CHAPTER 7

Interest Rates and Bond Valuation I. DEFINITIONS

COUPON a 1. The stated interest payment, in dollars, made on a bond each period is called the bonds: a. coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate. FACE VALUE b 2. The principal amount of a bond that is repaid at the end of the loan term is called the bonds: a. coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate. MATURITY c 3. The specified date on which the principal amount of a bond is repaid is called the bonds: a. coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate. YIELD TO MATURITY d 4. The rate of return required by investors in the mar et for ownin! a bond is called the: a. coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate. COUPON RATE e ". The annual coupon of a bond divided by its face value is called the bonds: a. coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate.

CHAPTER 7 PAR BONDS a #. $ bond with a face value of %1,&&& that sells for %1,&&& in the mar et is called a ''''' bond. a. par value b. discount c. premium d. (ero coupon e. floatin! rate DISCOUNT BONDS b ). $ bond with a face value of %1,&&& that sells for less than %1,&&& in the mar et is called a ''''' bond. a. par b. discount c. premium d. (ero coupon e. floatin! rate PREMIUM BONDS c *. $ bond with a face value of %1,&&& that sells for more than %1,&&& in the mar et is called a ''''' bond. a. par b. discount c. premium d. (ero coupon e. floatin! rate UNFUNDED DEBT d +. The unfunded debt of a firm is !enerally understood to mean the firms: a. preferred stoc . b. debts that mature in more than one year. c. debentures. d. debts that mature in less than one year. e. secured debt. INDENTURE a 1&. The written, le!ally bindin! a!reement between the corporate borrower and the lender detailin! the terms of a bond issue is called the: a. indenture. b. covenant. c. terms of trade. d. form "14&. e. call provision.

CHAPTER 7 REGISTERED BONDS b 11. The form of bond issue in which the re!istrar of the company records ownership of each bond, with relevant payments made directly to the owner of record, is called the ''''' form. a. new,issue b. re!istered c. bearer d. debenture e. collateral BEARER BONDS c 12. The form of bond issue in which the bond is issued without record of the owners name, with relevant payments made directly to whoever physically holds the bond, is called the ''''' form. a. new,issue b. re!istered c. bearer d. debenture e. collateral DEBENTURES e 13. The unsecured debts of a firm with maturities !reater than 1& years are most literally called: a. unfunded liabilities. b. sin in! funds. c. bonds. d. notes. e. debentures. NOTES d 14. a. b. c. d. e. The unsecured debts of a firm with maturities less than 1& years are most literally called: unfunded liabilities. sin in! funds. bonds. notes. debentures.

SENIORITY e 1". -n the event of default, ''''' debt holders must !ive preference to more ''''' debt holders in the priority of repayment distributions. a. short,term. lon!,term b. lon!,term. short,term c. senior. /unior d. senior. subordinated e. subordinated. senior

CHAPTER 7 SINKING FUND a 1#. $n account mana!ed by the bond trustee for early bond redemption payments is called a: a. sin in! fund. b. collateral payment account. c. deed in trust account. d. call provision. e. par value fund. CALL PROVISION b 1). $n a!reement !ivin! the bond issuer the option to repurchase the bond at a specified price prior to maturity is the ''''' provision. a. sin in! fund b. call c. seniority d. collateral e. trustee CALL PREMIUM c 1*. The amount by which the call price e0ceeds the bonds par value is the: a. coupon rate. b. redemption value. c. call premium. d. ori!inal,issue discount. e. call rate. DEFERRED CALL PROVISION d 1+. $ deferred call provision refers to the: a. open mar et price of a callable bond on a certain date. b. seniority of callable bonds to noncallable bonds in the event of corporate default. c. prohibition of a company from ever redeemin! callable bonds. d. prohibition of a company from redeemin! callable bonds prior to a certain date. e. amount by which the call price for a callable bond e0ceeds its par value. PROTECTIVE COVENANT e 2&. 1arts of the indenture limitin! certain actions that mi!ht be ta en durin! the term of the loan to protect the interests of the lender are called: a. trustee relationships. b. sin in! funds provisions. c. bond ratin!s. d. deferred call provisions. e. protective covenants.

CHAPTER 7 TREASURY BONDS a 21. The lon!,term bonds issued by the 2nited 3tates !overnment are called ''''' bonds. a. Treasury b. municipal c. floatin!,rate d. /un e. (ero coupon MUNICIPAL BONDS b 22. The lon!,term bonds issued by state and local !overnments in the 2nited 3tates are called ''''' bonds. a. Treasury b. municipal c. floatin!,rate d. /un e. (ero coupon ZERO COUPON BONDS e 23. $ bond that ma es no coupon payments and is initially priced at a deep discount is called a ''''' bond. a. Treasury b. municipal c. floatin!,rate d. /un e. (ero coupon FLOATING-RATE BONDS c 24. $ bond that pays a variable amount of coupon interest over time is called a ''''' bond. a. Treasury b. municipal c. floatin!,rate d. /un e. (ero coupon CONVERTIBLE BONDS d 2". $ bond which, at the election of the holder, can be swapped for a fi0ed number of shares of common stoc at any time prior to the bonds maturity is called a ''''' bond. a. (ero coupon b. callable c. putable d. convertible e. warrant

CHAPTER 7 PRICE TRANSPARENCY a 2#. $ financial mar et is ''''' if it is possible to easily observe its prices and tradin! volume. a. transparent b. open c. ordered d. in equilibrium e. chaotic CURRENT YIELD b 2). The annual coupon payment of a bond divided by its mar et price is called the: a. coupon rate. b. current yield. c. yield to maturity. d. bid,as spread. e. capital !ains yield. BID PRICES c 2*. The price a dealer is willin! to pay for a security held by an investor is called the: a. equilibrium price. b. as price. c. bid price. d. bid,as spread. e. auction price. ASK PRICES d 2+. The price a dealer is willin! to accept for sellin! a security to an investor is called the: a. equilibrium price. b. auction price. c. bid price. d. as price. e. bid,as spread. NOMINAL RATES e 3&. -nterest rates or rates of return on investments that have not been ad/usted for the effects of inflation are called ''''' rates. a. coupon b. stripped c. effective d. real e. nominal

CHAPTER 7 REAL RATES a 31. -nterest rates or rates of return on investments that have been ad/usted for the effects of inflation are called ''''' rates. a. real b. nominal c. effective d. stripped e. coupon FISHER EFFECT b 32. The relationship between nominal rates, real rates, and inflation is nown as the: a. 4iller and 4odi!liani theorem. b. 5isher effect. c. 6ordon !rowth model. d. term structure of interest rates. e. interest rate ris premium. TERM STRUCTURE OF INTEREST RATES c 33. The relationship between nominal interest rates on default,free, pure discount securities and the time to maturity is called the: a. liquidity effect. b. 5isher effect. c. term structure of interest rates. d. inflation premium. e. interest rate ris premium. INFLATION PREMIUM d 34. The ''''' premium is that portion of a nominal interest rate or bond yield that represents compensation for e0pected future overall price appreciation. a. default ris b. ta0ability c. liquidity d. inflation e. interest rate ris DEFAULT RISK PREMIUM a 3". The ''''' premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer. a. default ris b. ta0ability c. liquidity d. inflation e. interest rate ris

CHAPTER 7 II. CONCEPTS BOND FEATURES d 3#. $ bond with a ) percent coupon that pays interest semi,annually and is priced at par will have a mar et price of ''''' and interest payments in the amount of ''''' each. a. %1,&&). %)& b. %1,&)&. %3" c. %1,&)&. %)& d. %1,&&&. %3" e. %1,&&&. %)& BOND PRICES AND YIELDS e 3). $ll else constant, a bond will sell at ''''' when the yield to maturity is ''''' the coupon rate. a. a premium. hi!her than b. a premium. equal to c. at par. hi!her than d. at par. less than e. a discount. hi!her than BOND PRICES AND YIELDS d 3*. $ll else constant, a coupon bond that is sellin! at a premium, must have: a. a coupon rate that is equal to the yield to maturity. b. a mar et price that is less than par value. c. semi,annual interest payments. d. a yield to maturity that is less than the coupon rate. e. a coupon rate that is less than the yield to maturity. BOND PRICES c 3+. The mar et price of a bond is equal to the present value of the: a. face value minus the present value of the annuity payments. b. annuity payments plus the future value of the face amount. c. face value plus the present value of the annuity payments. d. face value plus the future value of the annuity payments. e. annuity payments minus the face value of the bond. BOND PRICES a 4&. $s the yield to maturity increases, the: a. amount the investor is willin! to pay to buy a bond decreases. b. lon!er the time to maturity. c. lower the coupon rate desired by that investor. d. hi!her the price the investor offers to buy a bond. e. lower the rate of return desired by the investor.

CHAPTER 7 SEMIANNNUAL BONDS e 41. $merican 5ortunes is preparin! a bond offerin! with an * percent coupon rate. The bonds will be repaid in 1& years. The company plans to issue the bonds at par value and pay interest semiannually. 6iven this, which of the followin! statements are correct7 -. The initial sellin! price of each bond will be %1,&&&. --. $fter the bonds have been outstandin! for 1 year, you should use + as the number of compoundin! periods when calculatin! the mar et value of the bond. ---. 8ach interest payment per bond will be %4&. -9. The yield to maturity when the bonds are first issued is * percent. a. - and -- only b. -- and --- only c. --, ---, and -9 only d. -, --, and --- only e. -, ---, and -9 only SEMIANNUAL BONDS AND EFFECTIVE ANNUAL RATE d 42. The newly issued bonds of the :ynslow ;orp. offer a # percent coupon with semiannual interest payments. The bonds are currently priced at par value. The effective annual rate provided by these bonds must be: a. equal to 3 percent. b. !reater than 3 percent but less than 4 percent. c. equal to # percent. d. !reater than # percent but less than ) percent. e. equal to 12 percent. INTEREST RATE RISK d 43. :hich one of the followin! statements is correct concernin! interest rate ris as it relates to bonds, all else equal7 a. The shorter the time to maturity, the !reater the interest rate ris . b. The hi!her the coupon rate, the !reater the interest rate ris . c. 5or a bond sellin! at par value, there is no interest rate ris . d. The !reater the number of semiannual interest payments, the !reater the interest rate ris . e. The lower the amount of each interest payment, the lower the interest rate ris . INTEREST RATE RISK e 44. :hich one of the followin! bonds has the !reatest interest rate ris 7 a. ",year. + percent coupon b. ",year. ) percent coupon c. ),year. ) percent coupon d. +,year. + percent coupon e. +,year. ) percent coupon

CHAPTER 7 INTEREST RATE RISK b 4". -nterest rate ris ''''' as the time to maturity increases. a. increases at an increasin! rate b. increases at a decreasin! rate c. increases at a constant rate d. decreases at an increasin! rate e. decreases at a decreasin! rate INTEREST RATE RISK c 4#. <ou own a bond that has a ) percent coupon and matures in 12 years. <ou purchased this bond at par value when it was ori!inally issued. -f the current mar et rate for this type and quality of bond is )." percent, then you would e0pect: a. the bond issuer to increase the amount of each interest payment on these bonds. b. the yield to maturity to remain constant due to the fi0ed coupon rate. c. to reali(e a capital loss if you sold the bond at the mar et price today. d. todays mar et price to e0ceed the face value of the bond. e. the current yield today to be less than ) percent. INTEREST RATE RISK c 4). <ou e0pect interest rates to decline and wish to capitali(e on the anticipated chan!es in bond prices. To reali(e your ma0imum !ain, all else constant, you should purchase ''''' bonds. a. short,term. low coupon b. short,term. hi!h coupon c. lon!,term. (ero coupon d. lon!,term. low coupon e. lon!,term. hi!h coupon YIELD TO MATURITY AND CURRENT YIELD e 4*. $ll else constant, as the mar et price of a bond increases the current yield ''''' and the yield to maturity ''''' a. increases. increases. b. increases. decreases. c. remains constant. increases. d. decreases. increases. e. decreases. decreases. BOND FEATURES d 4+. :hich of the followin! statements concernin! bond features is =are> correct7 -. ?ondholders !enerally have votin! power in a corporation. --. ?ond interest is ta0,deductible as a business e0pense. ---. The repayment of the bond principle is ta0,deductible. -9. 5ailure to pay either the interest payments or the bond principle as a!reed can cause a firm to !o into ban ruptcy. a. -- only b. - and -- only c. --- and -9 only d. -- and -9 only e. --, ---, and -9 only BOND INDENTURE d "&. :hich of the followin! items are !enerally included in a bond indenture7

CHAPTER 7 -. --. ---. -9. a. b. c. d. e. call provisions security description current yield protective covenants - and -- only -- and -9 only --, ---, and -9 only -, --, and -9 only -, --, ---, and -9

BOND CLASSIFICATIONS e "1. :hich one of the followin! statements is correct concernin! bond classifications7 a. $ debenture is a lon!,term bond secured by the fi0ed assets of a firm. b. $ mort!a!e security is a bond issued solely by a home builder. c. $ note is a bond which has an ori!inal maturity date lon!er than 1& years. d. $ subordinated bond receives preferential treatment over all other bonds in a ban ruptcy. e. $ callable bond can be repurchased by the issuer prior to the initial maturity date. CALLABLE BONDS b "2. ;allable bonds !enerally: a. allow the bondholder to decide when the bond is to be called. b. are associated with sin in! funds. c. permit the issuer to repurchase the bonds at a discount. d. are called within the first couple of years after issuance. e. are required to have a deferred call provision if they have a @ma e,wholeA call provision. PROTECTIVE COVENANTS c "3. :hich of the followin! is a =are> positive covenant=s> that mi!ht be found in a bond indenture7 -. The company shall maintain a current ratio of 1." or better. --. The company must limit the amount of dividends it pays accordin! to the stated formula. ---. The company cannot lease any ma/or assets without approval by the lender. -9. The company must maintain the loan collateral in !ood wor in! order. a. - only b. - and -- only c. - and -9 only d. -- and -9 only e. -, --, and -9 only

CHAPTER 7 PROTECTIVE COVENANTS e "4. 1rotective covenants: a. are primarily desi!ned to protect the issuin! corporation from unreasonable demands of bondholders. b. are consistent for all bonds issued by a corporation within the 2nited 3tates. c. are limited to statin! actions which a firm must ta e. d. only apply to bonds that have a deferred call provision. e. are primarily desi!ned to protect bondholders from future actions of the bond issuer. BOND RATINGS b "". :hich one of the followin! statements concernin! bond ratin!s is correct7 a. 3tandard and 1oors and 9alue Bine are the primary bond ratin! a!encies. b. ?ond ratin!s are solely an assessment of the creditworthiness of the bond issuer. c. -nvestment !rade bonds include only those bonds receivin! one of the hi!hest three bond ratin!s. d. ?ond ratin!s evaluate the e0pected price volatility of a bond issue. e. $ll bonds receive the same ratin! classification from all ratin! a!encies. BOND RATINGS d "#. $ @fallen an!elA is a bond that: a. lowered its annual interest payment. b. has moved from bein! a lon!,term obli!ation to bein! a short,term obli!ation. c. has moved from havin! a yield to maturity in e0cess of the coupon rate to havin! a yield to maturity that is less than the coupon rate. d. has moved from bein! an investment,!rade bond to bein! a /un bond. e. is rated as ?a by one ratin! a!ency and rated as ?? by another ratin! a!ency. TREASURY BONDS a "). ?onds issued by the 2.3. !overnment: -. are considered to be free of default ris . --. are considered to be free of interest rate ris . ---. provide totally ta0,free income. -9. pay interest that is e0empt from federal income ta0es. a. - only b. - and --- only c. - and -9 only d. -- and --- only e. -- and -9 only TREASURY BONDS d "*. Treasury bonds are: a. those bonds issued by any !overnmental a!ency in the 2.3. b. issued only on the first day of each fiscal year by the 2.3. Cepartment of Treasury. c. preferred by hi!h,income individuals because they offer the best ta0 benefits. d. !enerally issued as coupon bonds. e. totally ris ,free.

CHAPTER 7 MUNICIPAL BONDS a "+. 4unicipal bonds: a. offer income ta0 advanta!es to individuals. b. !enerally pay a hi!her rate of return than corporate bonds. c. are those bonds issued only by local municipalities, such as a city or a borou!h. d. are rarely callable. e. pay interest that is always e0empt from both federal and state income ta0es. TAXABLE VERSUS MUNICIPAL BONDS d #&. The brea ,even ta0 rate between a ta0able corporate bond yieldin! ) percent and a comparable nonta0able municipal bond yieldin! " percent can be e0pressed as: a. .&) =1 , tD> E .&". b. .&" =1 , tD> E .&). c. .&) F =1 , tD> E .&". d. .&) =1 , tD> E .&". e. .&" =1 , tD> E .&). ZERO COUPON BONDS e #1. $ (ero coupon bond: a. is sold at a lar!e premium. b. has a price equal to the future value of the face amount !iven a specified rate of return. c. can only be issued by the 2.3. Treasury. d. has less interest rate ris than a comparable coupon bond. e. has implicit interest which is calculated by amorti(in! the loan. ZERO COUPON BONDS b #2. The total interest paid on a (ero,coupon bond is equal to: a. (ero. b. the face value minus the issue price. c. the face value minus the mar et price on the maturity date. d. %1,&&& minus the face value. e. %1,&&& minus the par value. FLOATING-RATE BONDS d #3. The collar of a floatin!,rate bond refers to the minimum and ma0imum: a. call periods. b. maturity dates. c. mar et prices. d. coupon rates. e. yields to maturity.

CHAPTER 7 FLOATING-RATE BONDS d #4. :hich of the followin! are common characteristics of floatin!,rate bonds7 -. ad/ustable coupon rates --. ad/ustable maturity dates ---. put provision -9. coupon cap a. - and -- only b. -- and --- only c. -, --, and -9 only d. -, ---, and -9 only e. -, --, ---, and -9 FLOATING RATE BONDS c #". $ corporation is more prone to issue floatin!,rate bonds when they e0pect future interest rates to ''''' over the life of the bond. a. remain constant b. increase briefly and then decline sli!htly c. continually decline d. decline briefly and then increase si!nificantly e. continually increase CATASTROPHE BONDS e ##. @;atA bonds are primarily desi!ned to help: a. cities recover from economic recessions. b. corporations recover from overseas competition. c. the federal !overnment cope with hu!e deficits. d. animal food producers raise capital to compete internationally. e. insurance companies recover from natural disasters. TYPES OF BONDS AND INVESTOR PREFERENCES c #). -nvestors !enerally tend to buy: a. Treasury bonds for their hi!h yields. b. municipal bonds for their hi!h yields. c. convertible bonds for their potential price appreciation. d. corporate bonds for their liquidity. e. Treasury bonds for their preferential ta0 treatment. TYPES OF BONDS b #*. $ convertible bond is a bond that can be: a. e0chan!ed for cash at prescribed points in time. b. e0chan!ed for a stated number of shares of common stoc of the bond issuer. c. modified from a fi0ed coupon bond into a floatin! coupon bond at prescribed points in time. d. submitted to the issuer for redemption at the discretion of the bondholder. e. submitted for payment any time the economy converts into a recessionary period.

CHAPTER 7 PUT PROVISION c #+. $ put provision in a bond indenture allows: a. a bond issuer to recall the bond after a specified period of time at a price that e0ceeds the face amount. b. a bondholder to force the issuer to increase the coupon rate if inflation increases by more than a specified amount. c. the bondholder to force the issuer to buy bac the bond at a specified price prior to maturity. d. the issuer to convert a coupon bond into a (ero coupon bond at their discretion. e. the issuer to suspend interest payments for any year in which the interest e0pense e0ceeds the net income of the firm. BOND TRADING b )&. -f you want to sell a bond issued by a smaller corporation, you: a. can always do so quite easily by tradin! it on the Gew <or 3toc 80chan!e. b. may encounter difficulties in e0ecutin! the trade. c. can usually do so quite efficiently due to the hi!h liquidity of the bond mar et. d. can do so quite quic ly due to the hi!h volume of tradin! in the bond mar ets. e. will most li ely trade in an auction mar et, such as the Gew <or 3toc 80chan!e. BASIS POINT a )1. Hne basis point is equal to: a. .&1 percent. b. .1& percent. c. 1.& percent. d. 1& percent. e. 1&& percent. CORPORATE BOND QUOTE c )2. The @83T 31I8$CA shown in The Wall Street Journal listin! of corporate bonds represents the estimated: a. yield to maturity. b. difference between the current yield and the yield to maturity. c. difference between the bonds yield and the yield of a particular Treasury issue. d. ran!e of yields to maturity provided by the bond over its life to date. e. difference between the yield to call and the yield to maturity. TREASURY BOND QUOTE e )3. $ Treasury bond that is quoted at 1&&:&) is sellin!: a. at ) percent over the face amount. b. at a ) percent discount. c. at a ) percent premium. d. at par and pays a ) percent coupon. e. for about %2.1+ over face value.

CHAPTER 7 TREASURY BONDS b )4. $s of 2&&4, the lon!est maturity Treasury security currently bein! issued is the: a. ",year note. b. 1&,year note. c. 1",year bond. d. 2&,year bond. e. 3&,year bond. BID VERSUS ASKED PRICES a )". $ Treasury bond has an as ed quote of 1&&:12 and a bid quote of 1&&:11. Hne bond: a. can be purchased at a price of %1,&&3.)". b. can be sold at a price of %1,&&3.)". c. has a spread of 1& basis points. d. has a yield to maturity that lies between 11 and 12 percent. e. can be sold to a dealer at a price of %1,&&1.1&. CLEAN VERSUS DIRTY PRICES c )#. Today, $u!ust 13, you want to buy a bond with a quoted price of 1&1.". The bond pays interest on 5ebruary 1 and $u!ust 1. The price you will pay to purchase this bond is equal to the: a. clean price. b. muddy price. c. dirty price. d. par value price. e. bid price. REAL RATE OF RETURN d )). The increase you reali(e in buyin! power as a result of ownin! a bond is referred to as the ''''' rate of return. a. inflated b. reali(ed c. nominal d. real e. ris ,free FISHER EFFECT e )*. The 5isher formula is e0pressed as: a. 1 F r E =1 F I> =1 F h>. b. 1 F r E =1 F I> =1 F h>. c. 1 F h E =1 F r> =1 F I>. d. 1 F I E =1 F r> =1 F h>. e. 1 F I E =1 F r> =1 F h>.

CHAPTER 7 FISHER EFFECT d )+. The 5isher 8ffect primarily emphasi(es the effects of ''''' ris on an investors rate of return. a. default b. mar et c. interest rate d. inflation e. maturity TERM STRUCTURE OF INTEREST RATES a *&. The term structure of interest rates reflects the: a. pure time value of money for various len!ths of time. b. actual ris premium bein! paid for corporate bonds of varyin! maturities. c. pure inflation ad/ustment applied to bonds of various maturities. d. interest rate ris premium applicable to bonds of varyin! maturities. e. nominal interest rates applicable to coupon bonds of varyin! maturities. TERM STRUCTURE OF INTEREST RATES d *1. :hich of the followin! statements are correct concernin! the term structure of interest rates7 -. The outloo for future inflation influences the shape of the term structure of interest rates. --. The term structure of interest rates includes only the real rate of return and the inflation premium. ---. The interest rate ris premium is included in the term structure of interest rates. -9. The term structure of interest rates can be downslopin!. a. - and -- only b. -- and -9 only c. --- and -9 only d. -, ---, and -9 only e. -, --, and -9 only CORPORATE VERSUS TREASURY BONDS c *2. Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to: a. interest rate ris and time value of money. b. time value of money and inflation. c. ta0es and potential default. d. ta0es and inflation. e. inflation and interest rate ris .

CHAPTER 7 III. PROBLEMS YIELD TO MATURITY c *3. The bonds issued by Jensen K 3on bear a # percent coupon, payable semiannually. The bond matures in * years and has a %1,&&& face value. ;urrently, the bond sells at par. :hat is the yield to maturity7 a. ".*) percent b. ".+) percent c. #.&& percent d. #.&+ percent e. #.1) percent YIELD TO MATURITY a *4. $ 6eneral ;o. bond has an * percent coupon and pays interest annually. The face value is %1,&&& and the current mar et price is %1,&2&."&. The bond matures in 2& years. :hat is the yield to maturity7 a. ).)+ percent b. ).*2 percent c. *.&& percent d. *.&4 percent e. *.12 percent YIELD TO MATURITY d *". :inston 8nterprises has a 1",year bond issue outstandin! that pays a + percent coupon. The bond is currently priced at %*+4.#& and has a par value of %1,&&&. -nterest is paid semiannually. :hat is the yield to maturity7 a. *.#) percent b. 1&.13 percent c. 1&.1# percent d. 1&.4& percent e. 1&.4" percent PRICE OF COUPON BOND a *#. :ine and Ioses, -nc. offers a ) percent coupon bond with semiannual payments and a yield to maturity of ).)3 percent. The bonds mature in + years. :hat is the mar et price of a %1,&&& face value bond7 a. %+"3.2* b. %+"3.** c. %1,1&*.1# d. %1,4&1.2# e. %1,4&1.*#

CHAPTER 7 PRICE OF COUPON BOND c *). 1arty Time, -nc. has a # percent coupon bond that matures in 11 years. The bond pays interest semiannually. :hat is the mar et price of a %1,&&& face value bond if the yield to maturity is 12.+ percent7 a. %434."+ b. %"*&.*# c. %#&&.34 d. %#&".+2 e. %+4).*) PRICE OF COUPON BOND d **. 6u!enheim, -nc. offers a ) percent coupon bond with annual payments. The yield to maturity is ".*" percent and the maturity date is + years. :hat is the mar et price of a %1,&&& face value bond7 a. %)42.## b. %*#*.#) c. %*#+.#) d. %1,&)*.)3 e. %1,&)+."+ TIME TO MATURITY OF COUPON BOND a *+. The Bo 3un ;orporation offers a # percent bond with a current mar et price of %*)".&". The yield to maturity is ).34 percent. The face value is %1,&&&. -nterest is paid semiannually. Low many years is it until this bond matures7 a. 1# years b. 1* years c. 24 years d. 3& years e. 3# years TIME TO MATURITY OF COUPON BOND b +&. Li!h Goon 3un, -nc. has a " percent, semiannual coupon bond with a current mar et price of %+**."2. The bond has a par value of %1,&&& and a yield to maturity of ".2+ percent. Low many years is it until this bond matures7 a. 4.& years b. 4." years c. #." years d. *.& years e. +.& years PRICE OF ZERO COUPON a +1. <our firm offers a 1&,year, (ero coupon bond. The yield to maturity is *.* percent. :hat is the current mar et price of a %1,&&& face value bond7 a. %43&.24 b. %4)3.2# c. %*3"."# d. %+1+.12 e. %1,&**.&&

CHAPTER 7 PRICE OF ZERO COUPON BOND b +2. Teds ;o. offers a (ero coupon bond with an 11.3 percent yield to maturity. The bond matures in 1# years. :hat is the current price of a %1,&&& face value bond7 a. %1)*.)* b. %1*&.33 c. %1**.3# d. %1+&.&+ e. %1+2.1* TIME TO MATURITY OF ZERO COUPON BOND c +3. The (ero coupon bonds of 4ar co, -nc. have a mar et price of %3+4.4), a face value of %1,&&&, and a yield to maturity of #.*) percent. Low many years is it until this bond matures7 a. ) years b. 1& years c. 14 years d. 1* years e. 21 years INTEREST RATE RISK b +4. $ 12,year, " percent coupon bond pays interest annually. The bond has a face value of %1,&&&. :hat is the chan!e in the price of this bond if the mar et yield rises to # percent from the current yield of 4." percent7 a. 11.11 percent decrease b. 12.3* percent decrease c. 12.3* percent increase d. 14.13 percent decrease e. 14.13 percent increase INTEREST RATE RISK d +". Jac son ;entral has a #,year, * percent annual coupon bond with a %1,&&& par value. 8arls 8nterprises has a 12,year, * percent annual coupon bond with a %1,&&& par value. ?oth bonds currently have a yield to maturity of # percent. :hich of the followin! statements are correct if the mar et yield increases to ) percent7 a. ?oth bonds would decrease in value by 4.#1 percent. b. The 8arls bond will increase in value by %**.2". c. The Jac son bond will increase in value by 4.#1 percent. d. The 8arls bond will decrease in value by )."# percent. e. The 8arls bond will decrease in value by %"&.#*. CURRENT YIELD a +#. C$n!elos bonds have a face value of %1,&&& and a current mar et price of %1&1&. The bonds have a ) percent coupon rate. :hat is the current yield on these bonds7 a. #.+3 percent b. #.+) percent c. ).&& percent d. ).&3 percent e. ).&) percent

CHAPTER 7 CURRENT YIELD d +). 4it(is, --. ?onds offer a # percent coupon at a current mar et price of %+*+. The bonds have a face value of %1,&&& and a call price of %1,&2&. :hat is the current yield on these bonds7 a. ".** percent b. ".+) percent c. #.&& percent d. #.&) percent e. #.12 percent CALL PREMIUM c +*. The bonds offered by Beos 1umps are callable in 3 years at a quoted price of 1&1. :hat is the amount of the call premium on a %1,&&& par value bond7 a. %3.33 b. %".&& c. %1&.&& d. %13.33 e. %1&&.&& CORPORATE BOND QUOTE c ++. $ corporate bond is quoted at a current price of 1&2.)#). :hat is the mar et price of a bond with a %1,&&& face value7 a. %1,&&&.2* b. %1,&&2.)) c. %1,&2).#) d. %1,1&2.)) e. %1,2)#.)& ZERO COUPON BOND QUOTE c 1&&. $ %1,&&& face value (ero coupon bond is quoted at a price of 43.3&. :hat is the amount you would pay to purchase this bond7 a. %43.3& b. %43&.3& c. %433.&& d. %+"#.)& e. %1,&43.3& TREASURY BOND QUOTE b 1&1. $ Treasury bond is quoted at a price of 1&#:13. :hat is the mar et price of this bond if the face value is %1,&&&7 a. %1&#.13 b. %1,&#4.&# c. %1,1&#.13 d. %1,1&#.41 e. %1,1&#.#4

CHAPTER 7 TREASURY BOND QUOTE AND COUPON RATE c 1&2. $ Treasury bond is quoted at a price of 1&1:&& with a current yield of ".+4 percent. :hat is the coupon rate7 a. ".** percent b. ".+4 percent c. #.&& percent d. #.&# percent e. #.** percent CORPORATE QUOTE AND CURRENT YIELD e 1&3. $ corporate bond is quoted at a price of +*.#2" with a ).*)" coupon. The bond pays interest semiannually. :hat is the current yield on one of these bonds7 a. )."& percent b. ).)# percent c. ).** percent d. ).+) percent e. ).+* percent TREASURY QUOTE AND CURRENT YIELD a 1&4. $ Treasury bond is quoted at a price of 1&3:23 with a 4.#2" coupon. The bond pays interest semiannually. :hat is the current yield on one of these bonds7 a. 4.4# percent b. 4."4 percent c. 4.#3 percent d. 4.#* percent e. 4.)4 percent BID-ASK SPREAD c 1&". $ Treasury bond is quoted as 1&1:1* as ed and 1&1:1# bid. :hat is the bid,as spread in dollars on a %1,&&& face value bond7 a. %.&2 b. %.2& c. %.#2" d. %2.&& e. %#.2" EFFECTIVE ANNUAL RATES AND INTEREST PAYMENTS a 1&#. The semiannual, ten,year bonds of $dep, -nc. are sellin! at par and have an effective annual yield of 4.2+" percent. :hat is the amount of each interest payment on a %1,&&& $dep bond7 a. %21.2" b. %21.4* c. %21."& d. %42."& e. %42.+"

CHAPTER 7 FISHER EFFECT c 1&). $ bond that pays interest annually yields a ).2" percent rate of return. The inflation rate for the same period is 3." percent. :hat is the real rate of return on this bond7 a. 3."& percent b. 3.") percent c. 3.#2 percent d. 3.)2 percent e. 3.)" percent FISHER EFFECT b 1&*. The bonds of 5ran s :eldin!, -nc. pay an * percent coupon, have a ).+* percent yield to maturity and have a face value of %1,&&&. The current rate of inflation is 2." percent. :hat is the real rate of return on these bonds7 a. ".32 percent b. ".3" percent c. ".3) percent d. ".42 percent e. ".4* percent FISHER EFFECT d 1&+. The outstandin! bonds of Ioy Thomas, -nc. provide a real rate of return of 3.# percent. The current rate of inflation is 2." percent. :hat is the nominal rate of return on these bonds7 a. #.1& percent b. #.13 percent c. #.1# percent d. #.1+ percent e. #.22 percent FISHER EFFECT a 11&. The nominal rate of return on the bonds of 3tus ?oats is *.)" percent. The real rate of return is 3.4 percent. :hat is the rate of inflation7 a. ".1) percent b. ".2* percent c. ".3" percent d. ".43 percent e. ".4+ percent ZERO COUPON BOND AND IMPLICIT INTEREST c 111. $ (ero coupon bond with a face value of %1,&&& is issued with an initial price of %4#3.34. The bond matures in 2" years. :hat is the implicit interest, in dollars, for the first year of the bonds life7 a. %+.&* b. %12."# c. %14.4* d. %21.4) e. %31.2"

CHAPTER 7 ZERO COUPON BOND PRICING c 112. The 4erry:eather 5irm wants to raise %1& million to e0pand their business. To accomplish this, they plan to sell 3&,year, %1,&&& face value (ero,coupon bonds. The bonds will be priced to yield # percent. :hat is the minimum number of bonds they must sell to raise the %1& million they need7 a. 4),411 b. "2,##) c. "),43" d. #&,&&& e. 11),43" IV. ESSAYS TREASURY YIELD CURVE 113. Craw a !raph of a typical Treasury yield curve and discuss why it usually ta es that shape. The student should draw a !raph similar to the Treasury yield curve found in the te0t. 5actors impactin! the shape of the yield curve are the ris free rate, the inflation premium and the interest rate ris premium. BOND YIELD PREMIUMS 114. 80plain why some bond investors are sub/ect to liquidity ris , default ris , andMor ta0ability ris . Low do each of these ris s affect the yield of a bond7 Biquidity problems e0ist in thinly traded bonds ma in! some bonds difficult to sell at their actual value. Cefault ris is the li elihood the corporation will default on its bond obli!ations. Ta0ability ris reflects the fact that some bonds are ta0ed disadvanta!eously compared to others. -f any of these ris s e0ist, investors will require compensation by demandin! a hi!h yield. CROSSOVER BONDS 11". 80plain what a crossover bond is and the ris s and e0pected rewards for investors when they purchase such bonds. $ crossover bond is one that is rated investment !rade by one ratin! a!ency and below investment !rade by another. 3ince the ratin!s a!encies disa!ree, investors must essentially ta e a position as to which one is correct. 6iven the added li elihood of default, investors should e0pect to earn a ris premium over investment !rade bonds when purchasin! crossovers. INTEREST RATE RISK 11#. Cefine what is meant by interest rate ris . $ssume you are the mana!er of a %1&& million portfolio of corporate bonds and you believe interest rates will fall. :hat ad/ustments should you ma e to your portfolio based on your beliefs7 -nterest rate ris is the ris that arises for bond owners from fluctuatin! interest rates. $ll else the same, if interest rates are e0pected to fall you should purchase lon!,term bonds andMor low coupon bonds, and sell shorter,term, hi!her,coupon bonds.

CHAPTER 7 INTEREST RATE RISK AND THE ISSUER 11). :hy do corporations issue 1&&,year bonds, nowin! that interest rate ris is hi!hest for very lon!,term bonds7 Low does the interest rate ris affect the issuer7 8ssentially, the issuer ta es the opposite side of the interest rate ris position. ?y issuin! lon!, term bonds, the corporation is essentially bettin! that rates wont fall si!nificantly. -f they do, the corporation will incur a loss due to borrowin! at rates hi!her than the !oin! mar et rates. Hn the other hand, if rates rise, the corporation benefits by havin! loc ed in its borrowin! rate for up to 1&& years. -n addition, these bonds are a source of lon!,term financin! where the cost, i.e. the interest, is ta0 deductible. -f the firm should issue stoc s, the cost, i.e. the dividends, are not ta0 deductible. This is why the -I3 frowns on 1&& year bonds. YIELD CURVE 11*. -n the early 1+*&s, the Treasury yield curve had a severe downward slope with short,term yields near 2&N and lon!,term yields below 1"N. 80plain how such a pattern mi!ht occur. The downward slope occurs because the e0pected inflation premium is declinin!. The decline in the inflation premium is si!nificant enou!h to overcome the interest rate ris premium. BOND RATINGS 11+. -nterest rate ris is often e0plained by usin! the concept of a teeter,totter. 80plain interest rate ris and how it is related to the movements of a teeter,totter. -nterest rates sit on one end of the teeter,totter while bond prices sit on the other end. $s interest rates move up, bond prices move down as seen by the movements of a teeter,totter. 4ovement in the opposite direction also applies. -n addition, short,term bonds are located a short distance from the fulcrum while lon!,term bonds are situated towards the end of the teeter,totter illustratin! that lon!,term bonds move further in reaction to a chan!e in interest rates than do short,term bonds. BOND VALUATION 12&. The discussion of asset pricin! in the te0t su!!ests that an investor will be indifferent between two bonds which have equal yields to maturity as lon! as they have equivalent default ris . ;an you thin of any real,world factors which mi!ht ma e a !iven investor prefer one of these bonds over the other7 Gote that the question only implies the bonds have the same yields and bond ratin!s. There are the additional issues of ta0ability, liquidity and interest rate ris . 3tudents should be able to recap the discussion on the determinants of bond yields found in section ).) of the te0t.