Homework

Chapter 7 - Interest Rates & Bond Valuations

1) Julie just received her annual payment of $80 on a bond she owns. Which of the following refers to this payment?

A) Call premium.
B) Coupon.
C) Yield.
D) Discount.
E) Face value.

2) Marc owns a bond that will pay him $90 each year in interest plus a $1,000 principal payment at maturity. What is the $1,000 called?
A) Discount.
B) Face value.
C) Dirty price.
D) Coupon.
E) Yield.

3) To calculate current yield, divide the annual interest on a bond by which one of the following?

A) Face value.
B) Par value.
C) Coupon rate.
D) Market price.
E) Call price.

4) A zero coupon bond:
A) Can only be issued by the U.S. Treasury.
B) Is sold at a large premium.
C) Provides no taxable income to the bondholder until the bond matures.
D) Pays interest that is tax deductible to the issuer at the time of payment.
E) Has more interest rate risk than a comparable coupon bond.

5) Stephen has researched Aggie Anvils and believes the company is poised to significantly increase in value. He has decided to purchase Aggie Anvils bonds as he needs a steady source of income. However, he still wishes that he could share in the company's upside along with the shareholders. Which one of the following bond features will help him fulfill his wish?

A) Crossover rating.
B) Warrant.
C) Call provision.
D) Positive covenant.
E) Put provision.

6) Which one of the following statements is correct?

A) Historical real rates of return must be positive.
B) The risk-free rate represents the change in purchasing power.
C) The real rate must be less than the nominal rate given a positive rate of inflation.
D) Nominal rates exceed real rates by the amount of the risk-free rate.
E) Any return greater than the inflation rate represents the risk premium.

7) Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

A) Taxability.
B) Inflation.
C) Default risk.
D) Liquidity.
E) Interest rate risk.

8) Which term below is the price at which a dealer will sell a bond?

A) Bid-ask spread
B) Par value
C) Bid price
D) Asked price
E) Call price

9) You expect interest rates to go down in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

A) Short-term; high coupon.
B) Short-term; low coupon.
C) Long-term; low coupon.
D) Long-term; zero coupon.
E) Long-term; high coupon.

10) Sometimes an indenture includes items that restrict and limit things the bond issuer can do. These restrictions/limitations are put in place to help protect the bondholder's interests and are called:

A) Trustee relationships.
B) Bylaws.
C) Protective covenants.
D) Legal bounds.
E) Trust deed.

11) Emilie's Energy has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?

A) 12.53 years
B) 25.05 years
C) 12.26 years
D) 24.37 years
E) 18.49 years

12) The 7 percent bonds issued by Melanie's Music pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,082. What is the yield to maturity?
A) 6.87 percent
B) 7.20 percent
C) 6.92 percent
D) 5.70 percent
E) 6.48 percent

13) The zero coupon bonds of Race Rackets have a market price of $211.56, a face value of $1,000, and a yield to maturity of 7.69 percent. How many years is it until these bonds mature?

A) 22.28 years
B) 20.58 years
C) 44.01 years
D) 23.92 years
E) 46.59 years

14) A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

A) 1.79 percent decrease
B) 1.79 percent increase
C) 1.6 percent decrease
D) 1.97 percent increase
E) 1 percent decrease

15) Rebekah's Railways issued 20-year bonds a year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 9.8 percent, what is the current bond price?

A) $991.90
B) $985.55
C) $1,042.16
D) $1,098.00
E) $1,034.19

16) Paul's Parts issued 15-year bonds 2 years ago at a coupon rate of 8.8 percent. The bonds make semiannual payments. If these bonds currently sell for 98.6 percent of par value, what is the YTM?

A) 9.13 percent
B) 8.68 percent
C) 8.98 percent
D) 8.42 percent
E) 9.27 percent

17) A bond has a coupon rate of 8 percent, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what will be the percentage change in the bond price?

A) -9.56 percent
B) -10.67 percent
C) -10.16 percent
D) -10.02 percent
E) -9.87 percent

18) An investment offers a total return of 12.4 percent over the coming year. You believe the total real return will be only 9.7 percent. What do you believe the exact inflation rate will be for the next year?

A) 2.58 percent
B) 2.46 percent
C) 2.70 percent
D) 2.52 percent
E) 2.67 percent

19) We discussed an article on General Electric (GE) in class. Which of the statements is true about GE?

A) 2018 has been a difficult year for the company.
B) The company will take a $23 billion write off to reflect problems in its power division.
C) Their credit rating is likely to be downgraded.
D) They replaced their CEO in October 2018.
E) All of the above

20) When a company takes a "Write off", it:

A) Will always increase the price of the company's stock.
B) Will always decrease the price of the company's stock.
C) Will increase earnings in the quarter/year the write off is taken.
D) Will decrease earnings in the quarter/year the write off is taken.
E) Increase the book value of the asset being written off.