Question 1

The primary purpose of protective covenants is to help:

Accepted Answer

A)   reduce interest rate risk.
B)   the issuer in case of default.
C)   protect bondholders from issuer actions.
D)   bondholders whose bonds are called.
E)   convert bearer bonds into registered form.F) C) and D)
G) None of the above

Question 2

Smiley Industrial Goods has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,095. At this price, the bonds yield 6.4 percent. What must the coupon rate be on these bonds?

Accepted Answer

A)   6.67 percent
B)   6.84 percent
C)   7.23 percent
D)   7.50 percent
E)   7.83 percentF) A) and D)
G) A) and E)

Question 3

Dexter, Inc. has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision.

Accepted Answer

A)   safeguard
B)   market
C)   liquidity
D)   deferred call
E)   sinking fundF) C) and D)
G) A) and B)

Question 4

Which one of the following statements is correct?

Accepted Answer

A)   Bonds are generally called at par value.
B)   A current list of all bondholders is maintained whenever a firm issues bearer bonds.
C)   An indenture is a contract between a bond's issuer and its holders.
D)   Collateralized bonds are called debentures.
E)   A bondholder has the right to determine when his or her bond is called.F) A) and C)
G) C) and E)

Question 5

A 6 percent bond has a yield to maturity of 6.5 percent. The bond matures in 7 years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment?

Accepted Answer

A)   $30.00
B)   $32.50
C)   $60.00
D)   $62.50
E)   $65.00F) A) and E)
G) C) and D)

Question 6

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

Accepted Answer

A)   Registered account
B)   Bearer account
C)   Call account
D)   Sinking fund
E)   Premium fundF) All of the above
G) A) and B)

Question 7

A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $27.50 each and matures in 6 years. What is the coupon rate?

Accepted Answer

A)   2.72 percent
B)   2.75 percent
C)   5.00 percent
D)   5.43 percent
E)   5.50 percentF) D) and E)
G) C) and D)

Question 8

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

Accepted Answer

A)   market yield.
B)   yield-to-call.
C)   bid-ask spread.
D)   current yield.
E)   bond premium.F) B) and E)
G) A) and C)

Question 9

A bond for which no specific property has been pledged as security is classified as a:

Accepted Answer

A)   bearer bond.
B)   trust deed bond.
C)   registered bond.
D)   debenture.
E)   sinking fund bond.F) B) and E)
G) A) and B)

Question 10

On which one of the following dates is the principal amount of a bond repaid?

Accepted Answer

A)   Coupon date
B)   Issue date
C)   Discount date
D)   Maturity date
E)   Face dateF) C) and D)
G) A) and B)

Question 11

Keyser Materials has 8 percent coupon bonds on the market with 19 years to maturity. The bonds make semiannual payments and currently sell for 102 percent of par. What is the current yield on Keyser Materials bonds? The YTM? The effective annual yield?

Accepted Answer

A)   7.84 percent; 7.80 percent; 7.95 percent
B)   7.84 percent; 7.92 percent; 7.95 percent
C)   7.84 percent; 7.92 percent; 7.97 percent
D)   7.80 percent; 7.84 percent; 7.92 percent
E)   7.80 percent; 7.92 percent; 7.95 percentF) C) and D)
G) A) and C)

Question 12

Zero-coupon bonds:

Accepted Answer

A)   are valued using simple interest.
B)   are only issued by the U.S. Treasury.
C)   create a tax deduction for the issuer only at maturity.
D)   are issued at a premium.
E)   create annual taxable income to individual bondholders.F) A) and B)
G) C) and D)

Question 13

The term structure of interest rates is affected by which of the following? I. interest rate risk premium
II)  real rate of interest
III)  default risk premium
IV)  inflation premium

Accepted Answer

A)   I and II only
B)   II and III only
C)   I, III, and IV only
D)   I, II, and IV only
E)   I, II, III, and IF) A) and E)
G) A) and B)

Question 14

You purchase a bond with an invoice price of $1,120. The bond has a coupon rate of 7.5 percent, semiannual coupons, and there are four months to the next coupon date. What is the clean price of the bond?

Accepted Answer

A)   $1,095.00
B)   $1,107.50
C)   $1,114.00
D)   $1,132.50
E)   $1,157.50F) A) and E)
G) All of the above

Question 15

Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a 6 percent coupon and pays interest semiannually. There are 2 months until the next coupon date. What is the clean price of this bond?

Accepted Answer

A)   $947
B)   $957
C)   $967
D)   $977
E)   $987F) B) and D)
G) A) and B)

Question 16

The inflation premium:

Accepted Answer

A)   increases the real return.
B)   is inversely related to the time to maturity.
C)   remains constant over time.
D)   rewards investors for accepting interest rate risk.
E)   compensates investors for expected price increases.F) A) and D)
G) A) and C)

Question 17

The term structure of interest rates represents the relationship between which of the following?

Accepted Answer

A)   Nominal rates on risk-free and risky bonds
B)   Real rates on risk-free and risky bonds
C)   Nominal and real rates on default-free, pure discount bonds
D)   Market and coupon rates on default-free, pure discount bonds
E)   Nominal rates on default-free, pure discount bonds and time to maturityF) D) and E)
G) A) and B)

Question 18

Generally speaking, bonds issued in the U.S. pay interest on a(n)  _____ basis.

Accepted Answer

A)   annual
B)   semi-annual
C)   quarterly
D)   monthly
E)   dailyF) A) and B)
G) C) and D)

Question 19

Which one of the following statements is correct regarding mortgage backed securities (MBSs) ?

Accepted Answer

A)   There is a separate MBS for each individual mortgage processed by a mortgage broker.
B)   A MBS is a type of a debenture.
C)   The originating bank is the seller of MBSs to investors.
D)   Investors in MBSs are protected from default.
E)   Investors in MBSs are subject to real estate deflation risk.F) C) and D)
G) C) and E)

Question 20

Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?

Accepted Answer

A)   real rate
B)   liquidity premium
C)   interest rate risk premium
D)   inflation premium
E)   taxability premiumF) B) and E)
G) None of the above

Exam 6: Interest Rates and Bond Valuation

A bond for which no specific property has been pledged as security is classified as a:

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The term structure of interest rates is affected by which of the following? I. interest rate risk premium II) real rate of interest III) default risk premium IV) inflation premium

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A $1,000 face value bond is currently quoted at 101.2. The bond pays semiannual payments of $27.50 each and matures in 6 years. What is the coupon rate?

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What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

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A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

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Suppose that a small, rural city in the countryside of North Dakota plans to issue $150,000 worth of 10-year bonds. Which one of the following components of the bond's yield will be affected by the fact that no active secondary market is expected for these bonds?

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A 6 percent bond has a yield to maturity of 6.5 percent. The bond matures in 7 years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment?

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Which one of the following statements is correct?

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The inflation premium:

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The term structure of interest rates represents the relationship between which of the following?

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The primary purpose of protective covenants is to help:

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Smiley Industrial Goods has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,095. At this price, the bonds yield 6.4 percent. What must the coupon rate be on these bonds?

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Zero-coupon bonds:

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On which one of the following dates is the principal amount of a bond repaid?

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Which one of the following statements is correct regarding mortgage backed securities (MBSs) ?

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Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.

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Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a 6 percent coupon and pays interest semiannually. There are 2 months until the next coupon date. What is the clean price of this bond?

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Dexter, Inc. has a bond issue outstanding. The issue's indenture provision prohibits the firm from redeeming the bonds during the first three years. This provision is referred to as the _____ provision.

Correct AnswerverifiedShow Answer

Keyser Materials has 8 percent coupon bonds on the market with 19 years to maturity. The bonds make semiannual payments and currently sell for 102 percent of par. What is the current yield on Keyser Materials bonds? The YTM? The effective annual yield?

Correct AnswerverifiedShow Answer

You purchase a bond with an invoice price of $1,120. The bond has a coupon rate of 7.5 percent, semiannual coupons, and there are four months to the next coupon date. What is the clean price of the bond?

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