interest payable semiannually and a remaining term of 20 years has a market required yield of 10%. What percentage of face value is the bond selling for today?

a. 65.68%

b. 65.94%

c. 60.00%

d. none of the above

15. Call provisions usually arise when the issuing company wants the option to:

a. retire the bonds earlier than initially planned because of a potential abundance of unnecessary capital

b. require the mandatory retirement of bonds if market interest rates rise substantially above the stipulated coupon rate

c. require the mandatory retirement of bonds in conjunction with the issuance of lower cost debt, thus refunding debt to take advantage of lower market rates

d. refund their debt because interest rates are escalating

16. If a $1,000 bond currently sells for $627.76 and has 15 years remaining to its maturity, what is the market's required yield if the bond has an 8% coupon payable semiannually?

a. 8.00%

b. 14.00%

c. 7.00%

d. 16.00%

17. Without regard to the stipulated coupon rate affixed to a bond, when interest rates move in one direction, the price of the bond moves:

a. in an opposite direction

b. in a similar direction

c. more drastically as the duration of the bond extends farther in time

d. a and c

18. Because bond prices are sensitive to changes in interest rates:

a. it stands to reason that bonds hardly ever sell in the secondary market at their face value

b. it is not often that market interest rates and the bond's coupon rates are equal

c. interest rates in excess of the coupon rate cause the bond to sell at a discount, whereas interest rates below the coupon rate cause the bond to sell at a premium

d. all of the above

19. If a 30-year bond has a 9% coupon payable annually and a quoted price of $826, then the bond's current yield would be about:

a. $90.00

b. 9.00%

c. 11.00%

d. 12.00%

20. In general, price changes due to a given interest rate change will be:

a. smaller as the term of the bond extends farther in time

b. larger as the term of the bond extends farther in time

c. smaller as the maturity date nears

d. b and c

21. A bond has just been advertised to sell for $788.10. With a par value of $1,000, a 10% coupon rate payable semiannually with 10 years remaining to maturity, the bond's yield to maturity must be about:

a. 7.00%

b. 10.00%

c. 14.00%

d. none of the above

22. If current interest rates were lower than the coupon rate, investors owning a bond would:

a. only sell the bond at a premium (above face value), recognizing that the lower interest rates would bid the bond up to the point where the investment yields the market's required return and no more

b. only sell the bond at a discount (below face value), recognizing that the lower the price of the bond, the closer the yield becomes to the market's return

c. be wise to hold the bond until maturity, at which point the market value will greater than the face value of the bond

d. none of the above

23. You have the option of purchasing a 6% coupon bond with interest payable semiannually and a remaining term of 10 years, or a zero coupon bond with a remaining term of 10 years. With a market required yield of 8%, what percentage of face value would you pay for each bond?

a. 45.64% for the zero and 86.58% for the coupon bond

b. 46.32% for the zero and 86.41% for the coupon bond

c. 46.32% for the zero and 86.58% for the coupon bond

d. none of the above

24. With a coupon rate of 8% and a current market price of $955.17, a bond's current yield, assuming six years to maturity, is:

a. 8.38%

b. 8.00%

c. 9.00%

d. none of the above

25. Companies attempt to issue bonds at a coupon rate that is equivalent to the market's required yield; however, there is usually a slight difference between the established coupon rate and the market's required yield. In this case:

a. there is always some discount or premium associated with the new issue

b. the market temporarily modifies its required yield so as to permit the bond to sell at its face value on the issue date

c. the issuing company modifies the coupon rate on the issue date to equal the market's required yield

d. all of the above

Answer Key

1. b

2. c

3. a

4. d

5. c

6. d

7. d

8. c

9. b

10. d

11. c

12. c

13. b

14. a

15. c

16. b

17. d

18. d

19. c

20. d

21. c

22. a

23. b

24. a

25. a