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Chapter Twelve
B 2. How much interest does an XYZ 7s09 bond pay each year?
a. 9% of par
b. 7% of par
c. 7.09% of par
d. Cannot be determined
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Chapter Twelve Test Bank
C 10. Debt that uses land and buildings as collateral is a _____ loan.
a. collateral trust
b. equipment trust
c. mortgage
d. senior
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B 14. A bond on which the interest is payable only if it is earned is a(n) ____ bond.
a. sinking fund
b. income
c. subordinated
d. full faith and credit
C 15. An income bond is most likely to be associated with financing which of the
following?
a. An apartment complex
b. A public highway
c. A toll bridge
d. Capital improvements to a park
B 16. Typical bond cash flows include all of the following EXCEPT
a. annuity plus lump sum
b. growing annuity plus lump sum
c. perpetuity
d. lump sum only
B 20. If you hold a bond certificate with your name on it, it is a _____ bond.
a. book entry
b. registered
c. bearer
d. convertible
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A 21. Newly issued bonds issued by the U. S. Treasury are in _____ form only.
a. book entry
b. registered
c. bearer
d. convertible
C 22. An individual who wishes to buy a U. S. Treasury bond must open an account
through the
a. Federal Reserve System
b. Security Investor Protection Corporation
c. Treasury Direct System
d. Federal Deposit Insurance Corporation
A 24. To solve for a bond's yield to maturity with semi-annual interest payments
a. divide the discount rate by two and double the number of periods
b. divide the discount rate by two and halve the number of periods
c. multiply the discount rate by two and double the number of periods
d. multiply the discount rate by two and halve the number of periods
C 25. You own $5,000 par of the XYZ 8s of 09. The bond paid interest six months
ago, and pays again tomorrow. How much is the next interest check?
a. $40
b. $80
c. $200
d. $400
C 26. You own $5,000 par of the XYZ 8s of 09; they sell for 94% of par. The bond
paid interest six months ago, and pays again tomorrow. How much is the next
interest check?
a. $376
b. $188
c. $200
d. $400
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Chapter Twelve Test Bank
a. CxR
b. C÷R
c. CR
d. RC
C 29. What is the value of a consol that pays $100 per year if the required rate of
return is 8%?
a. $800
b. $1000
c. $1250
d. $1500
A 30. The yield to maturity calculation assumes that _____ are reinvested at the
yield to maturity.
a. coupon proceeds
b. sinking fund payments
c. the principal payments
d. dollars equal to the purchase price
D 31. A specific yield to maturity can only be locked in with which of the following
bonds?
a. consol
b. variable rate
c. convertible
d. zero coupon
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D 37. Someone who relies on investment income for living expenses is most
concerned with
a. internal rate of return
b. yield to maturity
c. realized compound yield
d. current yield
B 39. The yield curve normally has a ____ first derivative and a _____ second
derivative.
a. positive, positive
b. positive, negative
c. negative, positive
d. negative, negative
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A 40. If all interest rates rise by a similar amount, this is a _____ in the yield curve.
a. parallel shift
b. stochastic aberration
c. non-parallel shift
d. non-stochastic aberration
B 41. Corporate bonds rated BBB will show a _____ of yield curve than U. S.
Treasury bonds.
a. lower level
b. higher level
c. flatter plot
d. steeper plot
B 42. Forward interest rates are mostly associated with the _____ theory of interest
rate structure.
a. liquidity premium
b. expectations
c. inflation premium
d. normal backwardation
B 43. Two-year certificates of deposit yield 5.00%; a one-year CD has a 4.66% rate.
What is the one-year forward rate?
a. 4.66%
b. 5.34%
c. 5.66%
d. 5.77%
B 44. If the expectations theory of interest rates is accurate, the only explanation for
an upward sloping yield curve is
a. fear of inflation
b. an expectation that interest rates will continually increase
c. demand for liquidity
d. risk aversion
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Chapter Twelve Test Bank
B 46. A $1000 par bond has a conversion price of $33.50. Its conversion ratio is
a. $29.85
b. 29.85 shares
c. $33,500
d. 33,500 shares
C 47. A $1000 par bond sells for $900 and has a conversion ratio of 25 shares. If
the underlying stock price is $35, the conversion value is
a. $25
b. $100
c. $875
d. $935
B 48. A convertible bond's ____ should never be _____ than its _____.
a. conversion value, less, market value
b. conversion value, more, market value
c. conversion ratio, less, conversion price
d. conversion price, less, conversion ratio
D 50. For a convertible bond, the difference between the bond price and the
conversion value is know as the
a. intrinsic value
b. residual value
c. discount under conversion value
d. premium over conversion value
A 51. The maximum level of accrued interest with most bonds occurs _____ times a
year.
a. two
b. four
c. six
d. twelve
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C 53. How much interest has accrued on an 8%, $1000 par bond seven days after
the last interest payment date?
a. None
b. $1.00
c. $1.53
d. $40.00
C 56. The demarcation between investment grade bonds and junk bonds is the S&P
_____ rating.
a. AAA
b. AA
c. BBB
d. B
A 58. The fact that bond prices change as market interest rates change is a result of
a. interest rate risk
b. purchasing power risk
c. default risk
d. reinvestment rate risk
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C 62. The _____ the _____ on a bond, the higher its reinvestment rate risk.
a. higher, yield to maturity
b. lower, yield to maturity
c. higher, coupon
d. lower, coupon
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D 68. If interest rates fall, t is the price change in a bond with “t” years until
maturity. Suppose there are four bonds: 2 , 4 , 22 , 24 . If the bonds are
identical in every respect except for their maturity, which of the following
statements is true?
a. ( 2 - 4 ) > 0
b. ( 2 - 4 ) = 0
c. ( 2 - 4 ) - ( 22 - 24 ) > 0
d. ( 2 - 4 ) - ( 22 - 24 ) < 0
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A 72. In calculating duration via the traditional method, the “weights” reflect the
a. time value of money
b. level of default risk
c. level of interest rate risk
d. cost of capital
A 73. If a $1,000 par value bond has a coupon rate of 6% with interest paid semi-
annually, a maturity of 12 years, and a yield-to-maturity of 7%, what is the current
price of this bond?
a. $919.71
b. $989.71
c. $1014.71
d. $1062.71
B 74. If a $1,000 face value bond has a coupon rate of 5.5% with interest paid semi-
annually, a maturity of 15 years, and a yield to maturity of 4.5%, what is the
current price of this bond?
a. $854.66
b. $1108.23
c. $1162.89
d. $1242.72
B 75. If a $1,000 face value bond has a coupon rate of 6.5% with interest paid semi-
annually, a maturity of 11 years, and a current price of 1090.34, what is the annual
yield-to-maturity of this bond?
a. 2.7%
b. 5.4%
c. 5.8%
d. 6.8%
C 76. If a $1,000 par value bond has a coupon rate of 7% with interest paid semi-
annually, a maturity of 18 years, and a current price of $1,235, what is the annual
yield-to-maturity of this bond?
a. 2.5%
b. 4.3%
c. 5.0%
d. 6.4%
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A 77. If a $1,000 face value zero coupon bond has a maturity of 15 years and a
yield-to-maturity of 6%, what is the current price of this bond?
a. $417.27
b. $518.27
c. $635.51
d. $782.48
B 78. If a $1,000 face value zero coupon bond has a maturity of 22 years and is
currently priced at $521.89, what is the annual yield-to-maturity?
a. 2%
b. 3%
c. 4%
d. 5%
B 79. What is the duration of a $1,000 par value bond with a coupon rate of 8%, a
yield-to-maturity of 6%, and 4 years left to maturity? (Assume annual coupon
payments)
a. 3.25 years
b. 3.59 years
c. 3.72 years
d. 3.86 years
B 80. What is the duration of a $1,000 par value bond with a coupon rate of 6%, a
yield-to-maturity of 5%, and 2 years left to maturity? (Interest payments are made
semi-annually.)
a. 1.7 years
b. 1.9 years
c. 2.0 years
d. 3.8 years
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