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Multiple Choice Questions 1. The current yield on a bond is equal to ________.

A) annual interest divided by the current market price B) the yield to maturity C) annual interest divided by the par value D) the internal rate of return ) none of the above Ans!er" A Difficulty" asy #ationale" A is current yield and is quoted as such in the financial press. $. %f a &' coupon bond is tradin( for )*&+.,,- it has a current yield of ____________ percent..1,,, par value) A) &.,, B) /.+0 C) &.$1 D) 2.+0 ) &.12 Ans!er" Difficulty" asy #ationale" &,3*&+ 4 &.12. 0. %f a /' coupon bond is tradin( for )*+,.,,- it has a current yield of ____________ percent. A) /.+ B) /.0 C) /.1 D) /., ) /./ Ans!er" B Difficulty" asy #ationale" /,3*+, 4 /.0.

$2. A coupon bond that pays interest annually has a par value of )1-,,,- matures in + years- and has a yield to maturity of 1,'. The intrinsic value of the bond today !ill be ______ if the coupon rate is &'. A) )&1$.** B) )/$,.*$ C) )1-1$0.,1 D) )22/.$2 ) )1-,,,.,, Ans!er" D Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 &,- n 4 +- i 4 1,- 87 4 22/.$2. $*. A coupon bond that pays interest annually- has a par value of )1-,,,- matures in + years- and has a yield to maturity of 1,'. The intrinsic value of the bond today !ill be _________ if the coupon rate is 1$'. A) )*$$.&& B) )*$1.1/ C) )1-,&+.2$ D) )1-,&&.$, ) none of the above Ans!er" C Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 1$,- n 4 +- i 4 1,- 87 4 1,&+.2$ 0,. A coupon bond that pays interest semi9annually has a par value of )1-,,,- matures in + years- and has a yield to maturity of 1,'. The intrinsic value of the bond today !ill be __________ if the coupon rate is 2'. A) )*$$.&2 B) )*$1.1/ C) )1-,&+.2, D) )1-,&&.$, ) none of the above Ans!er" A Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 1,- n 4 1,- i 4 +- 87 4 *$$.&2

01. A coupon bond that pays interest semi9annually has a par value of )1-,,,- matures in + years- and has a yield to maturity of 1,'. The intrinsic value of the bond today !ill be ________ if the coupon rate is 1$'. A) )*$$.&& B) )*$1.1/ C) )1-,&+.2, D) )1-,&&.$$ ) none of the above Ans!er" D Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 /,- n 4 1,- i 4 +- 87 4 1,&&.$$ 0$. A coupon bond that pays interest of )1,, annually has a par value of )1-,,,- matures in + years- and is sellin( today at a )&$ discount from par value. The yield to maturity on this bond is __________. A) /.,,' B) 2.00' C) 1$.,,' D) /,.,,' ) none of the above Ans!er" C Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 1,,- n 4 +- 87 4 9*$2- i 4 11.**&' 00. :ou purchased an annual interest coupon bond one year a(o that no! has / years remainin( until maturity. The coupon rate of interest !as 1,' and par value !as )1-,,,. At the time you purchased the bond- the yield to maturity !as 2'. The amount you paid for this bond one year a(o !as A) )1-,+&.+,. B) )1-,&+.+,. C) )1-,22.+,. D) )1.,*$.1/. ) )1-1,1.10. Ans!er" Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 1,,- n 4 &- i 4 2- 87 4 11,1.10

01. :ou purchased an annual interest coupon bond one year a(o that had / years remainin( to maturity at that time. The coupon interest rate !as 1,' and the par value !as )1-,,,. At the time you purchased the bond- the yield to maturity !as 2'. %f you sold the bond after receivin( the first interest payment and the yield to maturity continued to be 2'- your annual total rate of return on holdin( the bond for that year !ould have been _________. A) &.,,' B) &.2$' C) 2.,,' D) 11.*+' ) none of the above Ans!er" C Difficulty" Difficult #ationale" 67 4 1,,,- 85T 4 1,,- n 4 /- i 4 2- 87 4 1,*$.1/; 67 4 1,,,- 85T 4 1,,- n 4 +- i 4 2- 87 4 1,&*.2+; <8# 4 .1,&*.2+ 9 1,*$.1/ = 1,,) 3 1,*$.1/ 4 2' 0+. Consider t!o bonds- A and B. Both bonds presently are sellin( at their par value of )1-,,,. ach pays interest of )1$, annually. Bond A !ill mature in + years !hile bond B !ill mature in / years. %f the yields to maturity on the t!o bonds chan(e from 1$' to 1,'- ____________. A) both bonds !ill increase in value- but bond A !ill increase more than bond B B) both bonds !ill increase in value- but bond B !ill increase more than bond A C) both bonds !ill decrease in value- but bond A !ill decrease more than bond B D) both bonds !ill decrease in value- but bond B !ill decrease more than bond A ) none of the above Ans!er" B Difficulty" 5oderate #ationale" The lon(er the maturity- the (reater the price chan(e !hen interest rates chan(e. 0/. A >ero9coupon bond has a yield to maturity of *' and a par value of )1-,,,. %f the bond matures in 2 years- the bond should sell for a price of _______ today. A) 1$$.11 B) )+,1.2& C) )+10.1/ D) )120.1* ) none of the above Ans!er" B Difficulty" 5oderate #ationale" )1-,,,3.1.,*)2 4 )+,1.2&

0&. :ou have ?ust purchased a 1,9year >ero9coupon bond !ith a yield to maturity of 1,' and a par value of )1-,,,. @hat !ould your rate of return at the end of the year be if you sell the bondA Assume the yield to maturity on the bond is 11' at the time you sell. A) 1,.,,' B) $,.1$' C) 10.2' D) 1.1' ) none of the above Ans!er" D Difficulty" 5oderate #ationale" )1-,,,3.1.1,)1, 4 )02+.+1; )1-,,,3.1.11)* 4 )0*,.*$; .)0*,.*$ 9 )02+.+1)3 )02+.+1 4 1.1'. 02. A Treasury bill !ith a par value of )1,,-,,, due one month from no! is sellin( today for )**-,1,. The effective annual yield is __________. A) 1$.1,' B) 1$.++' C) 1$./$' D) 1$./2' ) none of the above Ans!er" D Difficulty" 5oderate #ationale" )**,3)**-,1, 4 ,.,1; .1.,1)1$ 9 1., 4 1$./2'. 0*. A Treasury bill !ith a par value of )1,,-,,, due t!o months from no! is sellin( today for )*2-,0*- !ith an effective annual yield of _________. A) 1$.1,' B) 1$.++' C) 1$./$' D) 1$./2' ) none of the above Ans!er" C Difficulty" 5oderate #ationale" )1-*/13)*2-,0* 4 ,.,$; .1.,$)/ 9 1 4 1$./$'.

1,. A Treasury bill !ith a par value of )1,,-,,, due three months from no! is sellin( today for )*&-,2&- !ith an effective annual yield of _________. A) 1$.1,' B) 1$.++' C) 1$./$' D) 1$./2' ) none of the above Ans!er" B Difficulty" 5oderate #ationale" )$-*103)*&-,2& 4 ,.,0; .1.,0)1 9 1.,, 4 1$.++'. 11. A coupon bond pays interest semi9annually- matures in + years- has a par value of )1-,,, and a coupon rate of 1$'- and an effective annual yield to maturity of 1,.$+'. The price the bond should sell for today is ________. A) )*$$.&& B) )*$1.1/ C) )1-,&+.2, D) )1-,&&.$, ) none of the above Ans!er" D Difficulty" 5oderate #ationale" .1.1,$+)13$ 9 1 4 +'- B41,- %4+'- 85T4/,- 6741,,,- 8741-,&&.$$. 1$. A convertible bond has a par value of )1-,,, and a current market price of )2+,. The current price of the issuin( firmCs stock is )$* and the conversion ratio is 0, shares. The bondCs market conversion value is ______. A) )&$* B) )21, C) )2&, D) )1-,,, ) none of the above Ans!er" C Difficulty" asy #ationale" 0, shares D )$*3share 4 )2&,.

+0. The yield to maturity on a bond is ________. A) belo! the coupon rate !hen the bond sells at a discount- and equal to the coupon rate !hen the bond sells at a premium. B) the discount rate that !ill 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. ) A- B- and C. Ans!er" B Difficulty" asy #ationale" The reverse of A is true; for C to be true payments must be reinvested at the yield to maturity. +1. A bond !ill sell at a discount !hen __________. A) the coupon rate is (reater than the current yield and the current yield is (reater than yield to maturity B) the coupon rate is (reater than yield to maturity C) the coupon rate is less than the current yield and the current yield is (reater 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 ) none of the above is true. Ans!er" D Difficulty" 5oderate #ationale" %n order for the investor to earn more than the current yield the bond must be sellin( for a discount. :ield to maturity !ill be (reater than current yield as investor !ill have purchased the bond at discount and !ill be receivin( the coupon payments over the life of the bond. ++. Consider a +9year bond !ith a 1,' coupon that has a present yield to maturity of 2'. %f interest rates remain constant- one year from no! the price of this bond !ill be _______. A) hi(her B) lo!er C) the same D) cannot be determined ) )1-,,, Ans!er" B Difficulty" 5oderate #ationale" This bond is a premium bond as interest rates have declined since the bond !as issued. %f interest rates remain constant- the price of a premium bond declines as the bond approaches maturity.

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20. A coupon bond that pays interest semi9annually has a par value of )1-,,,- matures in / years- and has a yield to maturity of *'. The intrinsic value of the bond today !ill be __________ if the coupon rate is *'. A) )*$$.&2 B) )*$1.1/ C) )1-,&+.2, D) )1-,,,.,, ) none of the above Ans!er" D Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 1+- n 4 1$- i 4 1.+- 87 4 1,,,.,,

21. A coupon bond that pays interest semi9annually has a par value of )1-,,,- matures in & years- and has a yield to maturity of 11'. The intrinsic value of the bond today !ill be __________ if the coupon rate is 2.2'. A) )*$$.&2 B) )2*1.+1 C) )1-,&+.2, D) )1-,&&.$, ) none of the above Ans!er" B Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 11- n 4 11- i 4 +.+- 87 4 2*1.+1 2+. A coupon bond that pays interest of )*, annually has a par value of )1-,,,- matures in * years- and is sellin( today at a )// discount from par value. The yield to maturity on this bond is __________. A) *.,,' B) 1,.1+' C) 11.$+' D) 1$.0$' ) none of the above Ans!er" B Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 *,- n 4 *- 87 4 9*01- i 4 1,.1+' 2/. A coupon bond that pays interest of )1, semi annually has a par value of )1-,,,matures in 1 years- and is sellin( today at a )0/ discount from par value. The yield to maturity on this bond is __________. A) 2./*' B) *.,*' C) 1,.10' D) *.&/' ) none of the above Ans!er" B Difficulty" 5oderate #ationale" 67 4 1,,,- 85T 4 1,- n 4 2- 87 4 9*/1- i 4 *.,*'

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