FIN5063 Week 4 All Quizzes

 

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, November 21, 2021, 4:02 PM
State	Finished
Completed on	Sunday, November 21, 2021, 4:12 PM
Time taken	9 mins 41 secs
Grade	10.00 out of 10.00 (100%)

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Question 1

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If you want to get a 2% real raise at work so that you can buy 2% more of the things you like, and you expect the inflation rate to be around 3% in the future, you will have to ask for a

Select one:

a.

2% raise in your salary.

b.

1% decline in your salary.

c.

1% raise in your salary.

d.

5% raise in your salary.

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The correct answer is: 5% raise in your salary.

Question 2

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Assume that you observe the following rates on the following 20 year bonds:
U.S. Treasury bonds = 4.15 percent
AAA Corporate bonds = 6.2 percent
BBB Corporate bonds = 7.15 percent
The main reason for the differences in the interest rates is:

Select one:

a.

Convertibility premium

b.

Inflation premium

c.

Maturity risk premium

d.

Default risk premium

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The correct answer is: Default risk premium

Question 3

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Which of these is the interest rate that is actually observed in financial markets?

Select one:

a.

Real interest rates

b.

Real risk free rate

c.

Market premium

d.

Nominal interest rates

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The correct answer is: Nominal interest rates

Question 4

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This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments.

Select one:

a.

inflation risk

b.

maturity risk

c.

default risk

d.

liquidity risk

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The correct answer is: default risk

Question 5

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The real interest rate is:

Select one:

a.

the rate that a security would pay if no inflation were expected over its holding period.

b.

the rate that a security would pay if the security had no maturity risk.

c.

the rate charged to the corporations with the best credit rating or least amount of default risk.

d.

None of these statements is a correct definition.

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The correct answer is: the rate that a security would pay if no inflation were expected over its holding period.

Question 6

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Assume the interest rate demanded on a bond issued by Ford is 7%. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to

Select one:

a.

12%

b.

5%

c.

2%

d.

-2%

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The correct answer is: 2%

Question 7

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Which of these statements is true?

Select one:

a.

The higher the liquidity risk, the higher the interest rate that security buyers will demand.

b.

The lower the expected inflation rate, the higher the interest rate that security buyers will demand.

c.

The lower the default risk, the higher the interest rate that security buyers will demand.

d.

The lower the time to maturity, the higher the interest rate that security buyers will demand.

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The correct answer is: The higher the liquidity risk, the higher the interest rate that security buyers will demand.

Question 8

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Which of the bonds below would be the most liquid?

Select one:

a.

A bond issued by Twitter.

b.

A bond issued by the United States government.

c.

A bond issued by Coca-Cola.

d.

A bond issued by Google.

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The correct answer is: A bond issued by the United States government.

Question 9

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An example of an illiquid asset is:

Select one:

a.

bonds issued by GM.

b.

common stock issued by a small but financially strong firm.

c.

common stock issued by Apple Inc.

d.

U.S. Treasury bill.

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The correct answer is: common stock issued by a small but financially strong firm.

Question 10

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Assume you borrow 100 apples and in 1 year you return 107 apples. Also assume inflation rate of 3%. Which of the below would be correct?

Select one:

a.

The real rate of interest on the loan is equal to 3%.

b.

The real rate of interest on the loan is equal to 4%.

c.

The real rate of interest on the loan is equal to 7%.

d.

The real rate of interest on the loan is equal to 10%.

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The correct answer is: The real rate of interest on the loan is equal to 4%.

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, November 21, 2021, 4:15 PM
State	Finished
Completed on	Sunday, November 21, 2021, 4:20 PM
Time taken	4 mins 44 secs
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

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Question 1

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Dakota Corporation 15-year bonds have an equilibrium rate of return of 9 percent. For all securities, the inflation risk premium is 1.95 percent and the real interest rate is 3.65 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the bond's default risk premium.

Select one:

a.

3.05 percent

b.

3.40 percent

c.

2.10 percent

d.

2.45 percent

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The correct answer is: 2.10 percent

Question 2

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A corporation's 10-year bonds are currently yielding a return of 7.75 percent. The expected inflation premium is 3.0 percent annually and the real interest rate is expected to be 3.00 percent annually over the next 10 years. The liquidity risk premium on the corporation's bonds is 0.50 percent. The maturity risk premium is 0.25 percent on two-year securities and increases by 0.10 percent for each additional year to maturity. What is the default risk premium on the corporation's 10-year bonds?

Select one:

a.

0.18 percent

b.

0.27 percent

c.

0.22 percent

d.

0.20 percent

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The correct answer is: 0.20 percent

Question 3

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Interest rates The Wall Street Journal reports that the current rate on 10-year Treasury bonds is 6.75 percent, on 20-year Treasury bonds is 7.25 percent, and on a 20-year corporate bond is 8.50 percent. Assume that the maturity risk premium is zero. If the default risk premium and liquidity risk premium on a 10-year corporate bond is the same as that on the 20-year corporate bond, what is the current rate on a 10-year corporate bond.

Select one:

a.

8.00 percent

b.

8.50 percent

c.

8.75 percent

d.

7.50 percent

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The correct answer is: 8.00 percent

Question 4

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A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and maturity risk premium is 0.95 percent. The security has no special covenants. Calculate the security's equilibrium rate of return.

Select one:

a.

8.50 percent

b.

6.05 percent

c.

9.90 percent

d.

10.25 percent

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The correct answer is: 10.25 percent

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, November 21, 2021, 4:22 PM
State	Finished
Completed on	Sunday, November 21, 2021, 4:32 PM
Time taken	10 mins 46 secs
Grade	8.00 out of 10.00 (80%)

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Question 1

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Which of the below is correct?

Select one:

a.

Bondholders have the option to return bonds that are callable and get back the amount they paid from the issuing company.

b.

The time to maturity will stay fixed throughout the life of the bond.

c.

When the bond matures the bondholder will receive back the amount he/she paid for the bond in the bond market.

d.

When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

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The correct answer is: When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

Question 2

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Bonds are issued by which of the following?

Select one:

a.

All of these

b.

State and local governments

c.

Federal government or its agencies

d.

Corporations

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The correct answer is: All of these

Question 3

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Which of the following is an important advantage to the issuer of a bond with a call provision?

Select one:

a.

They allow for refinancing opportunities.

b.

They are able to avoid reinvestment rate risk.

c.

They are able to reduce their credit risk.

d.

They are able to avoid interest rate risk.

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The correct answer is: They allow for refinancing opportunities.

Question 4

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Which of the following bonds makes no interest payments?

Select one:

a.

A bond whose coupon rates are greater than market interest rates

b.

Zero coupon bond

c.

A bond whose coupon rates are less than the market interest rates

d.

A bond whose coupon rate is equal to the market interest rates

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The correct answer is: Zero coupon bond

Question 5

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All of the following items would need to be included in the bond's indenture agreement EXCEPT:

Select one:

a.

steps that the bondholder can take in the event that the issuer fails to pay the interest or principal.

b.

the credit rating.

c.

the coupon rate.

d.

the call feature.

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The correct answer is: the credit rating.

Question 6

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Under which conditions will an investor demand a smaller return (yield) on a bond?

Select one:

a.

None of these conditions will cause an increase in the bond's yield.

b.

Interest rates increase due to increasing inflation rate.

c.

The bond issue is downgraded from A to BBB.

d.

The bond issue is upgraded from A to AA.

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The correct answer is: The bond issue is upgraded from A to AA.

Question 7

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When market interest rates increase

Select one:

a.

Bond prices will not be affected by this decline.

b.

Bond prices must also change at the same time, and the direction of the change will depend on the coupon rate and the time left to maturity.

c.

Bond prices must decline at the same time.

d.

Bond prices must rise at the same time.

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The correct answer is: Bond prices must decline at the same time.

Question 8

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Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

Select one:

a.

The term of the loan.

b.

All of these are factors that determine the coupon rate of a company's bonds.

c.

The level of interest rates in the overall economy at the time.

d.

The amount of uncertainty about whether the company will be able to make all the payments.

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The correct answer is: All of these are factors that determine the coupon rate of a company's bonds.

Question 9

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Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Select one:

a.

$27.50, $32.25, $0, respectively

b.

$5.50, $6.45, $0, respectively

c.

$55.00, $64.50, $0, respectively

d.

$27.50, $32.25, $100, respectively

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The correct answer is: $27.50, $32.25, $0, respectively

Question 10

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Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Select one:

a.

$877.81, $1,024.20, $5,072.50, respectively

b.

$1,000, $1,024.20, $1,001.45, respectively

c.

$1000, $1,000, $1,000, respectively

d.

$872.50, $1,000, $1,000, respectively

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The correct answer is: $877.81, $1,024.20, $5,072.50, respectively

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, November 21, 2021, 4:33 PM
State	Finished
Completed on	Sunday, November 21, 2021, 4:37 PM
Time taken	3 mins 24 secs
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

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Question 1

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A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

Select one:

a.

$21.55

b.

$19.67

c.

$25.00

d.

$41.22

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The correct answer is: $21.55

Question 2

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Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent. (Assume interest payments are semiannual and par value is $1,000.)

Select one:

a.

$1,315.62

b.

$982.03

c.

$1,010.59

d.

$1,220.93

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The correct answer is: $1,220.93

Question 3

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A corporate bond with a 5 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 8.0 percent. The firm has recently gotten into some trouble and the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be 9 percent. What will be the change in the bond's price in percentage terms? Assume interest payments are paid semi-annually and par value is $1,000.

Select one:

a.

-6.41%

b.

-6.90%

c.

-7.60%

d.

-7.07%

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The correct answer is: -7.07%

Question 4

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A 5.75 percent coupon bond with 12 years left to maturity is offered for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and par value is $1,000.)

Select one:

a.

3.09 percent

b.

5.75 percent

c.

3.00 percent

d.

6.00 percent

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The correct answer is: 6.00 percent

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, November 21, 2021, 4:39 PM
State	Finished
Completed on	Sunday, November 21, 2021, 4:44 PM
Time taken	4 mins 57 secs
Grade	10.00 out of 10.00 (100%)

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Question 1

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Assume you borrow 100 apples and in 1 year you return 107 apples. Also assume inflation rate of 3%. Which of the below would be correct?

Select one:

a.

The real rate of interest on the loan is equal to 3%.

b.

The real rate of interest on the loan is equal to 10%.

c.

The real rate of interest on the loan is equal to 4%.

d.

The real rate of interest on the loan is equal to 7%.

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The correct answer is: The real rate of interest on the loan is equal to 4%.

Question 2

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Assume the interest rate demanded on a bond issued by Ford is 7%. If the risk premium on this bond is equal to 5%, we would conclude that the risk-free rate is equal to

Select one:

a.

2%

b.

12%

c.

5%

d.

-2%

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The correct answer is: 2%

Question 3

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Which of the bonds below would be the most liquid?

Select one:

a.

A bond issued by Google.

b.

A bond issued by the United States government.

c.

A bond issued by Coca-Cola.

d.

A bond issued by Twitter.

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The correct answer is: A bond issued by the United States government.

Question 4

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According to the Fisher Effect equation the nominal rate of interest is equal to

Select one:

a.

The real rate of interest minus the inflation rate.

b.

The real rate of interest multiplied by the inflation rate.

c.

The real rate of interest divided by the inflation rate.

d.

The real rate of interest plus the inflation rate.

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The correct answer is: The real rate of interest plus the inflation rate.

Question 5

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Which of these refer to the ease with which an asset can be converted into cash?

Select one:

a.

Secondary market

b.

Direct transfer

c.

Primary market

d.

Liquidity

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The correct answer is: Liquidity

Question 6

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The liquidity premium will be larger if

Select one:

a.

The default risk is lower.

b.

There is typically a lot of trading activity related to the security.

c.

There is typically not much trading activity related to the security.

d.

The default risk is higher.

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The correct answer is: There is typically not much trading activity related to the security.

Question 7

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This is the risk that a security issuer will miss an interest or principal payment or continue to miss such payments.

Select one:

a.

inflation risk

b.

maturity risk

c.

default risk

d.

liquidity risk

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The correct answer is: default risk

Question 8

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An example of an illiquid asset is:

Select one:

a.

bonds issued by GM.

b.

common stock issued by a small but financially strong firm.

c.

common stock issued by Apple Inc.

d.

U.S. Treasury bill.

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The correct answer is: common stock issued by a small but financially strong firm.

Question 9

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Which of the following is the continual increase in the price level of a basket of goods and services?

Select one:

a.

Stagflation

b.

Inflation

c.

Recession

d.

Deflation

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The correct answer is: Inflation

Question 10

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Assume that you observe the following rates on the following 20 year bonds:
U.S. Treasury bonds = 4.15 percent
AAA Corporate bonds = 6.2 percent
BBB Corporate bonds = 7.15 percent
The main reason for the differences in the interest rates is:

Select one:

a.

Default risk premium

b.

Maturity risk premium

c.

Convertibility premium

d.

Inflation premium

Feedback

The correct answer is: Default risk premium

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, November 21, 2021, 4:48 PM
State	Finished
Completed on	Sunday, November 21, 2021, 5:05 PM
Time taken	16 mins 31 secs
Grade	8.00 out of 10.00 (80%)

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Question 1

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Under which conditions will an investor demand a larger return (yield) on a bond?

Select one:

a.

Interest rates decrease due to declining inflation rate.

b.

The bond issue is downgraded from A to BBB.

c.

None of these conditions will cause an increase in the bond's yield.

d.

The bond issue is upgraded from A to AA.

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The correct answer is: The bond issue is downgraded from A to BBB.

Question 2

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Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

Select one:

a.

All of these are factors that determine the coupon rate of a company's bonds.

b.

The amount of uncertainty about whether the company will be able to make all the payments.

c.

The level of interest rates in the overall economy at the time.

d.

The term of the loan.

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The correct answer is: All of these are factors that determine the coupon rate of a company's bonds.

Question 3

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Assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. This implies that

Select one:

a.

The bond’s yield to maturity is 7% below its coupon rate.

b.

The bond’s yield to maturity is 7% above its coupon rate.

c.

The bond is a discount bond.

d.

The bond is a premium bond.

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The correct answer is: The bond is a discount bond.

Question 4

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If a bond is selling at a premium, then ________________________________.

Select one:

a.

its yield should be greater than its coupon rate.

b.

its yield should be lower than its coupon rate.

c.

its coupon rate must be equal to one-half the yield to maturity for a 5-year bond.

d.

its yield should be equal to its coupon rate.

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The correct answer is: its yield should be lower than its coupon rate.

Question 5

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Which of the following bonds makes no interest payments?

Select one:

a.

A bond whose coupon rate is equal to the market interest rates

b.

Zero coupon bond

c.

A bond whose coupon rates are greater than market interest rates

d.

A bond whose coupon rates are less than the market interest rates

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The correct answer is: Zero coupon bond

Question 6

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If the coupon rate equals 7% then a corresponding $1,000 face value bond

Select one:

a.

Will yield 7% to a buyer of the bond.

b.

Will pay regular amounts that will depend on its yield to maturity.

c.

Will pay $35 every six months.

d.

Will pay $70 every six months.

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The correct answer is: Will pay $35 every six months.

Question 7

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All of the following items would need to be included in the bond's indenture agreement EXCEPT:

Select one:

a.

steps that the bondholder can take in the event that the issuer fails to pay the interest or principal.

b.

the call feature.

c.

the coupon rate.

d.

the credit rating.

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The correct answer is: the credit rating.

Question 8

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Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

Select one:

a.

IB bond, B&O bond, TC bond, JM bond

b.

JM bond, IB bond, B&O bond, TC bond

c.

JM bond, TC bond, B&O bond, IB bond

d.

TC bond, B&O bond, IB bond, JM bond

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The correct answer is: IB bond, B&O bond, TC bond, JM bond

Question 9

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Which of the following statements is correct?

Select one:

a.

The call feature does not impact the return that investors demand.

b.

All else the same, an investor will require more return to invest in a callable bond than one that is not callable.

c.

All else the same, an investor will require less return to invest in a callable bond than one that is not callable.

d.

We would need to know the current level of interest rates to answer this question.

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The correct answer is: All else the same, an investor will require more return to invest in a callable bond than one that is not callable.

Question 10

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Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Select one:

a.

$1,000, $1,024.20, $1,001.45, respectively

b.

$872.50, $1,000, $1,000, respectively

c.

$877.81, $1,024.20, $5,072.50, respectively

d.

$1000, $1,000, $1,000, respectively

Feedback

The correct answer is: $877.81, $1,024.20, $5,072.50, respectively

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FIN--5063-1D2-FA-2021 - Corporate Finance

Started on	Sunday, November 21, 2021, 5:05 PM
State	Finished
Completed on	Sunday, November 21, 2021, 5:10 PM
Time taken	5 mins
Points	4.00/4.00
Grade	10.00 out of 10.00 (100%)

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Question 1

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A bond with 14 years to maturity is selling for $1,070 and has a yield to maturity of 10.06 percent. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond's annual coupon rate?

Select one:

a.

8.19 percent

b.

5.50 percent

c.

9.57 percent

d.

11.00 percent

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The correct answer is: 11.00 percent

Question 2

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A corporate bond with a 5.75 percent coupon has 15 years left to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm has recently gotten more financially stable and the rating agency is upgrading the bonds to BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the bond's price in dollars? (Assume interest payments are paid semi-annually and a par value of $1,000.)

Select one:

a.

decrease $23.72

b.

increase $22.25

c.

decrease $22.25

d.

increase $23.72

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The correct answer is: increase $23.72

Question 3

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Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent. (Assume interest payments are semiannual and par value is $1,000.)

Select one:

a.

$1,315.62

b.

$1,010.59

c.

$1,220.93

d.

$982.03

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The correct answer is: $1,220.93

Question 4

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A 6 percent coupon bond with 12 years left to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the yield to maturity will be 6.25 percent. What is the change in price the bond will experience in dollars? (Assume semi-annual interest payments and $1,000 par value.)

Select one:

a.

$21.55

b.

$25.00

c.

$41.22

d.

$19.67

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The correct answer is: $21.55

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 A two-year Treasury security currently earns 5.13 percent. Over the next two years, the real interest rate is expected to be 2.15 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the two-year Treasury security.

Select one:

a.

1.23 percent

b.

5.13 percent

c.

2.98 percent

d.

3.38 percent

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The correct answer is: 1.23 percent

Which of the following makes this a true statement: The current price of a bond is…?

Select one:

a.

the present value of the future interest and par value at maturity cash flows discounted at the prevailing market interest rate.

b.

the present value of the future interest and par value at maturity cash flows discounted at the coupon interest rate.

c.

the future value of the future interest and par value at maturity cash flows discounted at the coupon interest rate.

d.

the future value of the future interest and par value at maturity cash flows discounted at the prevailing market interest rate.

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The correct answer is: the present value of the future interest and par value at maturity cash flows discounted at the prevailing market interest rate.

Question 2

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Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)

Select one:

a.

$5.50, $6.45, $0, respectively

b.

$27.50, $32.25, $100, respectively

c.

$55.00, $64.50, $0, respectively

d.

$27.50, $32.25, $0, respectively

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The correct answer is: $27.50, $32.25, $0, respectively

Question 3

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If a bond's market price is less than its par value, which of the following statements is likely to be correct?

Select one:

a.

All of the statements are correct.

b.

The coupon rate is smaller than the yield to maturity.

c.

The bond must have a low bond rating.

d.

The current yield is smaller than the coupon rate.

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The correct answer is: The coupon rate is smaller than the yield to maturity.

Question 4

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Why are bonds known as a fixed-income security?

Select one:

a.

Because the cash flows that a bondholder gets from holding the bond, if the bond is held until maturity, are fixed.

b.

Because the return on bonds is fixed over the life of the bond.

c.

Because all non-callable bonds must have exactly the same contract terms fixed in their bond indentures.

d.

Because the price of the bond is fixed over the life of the bond.

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The correct answer is: Because the cash flows that a bondholder gets from holding the bond, if the bond is held until maturity, are fixed.

Question 5

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A bond issued by a corporation on May 1, 1999, is scheduled to mature on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume annual interest payments.)

Select one:

a.

9 years

b.

19 years

c.

20 years

d.

10 years

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The correct answer is: 10 years

Question 6

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Which of the following bonds makes no interest payments?

Select one:

a.

Zero coupon bond

b.

A bond whose coupon rates are greater than market interest rates

c.

A bond whose coupon rates are less than the market interest rates

d.

A bond whose coupon rate is equal to the market interest rates

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The correct answer is: Zero coupon bond

Question 7

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Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

Select one:

a.

Prospectus

b.

Debenture

c.

Indenture

d.

Enforcement codes

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The correct answer is: Indenture

Question 8

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Which of the following is a true statement?

Select one:

a.

If interest rates fall, corporate bonds will have decreasing values.

b.

If interest rates fall, no bonds will enjoy rising values.

c.

If interest rates fall, all bonds will enjoy rising values.

d.

If interest rates fall, U.S. Treasury bonds will have decreasing values.

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The correct answer is: If interest rates fall, all bonds will enjoy rising values.

Question 9

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Which of the debt contracts below would be associated with the biggest interest rate risk?

Select one:

a.

A 5-year General Motors bond

b.

A 15-year Home Depot bond

c.

A 10-year U.S. Treasury bond

d.

A 3-year car loan

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The correct answer is: A 15-year Home Depot bond

Question 10

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Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Select one:

a.

$1,000, $1,024.20, $1,001.45, respectively

b.

$877.81, $1,024.20, $5,072.50, respectively

c.

$1000, $1,000, $1,000, respectively

d.

$872.50, $1,000, $1,000, respectively

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The correct answer is: $877.81, $1,024.20, $5,072.50, respectively

Question 1

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When market interest rates increase

Select one:

a.

Bond prices will not be affected by this decline.

b.

Bond prices must decline at the same time.

c.

Bond prices must also change at the same time, and the direction of the change will depend on the coupon rate and the time left to maturity.

d.

Bond prices must rise at the same time.

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The correct answer is: Bond prices must decline at the same time.

Question 2

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All of the following items would need to be included in the bond's indenture agreement EXCEPT:

Select one:

a.

steps that the bondholder can take in the event that the issuer fails to pay the interest or principal.

b.

the credit rating.

c.

the call feature.

d.

the coupon rate.

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The correct answer is: the credit rating.

Question 3

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Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. This implies that

Select one:

a.

The bond is a discount bond.

b.

The bond’s yield to maturity is 6% below its coupon rate.

c.

The bond’s yield to maturity is 6% above its coupon rate.

d.

The bond is a premium bond.

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The correct answer is: The bond is a premium bond.

Question 4

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Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Select one:

a.

Reinvestment rate risk

b.

Liquidity rate risk

c.

Interest rate risk

d.

Credit quality risk

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The correct answer is: Interest rate risk

Question 5

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When we say that a bondholder faces interest rate risk, we mean that the bondholder faces the possibility of a/an __________ in market interest rates and a/an _________ in the value of the bond as a result.

Select one:

a.

Decline; decline

b.

Increase; decline

c.

Increase; increase

d.

Decline; increase

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The correct answer is: Increase; decline

Question 6

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When market interest rates decline

Select one:

a.

Bond prices will not be affected by this decline.

b.

Bond prices must also change at the same time, and the direction of the change will depend on the coupon rate and the time left to maturity.

c.

Bond prices must also decline at the same time.

d.

Bond prices must rise at the same time.

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The correct answer is: Bond prices must rise at the same time.

Question 7

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If a bond’s yield to maturity falls below its coupon rate

Select one:

a.

The bond must be selling for a price lower than its par value.

b.

The coupon rate on the bond must decline as well.

c.

The bond must be selling for a price higher than its par value.

d.

The price of the bond must fall.

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The correct answer is: The bond must be selling for a price higher than its par value.

Question 8

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Assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. This implies that

Select one:

a.

The bond’s yield to maturity is 7% above its coupon rate.

b.

The bond is a discount bond.

c.

The bond’s yield to maturity is 7% below its coupon rate.

d.

The bond is a premium bond.

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The correct answer is: The bond is a discount bond.

Question 9

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If a bond is selling at a premium, then ________________________________.

Select one:

a.

its coupon rate must be equal to one-half the yield to maturity for a 5-year bond.

b.

its yield should be greater than its coupon rate.

c.

its yield should be lower than its coupon rate.

d.

its yield should be equal to its coupon rate.

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The correct answer is: its yield should be lower than its coupon rate.

Question 10

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If a bond’s yield to maturity rises above its coupon rate

Select one:

a.

The price of the bond must rise.

b.

The bond must be selling for a price higher than its par value.

c.

The coupon rate on the bond must rise as well.

d.

The bond must be selling for a price lower than its par value.

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The correct answer is: The bond must be selling for a price lower than its par value.

Which of these statements answers why bonds are known as fixed income securities?

Select one:

a.

Investors will not receive their principal when the bond's term is up.

b.

Investors know how much they will receive in interest payments.

c.

All of these.

d.

Many investors on fixed incomes buy them.

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The correct answer is: Investors know how much they will receive in interest payments.

Question 2

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Bonds are issued by which of the following?

Select one:

a.

All of these

b.

State and local governments

c.

Federal government or its agencies

d.

Corporations

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The correct answer is: All of these

Question 3

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Which of the following statements is correct?

Select one:

a.

All else the same, an investor will require more return to invest in a callable bond than one that is not callable.

b.

All else the same, an investor will require less return to invest in a callable bond than one that is not callable.

c.

We would need to know the current level of interest rates to answer this question.

d.

The call feature does not impact the return that investors demand.

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The correct answer is: All else the same, an investor will require more return to invest in a callable bond than one that is not callable.

Question 4

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Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest rate?

Select one:

a.

Liquidity rate risk

b.

Interest rate risk

c.

Credit quality risk

d.

Reinvestment rate risk

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The correct answer is: Reinvestment rate risk

Question 5

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Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Select one:

a.

$877.81, $1,024.20, $5,072.50, respectively

b.

$1,000, $1,024.20, $1,001.45, respectively

c.

$1000, $1,000, $1,000, respectively

d.

$872.50, $1,000, $1,000, respectively

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The correct answer is: $877.81, $1,024.20, $5,072.50, respectively

Question 6

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If a bond’s yield to maturity falls below its coupon rate

Select one:

a.

The price of the bond must fall.

b.

The bond must be selling for a price lower than its par value.

c.

The coupon rate on the bond must decline as well.

d.

The bond must be selling for a price higher than its par value.

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The correct answer is: The bond must be selling for a price higher than its par value.

Question 7

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Regarding a bond's characteristics, which of the following is the principal loan amount that the borrower must repay?

Select one:

a.

par or face value

b.

time to maturity value

c.

maturity date

d.

call premium

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The correct answer is: par or face value

Question 8

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Which of the below is correct?

Select one:

a.

When the bond matures the bondholder will receive back the amount he/she paid for the bond in the bond market.

b.

The time to maturity will stay fixed throughout the life of the bond.

c.

Bondholders have the option to return bonds that are callable and get back the amount they paid from the issuing company.

d.

When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

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The correct answer is: When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

Question 9

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Which of the following terms means that during periods when interest rates change substantially, bondholders experience distinct gains and losses in their bond investments?

Select one:

a.

Reinvestment rate risk

b.

Interest rate risk

c.

Liquidity rate risk

d.

Credit quality risk

Feedback

The correct answer is: Interest rate risk

Question 10

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If a bond’s yield to maturity rises above its coupon rate

Select one:

a.

The bond must be selling for a price higher than its par value.

b.

The price of the bond must rise.

c.

The coupon rate on the bond must rise as well.

d.

The bond must be selling for a price lower than its par value.

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The correct answer is: The bond must be selling for a price lower than its par value.

Assume that a bond is quoted to be selling at a price equal to $93, per $100 of face value. This implies that

Select one:

a.

The bond’s yield to maturity is 7% below its coupon rate.

b.

The bond is a discount bond.

c.

The bond’s yield to maturity is 7% above its coupon rate.

d.

The bond is a premium bond.

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The correct answer is: The bond is a discount bond.

Question 2

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Bond prices are usually quoted

Select one:

a.

Discounted by the coupon rate.

b.

In dollars and give the exact amount that the buyer will pay for one bond.

c.

As a percentage of its par value.

d.

As the dollar price of each $1,000 of the par value.

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The correct answer is: As a percentage of its par value.

Question 3

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Assume a bond has a coupon rate of 3%, par value of $1,000, and 1 year left to maturity. Assuming the bond indenture specifies semi-annual payments, what will be the cash flows to a buyer of the bond, provided the buyer pays $975 for the bond and holds it until it matures?

Select one:

a.

On payment of $30, and another payment of $975 when the bond matures.

b.

One payment of $15, and another payment of $1,015 when the bond matures.

c.

On payment of $30, and another payment of $1,030 when the bond matures.

d.

One payment of $15, and another payment of $975 when the bond matures.

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The correct answer is: One payment of $15, and another payment of $1,015 when the bond matures.

Question 4

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Consider the following three bond quotes; a Treasury note quoted at 87:25, and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000, what is the price of these three bonds in dollars?

Select one:

a.

$872.50, $1,000, $1,000, respectively

b.

$1000, $1,000, $1,000, respectively

c.

$877.81, $1,024.20, $5,072.50, respectively

d.

$1,000, $1,024.20, $1,001.45, respectively

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The correct answer is: $877.81, $1,024.20, $5,072.50, respectively

Question 5

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Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

Select one:

a.

The amount of uncertainty about whether the company will be able to make all the payments.

b.

The term of the loan.

c.

All of these are factors that determine the coupon rate of a company's bonds.

d.

The level of interest rates in the overall economy at the time.

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The correct answer is: All of these are factors that determine the coupon rate of a company's bonds.

Question 6

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Rank the following bonds in order from lowest credit risk to highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.

Select one:

a.

JM bond, TC bond, B&O bond, IB bond

b.

IB bond, B&O bond, TC bond, JM bond

c.

JM bond, IB bond, B&O bond, TC bond

d.

TC bond, B&O bond, IB bond, JM bond

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The correct answer is: IB bond, B&O bond, TC bond, JM bond

Question 7

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Which of the following is an important advantage to the issuer of a bond with a call provision?

Select one:

a.

They are able to reduce their credit risk.

b.

They are able to avoid reinvestment rate risk.

c.

They allow for refinancing opportunities.

d.

They are able to avoid interest rate risk.

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The correct answer is: They allow for refinancing opportunities.

Question 8

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Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

Select one:

a.

Indenture

b.

Debenture

c.

Enforcement codes

d.

Prospectus

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The correct answer is: Indenture

Question 9

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Which of the below is correct?

Select one:

a.

When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

b.

Bondholders have the option to return bonds that are callable and get back the amount they paid from the issuing company.

c.

The time to maturity will stay fixed throughout the life of the bond.

d.

When the bond matures the bondholder will receive back the amount he/she paid for the bond in the bond market.

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The correct answer is: When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

Question 10

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When we say that a bondholder faces interest rate risk, we mean that the bondholder faces the possibility of a/an __________ in market interest rates and a/an _________ in the value of the bond as a result.

Select one:

a.

Increase; increase

b.

Increase; decline

c.

Decline; increase

d.

Decline; decline

Feedback

The correct answer is: Increase; decline

Assume that a bond is quoted to be selling at a price equal to $106, per $100 of face value. This implies that

Select one:

a.

The bond’s yield to maturity is 6% above its coupon rate.

b.

The bond is a premium bond.

c.

The bond’s yield to maturity is 6% below its coupon rate.

d.

The bond is a discount bond.

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The correct answer is: The bond is a premium bond.

Question 2

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Bond prices are usually quoted

Select one:

a.

As a percentage of its par value.

b.

In dollars and give the exact amount that the buyer will pay for one bond.

c.

Discounted by the coupon rate.

d.

As the dollar price of each $1,000 of the par value.

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The correct answer is: As a percentage of its par value.

Question 3

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Which of the following is NOT a factor that determines the coupon rate of a company's bonds?

Select one:

a.

The amount of uncertainty about whether the company will be able to make all the payments.

b.

The level of interest rates in the overall economy at the time.

c.

The term of the loan.

d.

All of these are factors that determine the coupon rate of a company's bonds.

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The correct answer is: All of these are factors that determine the coupon rate of a company's bonds.

Question 4

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Which of the below is correct?

Select one:

a.

The time to maturity will stay fixed throughout the life of the bond.

b.

When the bond matures the bondholder will receive back the amount he/she paid for the bond in the bond market.

c.

When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

d.

Bondholders have the option to return bonds that are callable and get back the amount they paid from the issuing company.

Feedback

The correct answer is: When market interest rates rise we will expect an increase in the yield to maturity on an already outstanding bond.

Question 5

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Which of the following is a legal contract that outlines the precise terms between the issuer and the bondholder?

Select one:

a.

Indenture

b.

Prospectus

c.

Debenture

d.

Enforcement codes

Feedback

The correct answer is: Indenture

Question 6

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Which of these statements answers why bonds are known as fixed income securities?

Select one:

a.

All of these.

b.

Many investors on fixed incomes buy them.

c.

Investors know how much they will receive in interest payments.

d.

Investors will not receive their principal when the bond's term is up.

Feedback

The correct answer is: Investors know how much they will receive in interest payments.

Question 7

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All of the following items would need to be included in the bond's indenture agreement EXCEPT:

Select one:

a.

the call feature.

b.

the credit rating.

c.

the coupon rate.

d.

steps that the bondholder can take in the event that the issuer fails to pay the interest or principal.

Feedback

The correct answer is: the credit rating.

Question 8

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Which of the following is an important advantage to the issuer of a bond with a call provision?

Select one:

a.

They are able to avoid reinvestment rate risk.

b.

They allow for refinancing opportunities.

c.

They are able to reduce their credit risk.

d.

They are able to avoid interest rate risk.

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The correct answer is: They allow for refinancing opportunities.

Question 9

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If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following statements is true?

Select one:

a.

The current bond price will increase and interest rates on new bonds issues will decrease.

b.

The current bond price will decrease and interest rates on new bonds issues will increase.

c.

Interest rates required on new bond issues will increase.

d.

The current bond price will decrease.

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The correct answer is: The current bond price will increase and interest rates on new bonds issues will decrease.

Question 10

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Question text

Which of the debt contracts below would be associated with the biggest interest rate risk?

Select one:

a.

A 3-year car loan

b.

A 10-year U.S. Treasury bond

c.

A 15-year Home Depot bond

d.

A 5-year General Motors bond

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The correct answer is: A 15-year Home Depot bond

Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000 par value.)

Select one:

a.

$940.00

b.

$553.68

c.

$1,000.00

d.

$558.66

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The correct answer is: $553.68