1. A bond will pay $75 in interest at the end of each of the next four years plus the $1,000 principal at the end of four years. If the yield-to-maturity should be 6%, the bond's intrinsic value is:
(a) $1,052. (b) $1,123. (c) $848. (d) $1,014. (e) $987.
2. A low coupon corporate bond will likely
(a) have a higher intrinsic value than a similar high-coupon bond.
(b) have a lower rating.
(c) be selling at a premium.
(d) have no tax liability on eventual capital gains.
(e) be priced using the same discount rate as a high coupon bond.
3. One of two large organizations that rate corporate bonds is
(a) Wall Street Journal. (b) Standard and Poor's.
(c) Securities and Exchange Commission. (d) Federal Reserve.
(e) Dun and Bradstreet.
4. An example of an investment grade corporate bond would be one rated
(a) B. (b) D. (c) BBB. (d) BB. (e) C.
5. Fundamental bond analysis would lead an investor to
(a) buy a bond before a rating upgrade.
(b) sell a bond before a rating upgrade.
(c) use a passive policy since the market is efficient.
(d) buy a bond before a rating downgrade.
(e) ignore bond ratings.
6. When the degree of uncertainty about the economy increases, the spread in the promised yield-to-maturity between high and low-rated bonds tends to
(a) decrease. (b) increase or decrease depending on the coupon.
(c) widen. (d) reverse the sign of the spread.
(e) remain fixed.
7. Bond rating systems
(a) report levels of risk relative to other bonds.
(b) have little relationship to the actual risk.
(c) reclassify all bonds when the economy changes.
(d) maintain a fixed yield spread between rating levels.
(e) report a level of risk related to historic, absolute standards.
8. An attempt to relate bond yields from 1968-1991 to the Standard and Poor's 500 found
(a) no relationship.
(b) investment grade bonds had the largest beta.
(c) bond yields were more volatile than stock yields.
(d) over 90% of bond yield variance is explained by the stock market variance.
(e) lowest rated bonds had the largest beta.
9. A bond has a promised yield-to-maturity of 10% with a default premium of 4% and a risk premium of 2%. Its expected yield-to-maturity is
(a) 8%. (b) 4%. (c) 12%. (d) 16%. (e) 6%.
10. Fundamental bond analysis would lead an investor to
(a) buy a bond before a rating upgrade.
(b) sell a bond before a rating upgrade.
(c) use a passive policy since the market is efficient.
(d) buy a bond before a rating downgrade.
(e) ignore bond ratings.
11. The major factor resulting in a decrease in a bond's rating is
(a) decrease in marketability. (b) increase in default risk.
(c) the call provision. (d) an increase in its coupon rate.
(e) a longer time to maturity.
12. If a bond's yield-to-maturity is greater than the appropriate yield-to-maturity, the bond
(a) could have a positive or negative NPV.
(b) will have a positive NPV.
(c) will have an intrinsic value less than its market price.
(d) will have an intrinsic value equal to its market price.
(e) will have an NPV of 0.