FINA Test 2

Study online at quizlet.com/_ehnsg

1.

Assume that a bond has been owned by four

different investors during its 20-year history.
Which of the following is not likely to have
been shared by these different owners?

Yield to
maturity

14.

The existence of an upward-sloping yield

curve suggests that:

Interest rates
will be
increasing in
the future.

2.

A bond's par value can also be called its:

Face value

15.

3.

A bond's yield to maturity takes into

consideration:

Both
current
yield and
price
changes of
a bond.

How does a bond dealer generate profits

when trading bonds?

By maintaining
bid prices
lower than ask
prices

16.

How much does the $1,000 to be received

upon a bond's maturity in four years add
to the bond's price if the appropriate
discount rate is 6%?

$792.09
$1,000/(1.06)4
= $792.09

17.

How much should you be prepared to pay

for a 10-year bond with a 6% coupon and a
yield to maturity to maturity of 7.5%?

$897.04

A bond with 10 years until maturity, an 8%

coupon, and an 8% yield to maturity
increased in price to $1,107.83 yesterday.
What apparently happened to interest rates?

Rates
decreased
by 1.5%

5.

By how much did the price of a $1,000 parvalue bond decrease if The Wall Street
Journal shows a change of -12 from the
previous day?

$3.75
12/32 x 10 =
$3.75

18.

How much should you be prepared to pay

for a 10-year bond with a 6% coupon,
semi-annual payments, and a semiannually compounded yield of 7.5%?

$895.78

6.

By how much did the price of a $1,000 parvalue bond increase if The Wall Street Journal
shows a change of +6 from the previous day?

$1.875
6/32 x 10 =
$1,875

19.

$927.90

7.

By how much will a bond increase in price

over the next year if it currently sells for
$925, has five years until maturity, and an
annual coupon rate of 7%?

$12.55

How much should you pay for a $1,000

bond with 10% coupon, annual payments,
and five years to maturity if the interest
rate is 12%?

20.

$1,082.00

Capital losses will automatically be the case

for bond investors who buy:

Premium
bonds

How much would an investor expect to

pay for a $1,000 par value bond with a 9%
annual coupon that matures in 5 years if
the interest rate is 7%?

21.

9.

The coupon rate of a bond equals:

A
percentage
of its face
value

10.

The current yield of a bond can be calculated

by:

Dividing the
annual
coupon
payments
by the
price.

How much would an investor lose if she

purchased a 30-year zero-coupon bond
with a $1,000 par value and 10% yield to
maturity, only to see market interest rates
increase to 12% one year later? (Hint: How
much would the price change from a year
earlier?)

$19.93
Price =
1,000/(1.10)30
= 57.31
New Price =
1,000/(1.12)29=
37.38
Difference =
19.93

22.

How much would an investor need to

receive in nominal return if she desires a
real return of 4% and the rate of inflation
is 5%?

9.20%
1.04 = 1 +
nominal
return/1.05
9.2% = nominal
return

23.

If a bond is priced at par value, then:

Its coupon rate

equals its yield
to maturity.

24.

If a bond offers an investor 11% in nominal

return during a year in which the rate of
inflation was 4%, then the investor's real
return was:

6.73%
1 + real return
= 1.11/1.04
real return =
6.73%

4.

8.

11.

The current yield tends to overstate a bond's

total return when the bond sells for a
premium because:

The bond's
price will
decline
each year.

12.

The current yield tends to understate a

bond's total return when the bond sells for a
discount because:

The bond's
price will
increase
each year.

The discount rate that makes the present

value of a bond's payments equal to its price
is termed the:

Yield to
maturity

13.

25.

If a four year bond with a 7% coupon and a

10% yield to maturity is currently worth
$904.90, how much will it be worth one year
from now if interest rates are constant?

$925.39

37.

The numerator of the rate of return formula

for bond consists of the following:

26.

If an investor purchases a 3%, two-year TIPS

and the CPI increases 3% over each of the
next two years, how much does the investor
receive at maturity?

$1,092.73
1,030 x
(1.03)2 =
1,092.73.

A. coupon
income.
B. bond
price
change.
Both A
and B.

38.

If an investor purchases a bond when its

current yield is higher than the coupon rate,
then the bond's price will be expected to:

Increase
over time,
reaching
par value
at maturity.

Periodic receipts of interest by the

bondholders are known as:

Coupon
payments

39.

The purpose of a floating-rate bond is to:

If the 7s of 2005 are offered at 102:23, then the

price of a $1,000 bond would be:

$1,027.19
$1,000 +
$20 +
$10(23/32)
= $1,027.19

Offer rates
adjusted
to current
market
conditions.

40.

Suppose a 30-year maturity bond currently

selling for $1,040 is callable in 10 years at a call
price of $1,060. If its yield to maturity is 8.14%,
its yield to call is:

More than
8.14%

29.

If the coupon rate is lower than current

interest rates, then the yield to maturity will
be:

Equal to
the coupon
rate.

41.

$928.84

30.

If you purchase a five-year, zero-coupon bond

for $500, how much could it be sold for three
years later if interest rates have remained
stable?

$757.86

Two years ago bonds were issued with 10 years

until maturity, selling at par, and a 7%
coupon. If interest rates for that grade of bond
are currently 8.25%, what will be the market
price of these bonds?

42.

U.S. Treasury bond yields do not contain a:

Default
premium

If you purchase a three-year, 9% coupon

bond for $950, how much could it be sold for
two years later if interest rates have remained
stable?

$981.56

43.

The value of a callable bond:

Is limited
by its call
price.

44.

32.

An investor buys a five-year, 9% coupon bond

for $975, holds it for one year and then sells
the bond for $985. What was the investor's
rate of return?

10.26%
(90 +
10)/975 =
10.26%

What causes bonds to sell for a premium

compared to face value?

33.

An investor buys a ten-year, 7% coupon bond

for $1,050, holds it for one year and then sells
it for $1,040. What was the investor's rate of
return?

5.71%
(70 10)/1,050 =
5.71%

The bonds
have a
higher
than
market
coupon
rate.

45.

An investor holds two bonds, one with five

years until maturity and the other with 20
years until maturity. Which of the following
is more likely if interest rates suddenly
increase by 2%?

The 20year bond

will
decrease
more in
price.

What happens to the coupon rate of a bond

that pays $80 annually in interest if interest
rates change from 9% to 10%?

The
coupon
rate
remains at
8%.

46.

What happens to the price of a three-year

bond with an 8% coupon when interest rates
change from 8% to 6%?

A price
increase of
$53.47

35.

Investors who own bonds having lower

credit ratings should expect:

Higher
default
possibilities.

47.

What happens when a bond's expected cash

flows are discounted at a rate lower than the
bond's coupon rate?

36.

Many investors may be drawn to municipal

bonds because of the bonds':

Exemption
from
federal
taxes

The price
of the
bond
increases

48.

What is the amount of the annual coupon

payment for a bond that has six years until
maturity, sells for $1,050, and has a yield to
maturity of 9.37%?

$105.00

27.

28.

31.

34.

49.

What is the coupon rate for a bond with

three years until maturity, a price of
$1,053.46, and a yield to maturity of 6%?

8%

63.

Where does a "convertible bond" get

its name?

50.

What is the current yield of a bond with

a 6% coupon, four years until maturity,
and a price of $750?

8.0%
$60/750 = 8%

The option of
converting into
shares of common
stock.

64.

A Baa-rated bond.

What is the rate of return for an investor

who pays $1,054.47 for a three-year
bond with a 7% coupon and sells the
bond one year later for $1,037.19?

5.00%
Rate of Return =
($70.00 $17.28)/$1,054.47
=
$52.72/$1,054.47
= 5%

Which of the following bonds would

be considered to be of investmentgrade?

65.

Which of the following bonds would

be likely to exhibit a greater degree
of interest-rate risk?

A zero-coupon bond
with 30 years until
maturity.

66.

Which of the following factors will

change when interest rates change?

The present value of

a bond's payments

67.

Which of the following identifies the

distinction between a U.S. Treasury
bond and a Treasury note?

Bonds initially have

more than 10 years
until maturity; notes
have fewer than 10
years initially.

68.

Which of the following is correct

concerning real interest rates?

Real interest rates, if

positive, indicate
increased
purchasing power.

69.

Which of the following is correct for

a bond currently selling at a
premium to par?

Its current yield is

lower than its
coupon rate.

70.

Which of the following is correct for

a bond investor whose bond offers a
5% current yield and an 8% yield to
maturity?

The bond is selling at

a discount to par
value.

71.

Which of the following is correct for

a bond priced at $1,100 that has ten
years remaining until maturity, and
a 10% coupon, with semiannual
payments?

Each payment of
interest equals $50.

72.

Which of the following is correct

when a bond investor's rate of
return for a particular period equals
the bond's coupon rate?

The bond price

remained
unchanged during
the period.

73.

Which of the following is fixed (e.g.,

cannot change) for the life of a given
bond?

Coupon rate

74.

Which of the following is likely to be

correct for a CCC-rated bond,
compared to a BBB-rated bond?

The CCC bond will

offer a higher
promised yield to
maturity.

51.

52.

What is the relationship between an

investment's rate of return and its yield
to maturity for an investor that does
not hold a bond until maturity?

There is no
predetermined
relationship.

53.

What is the total return to an investor

who buys a bond for $1,100 when the
bond has a 9% coupon rate and five
years remaining until maturity, then
sells the bond after one year for $1,085?

6.82%
(90 - 15)/1,100 =
6.82%

54.

What is the yield to maturity for a bond

paying $100 annually that has six years
until maturity and sells for $1,000?

10.0%

55.

What is the yield to maturity of a bond

with the following characteristics?
Coupon rate is 8% with semi-annual
payments, current price is $960, three
years until maturity.

9.57%

56.

What price was quoted to an investor

who paid $982.50 for a $1,000 par value
bond?

98:08
980 + (8/32 x 10)
= 982.50

57.

What price was reported in the financial

press for a bond that was sold to an
investor for $1,045.63?

104:18

58.

What price will be paid for a U.S.

Treasury bond with an ask price of
135:20?

$1,356.25

When an investor purchases a $1,000 par

value bond that was quoted at 97.16,
the investor:

Pays 97.5% of
face value for the
bond

60.

When market interest rates exceed a

bond's coupon rate, the bond will:

Sell for more

than par value.

61.

When riskier corporations issue bonds

that include a default premium, the
promised yield will sometimes be:

Greater than the

actual yield.

75.

Which of the following presents the

correct relationship? As the coupon
rate of a bond increases, the bond's:

Interest payments
increse

62.

When the yield curve is upward-sloping,

then:

Short-maturity
bonds yield less
than longmaturity bonds.

76.

Which of the following statements is

correct for a 10% coupon bond that
has a current yield of 7%?

The bond's maturity

value is lower than
the bond's price.

59.

77.

Which of the following will not happen for an investor who owns TIPS during a period
of inflation?

The coupon payment will increase in real

terms.

78.

Which of the following will reduce the yield to maturity from what the investor
calculated at time of purchase?

Increasing interest rates; bonds sold

before maturity.

79.

Which of the following would not be associated with a zero-coupon bond?

Current yield

80.

The yield curve depicts the current relationship between:

Bond yields and maturity