Question 1

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity, then sells the bond after 1 year for $1,085?

Accepted Answer

A)   6.82%
B)   6.91%
C)   7.64%
D)  9.00%

Question 2

Nominal U.S. Treasury bond yields:

Accepted Answer

A)   are constant over time.
B)   are equal to the real yields.
C)   include a default premium.
D)  include an inflation premium.

Question 3

You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

Accepted Answer

A)   4.48%
B)   6.15%
C)   7.52%
D)  6.07%

Question 4

Assume a bond is currently selling at par value. What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

Accepted Answer

A)   The price of the bond will increase.
B)   The coupon rate of the bond will increase.
C)   The par value of the bond will decrease.
D)  The coupon payments will be adjusted to the new discount rate.

Question 5

The coupon rate of a bond equals:

Accepted Answer

A)   its yield to maturity.
B)   a defined percentage of its face value.
C)   the yield to maturity when the bond sells at a discount.
D)  the annual interest divided by the current market price.

Question 6

The current yield tends to understate a bond's total return when the bond sells for a discount because:

Accepted Answer

A)   increases in interest rates will increase the current yield.
B)   the bond's price will increase each year.
C)   current yields show only nominal returns.
D)  the bond may have a higher face value.

Question 7

An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

Accepted Answer

A)   The 5-year bond will decrease more in price.
B)   The 20-year bond will decrease more in price.
C)   Both bonds will decrease in price similarly.
D)  Neither bond will decrease in price, but their yields will increase.

Question 8

If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:

Accepted Answer

A)   bond is selling at a discount.
B)   bond has a high default premium.
C)   promised yield is not likely to materialize.
D)  bond must be a Treasury Inflation-Protected Security.

Question 9

How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually compounded yield of 7.5%?

Accepted Answer

A)   $895.78
B)   $897.04
C)   $938.40
D)  $1,312.66

Question 10

If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable?

Accepted Answer

A)   $848.12
B)   $923.50
C)   $862.92
D)  $911.15

Question 11

By how much will a bond increase in price over the next year if it currently sells for $925.16, has 5 years until maturity, and an annual coupon rate of 7%? (Do not round intermediate calculations.)

Accepted Answer

A)   $8.26
B)   $8.92
C)   $12.53
D)  $11.98

Question 12

Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?

Accepted Answer

Bonds are long-term debt instruments tha...

Question 13

If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

Accepted Answer

A)   decline over time, reaching par value at maturity.
B)   increase over time, reaching par value at maturity.
C)   be less than the face value at maturity.
D)  exceed the face value at maturity.

Question 14

Which of the following would not be associated with a zero-coupon bond?

Accepted Answer

A)   Yield to maturity
B)   Discount bond
C)   Current yield
D)  Interest-rate risk

Question 15

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?

Accepted Answer

A)   6.00%
B)   7.14%
C)   5.04%
D)  6.38%

Question 16

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

Accepted Answer

A)   the bond's price will decline each year.
B)   coupon payments can change at any time.
C)   bonds selling for a premium have low default risk.
D)  taxes must be paid on the current yield.

Question 17

Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond?

Accepted Answer

A)   The bond's current yield increased above the bond's coupon rate.
B)   The inflation rate increased.
C)   New bonds with similar characteristics have coupon rates of 6.5%.
D)  Market interest rates increased.

Question 18

Assume you just purchased a 12% annual coupon bond for $1,100 that matures in 3 years. Determine the current yield, yield to maturity, and price of the bond as of the date of purchase and on each anniversary date of its purchase until maturity.

Accepted Answer

The answer of Assume you just purchased a 12% annual...

Question 19

What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

Accepted Answer

A)   The rate of return will be lower than the yield to maturity.
B)   The rate of return will be higher than the yield to maturity.
C)   The rate of return will equal the yield to maturity.
D)  There is no predetermined relationship between the rate of return and the yield to maturity.

Question 20

Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds.

Accepted Answer

A) True 
 B)False

Exam 6: Valuing Bonds

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon and 5 years until maturity, then sells the bond after 1 year for $1,085?

Correct AnswerverifiedShow Answer

The current yield tends to overstate a bond's total return when the bond sells for a premium because:

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Nominal U.S. Treasury bond yields:

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Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?

Correct AnswerverifiedBonds are long-term debt instruments tha...View AnswerShow Answer

The current yield tends to understate a bond's total return when the bond sells for a discount because:

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If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond's price will be expected to:

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Which of the following would not be associated with a zero-coupon bond?

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Assume you just purchased a 12% annual coupon bond for $1,100 that matures in 3 years. Determine the current yield, yield to maturity, and price of the bond as of the date of purchase and on each anniversary date of its purchase until maturity.

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You purchased a 6% annual coupon bond at par and sold it one year later for $1,015.16. What was your rate of return on this investment if the face value at maturity was $1,000?

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If a bond offers a current yield of 5% and a yield to maturity of 5.45%, then the:

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How much should you be prepared to pay for a 10-year bond with a 6% coupon, semiannual payments, and a semiannually compounded yield of 7.5%?

Correct AnswerverifiedShow Answer

If you purchase a 5-year, zero-coupon bond for $691.72, how much could it be sold for 3 years later if interest rates have remained stable?

Correct AnswerverifiedShow Answer

An investor holds two bonds, one with 5 years until maturity and the other with 20 years until maturity. Which of the following is more likely if interest rates suddenly increase by 2%?

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What is the relationship between a bondholder's rate of return and the bond's yield to maturity if he does not hold the bond until it matures?

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Assume a bond is currently selling at par value. What will happen if the bond's expected cash flows are discounted at a rate lower than the bond's coupon rate?

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What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price quote of 84?

Correct AnswerverifiedShow Answer

By how much will a bond increase in price over the next year if it currently sells for $925.16, has 5 years until maturity, and an annual coupon rate of 7%? (Do not round intermediate calculations.)

Correct AnswerverifiedShow Answer

Assume an investor purchased a fixed-coupon bond at a time when the bond's yield to maturity was 6.9%. Further assume the investor sold the bond prior to maturity and realized a total return of 7.1%. Which of these most likely occurred while the investor owned the bond?

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The coupon rate of a bond equals:

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Even when the yield curve is upward-sloping, investors might rationally stay away from long-term bonds.

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Bonds are long-term debt instruments tha...
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