FIN350 Exercise No. 4
1. The coupon rate of a bond equals:
A) its yield to maturity.
B) a percentage of its face value.
C) the maturity value.
D) a percentage of its price.
Answer: B
2. What happens when a bond’s expected cash flows are discounted at a rate lower than the bond’s coupon rate?
A) The price of the bond increases.
B) The coupon rate of the bond increases.
C) The par value of the bond decreases.
D) The coupon payments will be adjusted to the new discount rate.
Answer: A
(Remarks: This is a discount bond. If discount rate (interest rate) is constant, then the price of this discount bond will increase with time. The wording in this question is imperfect.)
3. When an investor purchases a $1,000 par value bond that was quoted at 97.16, the investor:
A) receives 97.5% of the stated coupon payments.
B) receives $975 upon the maturity date of the bond.
C) pays 97.5% of face value for the bond.
D) pays $1,025 for the bond.
Answer: C
(Ignore this question)
4. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%?
A) $696.74
B) $1,075.82
C) $1,082.00
D) $1,123.01
Answer: C
5. 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:
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.
Answer: B
6. What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750?
A) 6.0%
B) 8.0%
C) 12.0%
D) 14.7%
Answer: B
$60/750 = 8%
7. The discount rate that makes the present value of a bond’s payments equal to its price is termed the:
A) rate of return.
B) yield to maturity.
C) current yield.
D) coupon rate.
Answer: B
8. What is the yield to maturity for a bond paying $100 annually that has six years until maturity and sells for $1,000?
A) 6.0%
B) 8.5%
C) 10.0%
D) 12.5%
Answer: C
i = 10% since the bond sells at par value.
9. What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?
A) The coupon rate increases to 10%.
B) The coupon rate remains at 9%.
C) The coupon rate remains at 8%.
D) The coupon rate decreases to 8%.
Answer: C
10. When the yield curve is upward-sloping, then:
A) short-maturity bonds offer high coupon rates.
B) long-maturity bonds are priced above par value.
C) short-maturity bonds yield less than long-maturity bonds.
D) long-maturity bonds increase in price when interest rates increase.
Answer: C
11. U.S. Treasury bond yields do not contain a:
A) coupon interest payment.
B) nominal interest rate.
C) default premium.
D) yield to maturity.
Answer: C
12. Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?
A) A zero-coupon bond with 20 years until maturity.
B) A coupon-paying bond with 20 years until maturity.
C) A floating-rate bond with 20 years until maturity.
D) A zero-coupon bond with 30 years until maturity.
Answer: D
13. The existence of an upward-sloping yield curve suggests that:
A) bonds should be selling at a discount to par value.
B) bonds will not return as much as common stocks.
C) interest rates will be increasing in the future.
D) real interest rates will be increasing soon.
Answer: C
14. Which of the following bonds would be considered to be of investment-grade?
A) A Caa-rated bond.
B) A Ca-rated bond.
C) A C-rated bond.
D) A Baa-rated bond.
Answer: D
15 If you purchase a five-year, zero-coupon bond for $500, how much could it be sold for three years later if interest rates have remained stable?
A) $650.00
B) $723.05
C) $757.86
D) $800.00
Answer: C
500 = 1000/(1 + i)5
14.87% = i
Three years later
Price = 1000/(1.1487)2
Price = $757.86
16. When the yield curve is upward-sloping, then:
A) short-maturity bonds offer high coupon rates.
B) long-maturity bonds are priced above par value.
C) short-maturity bonds yield less than long-maturity bonds.
D) long-maturity bonds increase in price when interest rates increase.
17. U.S. Treasury bond yields do not contain a:
A) coupon interest payment.
B) nominal interest rate.
C) default premium.
D) yield to maturity.
18. The existence of an upward-sloping yield curve suggests that
A) bonds should be selling at a discount to par value.
B) bonds will not return as much as common stocks.
C) interest rates will be increasing in the future.
D) real interest rates will be increasing soon.
19. Which of the following bonds would be considered to be of investment-grade?
A) A Caa-rated bond.
B) A Ca-rated bond.
C) A C-rated bond.
D) A Baa-rated bond.
20. The yield curve depicts the current relationship between:
A) bond yields and default risk.
B) bond maturity and bond ratings.
C) bond yields and maturity.
D) promised yields and default premiums.
21. Your uncle would like to limit his interest rate risk (also called maturity risk) and his default risk, but he would still like to invest in corporate bonds. Which of the possible bonds listed below best satisfies your uncle’s criteria?
a. AAA bond with 10 years to maturity.
b. BBB perpetual bond.
c. BBB bond with 10 years to maturity.
d. BBB bond with 5 years to maturity.
e. AAA bond with 5 years to maturity.
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