Chap 010

Chapter 10 - Bond Prices and Yields
Chapter 10
Bond Prices and Yields

Multiple Choice Questions

1. The invoice price of a bond is the ______.
A. stated or flat price in a quote sheet plus accrued interest
B. stated or flat price in a quote sheet minus accrued interest
C. bid price
. avera!e of the bid and as" price

#. $in"in! funds are commonl% vie&ed as protectin! the _______ of the bond.
A. issuer
B. under&riter
C. holder
. dealer

'. A collateral trust bond is _______.
A. secured b% other securities held b% the firm
B. secured b% equipment o&ned b% the firm
C. secured b% propert% o&ned b% the firm
. unsecured

(. A mort!a!e bond is _______.
. unsecured

). A debenture is _________.
. unsecured

10-1
*. Bonds issued in the +.$. are __________ and most bonds issued overseas are
___________.
A. bearer bonds, re!istered bonds
B. re!istered bonds, bearer bonds
C. strai!ht bonds, convertible bonds
. puttable bonds, callable

-. .loatin! rate bonds have a __________ that is ad/usted &ith current mar"et interest rates.
A. maturit% date
B. coupon pa%ment date
C. coupon rate
. dividend %ield

0. 1nflation-inde2ed Treasur% securities are commonl% called ____.
A. P13s
B. CA4s
C. T1P$
. $T41P$

5. 6hen discussin! bonds7 conve2it% relates to the _______.
A. shape of the bond price curve &ith respect to interest rates
B. shape of the %ield curve &ith respect to maturit%
C. slope of the %ield curve &ith respect to liquidit% premiums
. si8e of the bid-as" spread

10. A 9apanese firm issued and sold a pound denominated bond in the +nited 3in!dom. A
+.$. firm issued bonds denominated in dollars but sold the bonds in 9apan. 6hich one of the
follo&in! statements is correct:
A. Both bonds are e2amples of ;urobonds.
B. The 9apanese bond is a ;urobond and the +.$. bond is termed a forei!n bond.
C. The +.$. bond is a ;urobond and the 9apanese bond is termed a forei!n bond.
. <either bond is a ;urobond.

10-#
11. The primar% difference bet&een Treasur% notes and bonds is ________.
A. maturit% at issue
B. default ris"
C. coupon rate
. ta2 status

1#. T1P$ offer investors inflation protection b% ______________ b% the inflation rate each
%ear.
A. increasin! onl% the coupon rate
B. increasin! onl% the par value
C. increasin! both the par value and the coupon pa%ment
. increasin! the promised %ield to maturit%

1'. You &ould t%picall% find all but &hich one of the follo&in! in a bond contract:
A. A dividend restriction clause
B. A sin"in! fund clause
C. A requirement to subordinate an% ne& debt issued
. A price-earnin!s ratio

1(. To earn a hi!h ratin! from the bond ratin! a!encies7 a compan% &ould &ant to have
_________.
1. a lo& times interest earned ratio
11. a lo& debt to equit% ratio
111. a hi!h quic" ratio
A. 1 onl%
B. 11 and 111 onl%
C. 1 and 111 onl%
. 17 11 and 111

10-'
1). Accordin! to the liquidit% preference theor% of the term structure of interest rates an
increase in the %ield on lon! term corporate bonds versus short term bonds could be due to
_______.
A. declinin! liquidit% premiums
B. e2pectation of an upcomin! recession
C. a decline in future inflation e2pectations
. increase in e2pected interest rate volatilit%

1*. __________ are e2amples of s%ntheticall% created 8ero coupon bonds.
A. C=>T$
B. =P=$$?$
C. $T41P$
. A4?s

1-. A __________ bond is a bond &here the bondholder has the ri!ht to cash in the bond
before maturit% at a specific price after a specific date.
A. callable
B. coupon
C. puttable
. treasur%

10. T1P$ are an e2ample of _______________.
A. ;urobonds
B. convertible bonds
C. inde2ed bonds
. catastrophe bonds

15. Bonds issued in the currenc% of the issuer@s countr% but sold in other national mar"ets are
called _____________.
A. ;urobonds
B. Yan"ee bonds
C. $amurai bonds
. forei!n bonds

10-(
#0. You bu% a T1P$ at issue at par for A17000. The bond has a 'B coupon. 1nflation turns out
to be #B7 'B and (B over the ne2t three %ears. The total annual coupon income %ou &ill
receive in %ear three is _________.
A. A'0.00
B. A''.00
C. A'#.-0
. A'0.50

#1. The bonds of ;lbo& Crease ish&ashin! Compan% have received a ratin! of DCD b%
?ood%@s. The DCD ratin! indicates the bonds are _________.
A. hi!h !rade
B. intermediate !rade
C. investment !rade
. /un" bonds

##. Bonds rated _____ or better b% $tandard and Poor@s are considered investment !rade.
A. AA
B. BBB
C. BB
. CCC

#'. Consider the liquidit% preference theor% of the term structure of interest rates. =n avera!e7
one &ould e2pect investors to require _________.
A. a hi!her %ield on short term bonds than lon! term bonds
B. a hi!her %ield on lon! term bonds than short term bonds
C. the same %ield on both short term bonds and lon! term bonds
. the liquidit% preference theor% cannot be used to ma"e an% of the other statements.

10-)
#(. Consider t&o bonds7 A and B. Both bonds presentl% are sellin! at their par value of
A17000. ;ach pa% interest of A1#0 annuall%. Bond A &ill mature in ) %ears &hile bond B &ill
mature in * %ears. 1f the %ields to maturit% on the t&o bonds chan!e from 1#B to 1(B7
_________.
A. both bonds &ill increase in value but bond A &ill increase more than bond B
B. both bonds &ill increase in value but bond B &ill increase more than bond A
C. both bonds &ill decrease in value but bond A &ill decrease more than bond B
. both bonds &ill decrease in value but bond B &ill decrease more than bond A

#). ;ver%thin! else equal _________ bonds &ill require a hi!her promised YT? than
________ bonds.
A. catastrophe, standard
B. non-callable, callable
C. mort!a!e, debenture
. AAA rated, BAA rated

#*. Bonds &ith coupon rates that fall &hen the !eneral level of interest rates rise are called
_____________.
A. asset-bac"ed bonds
C. inverse floaters
. inde2 bonds

#-. _______ bonds represent a novel &a% of obtainin! insurance from capital mar"ets a!ainst
specified disasters.
A. Asset bac"ed bonds
B. T1P$
C. Catastrophe
. Pa% in 3ind

10-*
#0. The issuer of aEan ________ bond ma% choose to pa% interest either in cash or in
additional bonds.
A. asset bac"ed bonds
B. T1P$
C. catastrophe
. pa% in "ind

#5. ;ver%thin! else equal the __________ the maturit% of a bond and the __________ the
coupon the !reater the sensitivit% of the bond@s price to interest rate chan!es.
A. lon!er, hi!her
B. lon!er, lo&er
C. shorter, hi!her
. shorter, lo&er

'0. 6hich one of the follo&in! statements is correct:
A. 1nvoice price F .lat price - Accrued 1nterest
B. 1nvoice price F .lat price G Accrued 1nterest
C. .lat price F 1nvoice price G Accrued 1nterest
. 1nvoice price F $ettlement price - Accrued 1nterest

'1. A __________ bond is a bond &here the issuer has an option to retire the bond before
maturit% at a specific price after a specific date.
A. callable
B. coupon
C. puttable
. treasur%

'#. 6hich of the follo&in! possible provisions of a bond indenture is desi!ned to ease the
burden of principal repa%ment b% spreadin! it out over several %ears:
A. Callable feature
B. Convertible feature
C. $ubordination clause
. $in"in! fund

10--
''. $erial bonds are associated &ith _________.
A. sta!!ered maturit% dates
B. collateral
C. coupon pa%ment dates
. conversion features

'(. 1n an era of particularl% lo& interest rates7 &hich of the follo&in! bonds is most li"el% to
be called:
A. Hero coupon bonds
B. Coupon bonds sellin! at a discount
C. Coupon bonds sellin! at a premium
. .loatin! rate bonds

'). Consider the e2pectations theor% of the term structure of interest rates. 1f the %ield curve is
do&n&ard slopin!7 this indicates that investors e2pect short-term interest rates to __________
in the future.
A. increase
B. decrease
C. not chan!e
. chan!e in an unpredictable manner

'*. A convertible bond has a par value of A17000 but its current mar"et price is A5-). The
current price of the issuin! compan%@s stoc" is A#* and the conversion ratio is '( shares. The
bond@s mar"et conversion value is _________.
A. A17000
B. A00(
C. A5''
. A500

10-0
'-. A convertible bond has a par value of A17000 but its current mar"et price is A5)0. The
current price of the issuin! compan%@s stoc" is A15 and the conversion ratio is (0 shares. The
bond@s conversion premium is _________.
A. A)0.00
B. A150.00
C. A#00.00
. A#(0.00

'0. A coupon bond &hich pa%s interest of (B annuall%7 has a par value of A170007 matures in
) %ears7 and is sellin! toda% at A-0). The actual %ield to maturit% on this bond is _________.
A. -.#B
B. 0.0B
C. 5.1B
. 5.*B

'5. A coupon bond &hich pa%s interest of A*0 annuall%7 has a par value of A170007 matures in
) %ears7 and is sellin! toda% at a A0(.)# discount from par value. The appro2imate %ield to
maturit% on this bond is _________.
A. *B
B. -B
C. 0B
. 5B

(0. A coupon bond &hich pa%s interest of A*0 annuall%7 has a par value of A170007 matures in
) %ears7 and is sellin! toda% at a A-).#) discount from par value. The current %ield on this
bond is _________.
A. *.00B
B. *.(5B
C. *.-'B
. -.00B

10-5
(1. A callable bond pa%s annual interest of A*07 has a par value of A170007 matures in #0 %ears
but is callable in 10 %ears at a price of A171007 and has a value toda% of A10)).0(. The %ield to
call on this bond is _________.
A. *.00B
B. *.)0B
C. -.#0B
. 0.00B

(#. A coupon bond &hich pa%s interest semi-annuall% has a par value of A170007 matures in 0
%ears7 and has a %ield to maturit% of *B. 1f the coupon rate is -B7 the intrinsic value of the
bond toda% &ill be __________ Ito the nearest dollarJ.
A. A17000
B. A170*'
C. A17001
. A17100

('. A coupon bond &hich pa%s interest annuall%7 has a par value of A170007 matures in ) %ears
and has a %ield to maturit% of 1#B. 1f the coupon rate is 5B7 the intrinsic value of the bond
toda% &ill be appro2imatel% _________.
A. A0)*
B. A05#
C. A5#*
. A17000

((. A coupon bond pa%s semi-annual interest is reported as havin! an as" price of 11-B of its
A17000 par value in the 6all $treet 9ournal. 1f the last interest pa%ment &as made # months
a!o and the coupon rate is *B7 the invoice price of the bond &ill be _________.
A. A171(0
B. A171-0
C. A17100
. A17#00

10-10
(). A treasur% bond due in one %ear has a %ield of *.'B &hile a treasur% bond due in ) %ears
has a %ield of 0.0B. A bond due in ) %ears issued b% Ki!h Countr% ?ar"etin! Corporation
has a %ield of 5.*B &hile a bond due in one %ear issued b% Ki!h Countr% ?ar"etin!
Corporation has a %ield of *.0B. The default ris" premiums on the one-%ear and )-%ear bonds
issued b% Ki!h Countr% ?ar"etin! Corp. are respectivel% __________ and _________.
A. 0.(B7 0.'B
B. 0.(B7 0.)B
C. 0.)B7 0.)B
. 0.)B7 0.0B

(*. A 8ero-coupon bond has a %ield to maturit% of )B and a par value of A17000. 1f the bond
matures in 1* %ears7 it should sell for a price of __________ toda%.
A. A()0.00
B. A*(1.00
C. A-05.00
. A17100.00

(-. Yields on municipal bonds are t%picall% ___________ %ields on corporate bonds of
similar ris" and time to maturit%.
A. lo&er than
B. sli!htl% hi!her than
C. identical to
. t&ice as hi!h as

(0. You purchased a )-%ear annual interest coupon bond one %ear a!o. 1ts coupon interest rate
&as *B and its par value &as A17000. At the time %ou purchased the bond7 the %ield to
maturit% &as (B. 1f %ou sold the bond after receivin! the first interest pa%ment and the bond@s
%ield to maturit% had chan!ed to 'B7 %our annual total rate of return on holdin! the bond for
that %ear &ould have been appro2imatel% _________.
A. ).0B
B. ).)B
C. -.*B
. 0.5B

10-11
(5. Anal%sis of bond returns over a multi%ear hori8on based on forecasts of the bond@s %ield to
maturit% and reinvestment rate of coupons is called ______.
A. multi%ear anal%sis
B. hori8on anal%sis
C. maturit% anal%sis
. reinvestment anal%sis

A17000 par value 8ero coupon bonds7 i!nore liquidit% premiums

)0. The e2pected one-%ear interest rate one %ear from no& should be about _________.
A. *.00B
B. -.)0 B
C. 5.00B
. 10.00B

)1. =ne %ear from no& Bond C should sell for ________ Ito the nearest dollarJ.
A. A0)-
B. A0(#
C. A0')
. A0#1

)#. The e2pected t&o %ear interest rate three %ears from no& should be _________.
A. 5.))B
B. 11.-(B
C. 1(.05B
. 1'.-'B

10-1#
)'. The __________ of a bond is computed as the ratio of coupon pa%ments to mar"et price.
A. nominal %ield
B. current %ield
C. %ield to maturit%
. %ield to call

)(. A bond has a par value of A170007 a time to maturit% of 10 %ears7 and a coupon rate of 0B
&ith interest paid annuall%. 1f the current mar"et price is A-)07 &hat is the appro2imate capital
!ain %ield of this bond over the ne2t %ear:
A. 0.-B
B. 1.0B
C. #.)B
. '.(B

)). Consider the follo&in! A17000 par value 8ero-coupon bondsL

The e2pected one-%ear interest rate t&o %ears from no& should be _________.
A. -.00B
B. 0.00B
C. 5.00B
. 10.00B

)*. 6hich of the follo&in! bonds &ould most li"el% sell at the lo&est %ield:
A. A callable debenture
B. A putable mort!a!e bond
C. A callable mort!a!e bond
. A putable debenture

10-1'
)-. A 1B decline in %ield &ill have the least effect on the price of the bond &ith a
_________.
A. 10-%ear maturit%7 sellin! at 00
B. 10-%ear maturit%7 sellin! at 100
C. #0-%ear maturit%7 sellin! at 00
. #0-%ear maturit%7 sellin! at 100

)0. Consider the follo&in! A17000 par value 8ero-coupon bondsL

The e2pected one-%ear interest rate three %ears from no& should be _________.
A. -.00B
B. 0.00B
C. 5.00B
. 10.00B


The e2pected one-%ear interest rate four %ears from no& should be _________.
A. 1*.00B
B. 10.00B
C. #0.00B
. ##.00B

10-1(
*0. You can be sure that a bond &ill sell at a premium to par &hen _________.
A. its coupon rate is !reater than its %ield to maturit%
B. its coupon rate is less than its %ield to maturit%
C. its coupon rate equal to its %ield to maturit%
. its coupon rate is less than its conversion value

*1. A corporate bond has a 10 %ear maturit% and pa%s interest semiannuall%. The quoted
coupon rate is *B and the bond is priced at par. The bond is callable in ' %ears at 110B of
par. 6hat is the bond@s %ield to call:
A. *.-#B
B. 5.1-B
C. (.(5B
. 0.50B

*#. Consider a --%ear bond &ith a 5B coupon and a %ield to maturit% of 1#B. 1f interest rates
remain constant7 one %ear from no& the price of this bond &ill be _________.
A. hi!her
B. lo&er
C. the same
. indeterminate

*'. +nder the pure e2pectations h%pothesis and constant real interest rates for different
maturities7 an up&ard slopin! %ield curve &ould indicate __________________.
A. e2pected increases in inflation over time
B. e2pected decreases in inflation over time
C. the presence of a liquidit% premium
. that the equilibrium interest rate in the short term part of the mar"et is lo&er than the
equilibrium interest rate in the lon!-term part of the mar"et

10-1)
*(. The %ield to maturit% on a bond is ________.
1. above the coupon rate &hen the bond sells at a discount7 and belo& the coupon rate &hen
the bond sells at a premium
11. the discount rate that &ill set the present value of the pa%ments equal to the bond price
111. equal to the true compound return on investment onl% if all interest pa%ments received are
reinvested at the %ield to maturit%
A. 1 onl%
B. 11 onl%
C. 1 and 11 onl%
. 17 11 and 111

*). Yields on municipal bonds are !enerall% lo&er than %ields on similar corporate bonds
because of differences in _________.
A. mar"etabilit%
B. ris"
C. ta2ation
. call protection

**. Assumin! semiannual compoundin!7 a #0-%ear 8ero coupon bond &ith a par value of
A17000 and a required return of 1#B &ould be priced at _________.
A. A5-
B. A10(
C. A'*(
. A-'#

*-. A discount bond that pa%s interest semiannuall% &ill ______.
1. have a lo&er price than an equivalent annual pa%ment bond
11. have a hi!her ;A4 than an equivalent annual pa%ment bond
111. sell for less than its conversion value
A. 1 and 11 onl%
B. 1 and 111 onl%
C. 11 and 111 onl%
. 17 11 and 111

10-1*
*0. A *B coupon +.$. treasur% note pa%s interest on ?a% '1 and <ovember '0 and is traded
for settlement on Au!ust 10. The accrued interest on A1007000 face amount of this note is
_________.
A. A)01.5-
B. A171*'.5'
C. A#7'#-.0-
. A'7000.00

*5. The %ield to maturit% of an 10-%ear 8ero coupon bond7 &ith a par value of A17000 and a
mar"et price of A*#)7 is _____.
A. (.0B
B. *.1B
C. -.-B
. 10.(B

Consider a ne&l% issued T1P$ bond &ith a three %ear maturit%7 par value of A10007 and a
coupon rate of )B. Assume annual coupon pa%ments.

-0. 6hat is the nominal rate of return on the T1P$ bond in the first %ear:
A. ).00B
B. ).1)B
C. 0.1)B
. 5.00B

10-1-
-1. 6hat is the real rate of return on the T1P$ bond in the first %ear:
A. ).00B
B. 0.1)B
C. -.1)B
. (.00B

=n ?a% 17 #00-7 9oe Kill is considerin! one of the follo&in! ne&l%-issued 10 %ear AAA
corporate bonds.

-#. $uppose mar"et interest rates decline b% 100 basis points Ii.e.7 1BJ. The effect of this
decline &ould beL
A. The price of 6ild&ood bond &ould decline b% more than the Asbur% bond.
B. The price of 6ild&ood bond &ould decline b% less than the Asbur% bond.
C. The price of 6ild&ood bond &ould increase b% more than the Asbur% bond.
. The price of 6ild&ood bond &ould increase b% less than the Asbur% bond.

-'. 1f interest rates are e2pected to rise7 then 9oe Kill should ____.
A. prefer the 6ild&ood bond to the Asbur% bond
B. prefer the Asbur% bond to the 6ild&ood bond
C. be indifferent bet&een the 6ild&ood bond and the Asbur% bond
. there is not enou!h information !iven to tell

-(. 1f the volatilit% of interest rates is e2pected to increase7 the 9oe Kill should __.

10-10
-). =ne7 t&o and three %ear maturit%7 default-free7 8ero-coupon bonds have %ields-to-maturit%
of -B7 0B and 5B respectivel%. 6hat is the implied one-%ear for&ard rate7 one %ear from
toda%:
A. #.0B
B. 0.0B
C. 5.0B
. 11.1B

-*. 1f the quote for a Treasur% bond is listed in the ne&spaper as 50L05 bid7 50L1' as"7 the
actual price for %ou to purchase this bond !iven a A107000 par value is _____________.
A. A570#0.1#
B. A57005.'0
C. A570(0.*#
. A5701'.(#

--. 1f the price of a A107000 par Treasur% bond is A107#'-.)0 the quote &ould be listed in the
ne&spaper as ________.
A. 10#L10
B. 10#L11
C. 10#L1#
. 10#L1'

-0. A bond pa%s a semi-annual coupon and the last coupon &as paid *1 da%s a!o. 1f the
annual coupon pa%ment is A-)7 &hat is the accrued interest:
A. A1'.#1
B. A1#.)-
C. A1).((
. A1*.'#

10-15
-5. A bond has a flat price of A50) and it pa%s an annual coupon. The last coupon pa%ment
&as made 50 da%s a!o. 6hat is the invoice price if the annual coupon is A*5:
A. A555.))
B. A1700#.01
C. A1700-.()
. A1701#.1'

00. 1f the quote for a Treasur% bond is listed in the ne&spaper as 55L00 bid7 55L11 as"7 the
actual price %ou can sell this bond !iven a A107000 par value is _____________.
A. A570#0.1#
B. A575#).00
C. A575'(.'-
. A575)).('

01. A bond has a )B coupon rate. The coupon is paid semi-annuall% and the last coupon &as
paid ') da%s a!o. 1f the bond has a par value of A170007 &hat is the accrued interest:
A. A(.01
B. A1(.#(
C. A#).00
. A)0.00

0#. The price on a treasur% bond is 10(L#1 &ith a %ield to maturit% of '.()B. The price on a
comparable maturit% corporate bond is 10'L11 &ith a %ield to maturit% of (.)5B. 6hat is the
appro2imate percenta!e value of the credit ris" of the corporate bond:
A. 1.1(B
B. '.()B
C. (.)5B
. 0.0(B

10-#0
0'. You bu% a bond &ith a A17000 par toda% for a price of A0-). The bond has * %ears to
maturit% and ma"es annual coupon pa%ments of A-) per %ear. You hold the bond to maturit%
but %ou do not reinvest an% of %our coupons. 6hat &as %our effective ;A4 over the holdin!
period:
A. 10.(0B
B. 5.)-B
C. -.()B
. 0.-0B

0(. You bu% an 0 %ear A1000 par value bond toda% that has a *B %ield and a *B annual
pa%ment coupon. 1n one %ear promised %ields have risen to -B. Your one %ear holdin! period
return &as ___.
A. 0.*1B
B. -).'5B
C. 1.#0B
. -'.#)B

0). You bu% a 10 %ear A17000 par 8ero coupon bond priced to %ield *B. You do not sell the
bond. 1f %ou are in a #0B ta2 brac"et %ou &ill o&e ta2es on this investment after the first %ear
equal to _______.
A. A0
B. A(.#-
C. A5.'0
. A''.)1

0*. You bu% a 10 %ear A17000 par (B annual pa%ment coupon bond priced to %ield *B. You
do not sell the bond at %ear end. 1f %ou are in a 1)B ta2 brac"et at %ear end %ou &ill o&e ta2es
on this investment equal to _______.
A. A5.10
B. A(.#)
C. A-.*0
. A).#0

10-#1
0-. An investor pa%s A505.(0 for a bond. The bond has an annual coupon rate of (.0B. 6hat
is the current %ield on this bond:
A. (.00B
B. (.0)B
C. 5.*0B
. 5.-0B

00. 1f the coupon rate on a bond is (.)0B and the bond is sellin! at a premium7 &hich of the
follo&in! is the most li"el% %ield to maturit% on the bond:
A. (.'0B
B. (.)0B
C. ).#0B
. ).)0B

05. The price of a bond at the be!innin! of a period is A500.00 and A5-).00 at the end of the
period. 6hat is the holdin! period return if the annual coupon rate is (.)B:
A. (.00B
B. (.)0B
C. ).10B
. ).*B

50. A bond &as purchased at a premium and is no& sellin! at a discount because of a chan!e
in mar"et interest rates. 1f the bond pa%s a (B annual coupon7 &hat is the li"el% impact on the
holdin! period return in an investor decides to sell no&:
A. 1ncreased
B. ecreased
C. $ta%ed the same
. Can not be determined

10-##
51. The ___________ is the document definin! the contract bet&een the bond issuer and the
bondholder.
A. indenture
B. covenant a!reement
C. trustee a!reement
. collateral statement

5#. You hold a subordinated debenture in a firm. 1n the event of ban"ruptc% %ou &ill be paid
off before &hich one of the follo&in!:
A. ?ort!a!e bonds
B. $enior debentures
C. Preferred stoc"
. ;quipment obli!ation bonds

5'. 1f %ou are holdin! a premium bond %ou must e2pect a _______ each %ear until maturit%. 1f
%ou are holdin! a discount bond %ou must e2pect a _______ each %ear until maturit%.
A. capital !ain, capital loss
B. capital !ain, capital !ain
C. capital loss, capital !ain
. capital loss, capital loss

Chapter 10 Bond Prices and Yields Ans&er 3e%

Multiple Choice Questions

10-#'
1. The invoice price of a bond is the ______.
A. stated or flat price in a quote sheet plus accrued interest
B. stated or flat price in a quote sheet minus accrued interest
C. bid price
. avera!e of the bid and as" price

Difficulty: Medium

#. $in"in! funds are commonl% vie&ed as protectin! the _______ of the bond.
A. issuer
B. under&riter
C. holder
. dealer

Difficulty: Easy

'. A collateral trust bond is _______.
. unsecured

Difficulty: Easy

(. A mort!a!e bond is _______.
. unsecured

Difficulty: Easy

10-#(
). A debenture is _________.
D. unsecured

Difficulty: Easy

*. Bonds issued in the +.$. are __________ and most bonds issued overseas are
___________.
A. bearer bonds, re!istered bonds
B. re!istered bonds, bearer bonds
C. strai!ht bonds, convertible bonds
. puttable bonds, callable

Difficulty: Easy

-. .loatin! rate bonds have a __________ that is ad/usted &ith current mar"et interest rates.
A. maturit% date
B. coupon pa%ment date
C. coupon rate
. dividend %ield

Difficulty: Easy

0. 1nflation-inde2ed Treasur% securities are commonl% called ____.
A. P13s
B. CA4s
C. T1P$
. $T41P$

Difficulty: Easy

10-#)
5. 6hen discussin! bonds7 conve2it% relates to the _______.
A. shape of the bond price curve &ith respect to interest rates
B. shape of the %ield curve &ith respect to maturit%
C. slope of the %ield curve &ith respect to liquidit% premiums
. si8e of the bid-as" spread

Difficulty: Medium

10. A 9apanese firm issued and sold a pound denominated bond in the +nited 3in!dom. A
+.$. firm issued bonds denominated in dollars but sold the bonds in 9apan. 6hich one of the
follo&in! statements is correct:
A. Both bonds are e2amples of ;urobonds.
B. The 9apanese bond is a ;urobond and the +.$. bond is termed a forei!n bond.
C. The +.$. bond is a ;urobond and the 9apanese bond is termed a forei!n bond.
. <either bond is a ;urobond.

Difficulty: Hard

11. The primar% difference bet&een Treasur% notes and bonds is ________.
A. maturit% at issue
B. default ris"
C. coupon rate
. ta2 status

Difficulty: Easy

1#. T1P$ offer investors inflation protection b% ______________ b% the inflation rate each
%ear.
A. increasin! onl% the coupon rate
B. increasin! onl% the par value
C. increasin! both the par value and the coupon pa%ment
. increasin! the promised %ield to maturit%

Difficulty: Easy

10-#*
1'. You &ould t%picall% find all but &hich one of the follo&in! in a bond contract:
A. A dividend restriction clause
B. A sin"in! fund clause
C. A requirement to subordinate an% ne& debt issued
D. A price-earnin!s ratio

Difficulty: Easy

1(. To earn a hi!h ratin! from the bond ratin! a!encies7 a compan% &ould &ant to have
_________.
1. a lo& times interest earned ratio
11. a lo& debt to equit% ratio
111. a hi!h quic" ratio
A. 1 onl%
B. 11 and 111 onl%
C. 1 and 111 onl%
. 17 11 and 111

Difficulty: Easy

1). Accordin! to the liquidit% preference theor% of the term structure of interest rates an
increase in the %ield on lon! term corporate bonds versus short term bonds could be due to
_______.
A. declinin! liquidit% premiums
B. e2pectation of an upcomin! recession
C. a decline in future inflation e2pectations
D. increase in e2pected interest rate volatilit%

Difficulty: Hard

10-#-
1*. __________ are e2amples of s%ntheticall% created 8ero coupon bonds.
A. C=>T$
B. =P=$$?$
C. $T41P$
. A4?s

Difficulty: Easy

1-. A __________ bond is a bond &here the bondholder has the ri!ht to cash in the bond
before maturit% at a specific price after a specific date.
A. callable
B. coupon
C. puttable
. treasur%

Difficulty: Easy

10. T1P$ are an e2ample of _______________.
A. ;urobonds
C. inde2ed bonds
. catastrophe bonds

Difficulty: Easy

15. Bonds issued in the currenc% of the issuer@s countr% but sold in other national mar"ets are
called _____________.
A. ;urobonds
B. Yan"ee bonds
C. $amurai bonds
. forei!n bonds

Difficulty: Easy

10-#0
#0. You bu% a T1P$ at issue at par for A17000. The bond has a 'B coupon. 1nflation turns out
to be #B7 'B and (B over the ne2t three %ears. The total annual coupon income %ou &ill
receive in %ear three is _________.
A. A'0.00
B. A''.00
C. A'#.-0
. A'0.50
IA'0JI1.0#JI1.0'JI1.0(J F A'#.-0

Difficulty: Medium

#1. The bonds of ;lbo& Crease ish&ashin! Compan% have received a ratin! of DCD b%
?ood%@s. The DCD ratin! indicates the bonds are _________.
A. hi!h !rade
B. intermediate !rade
C. investment !rade
D. /un" bonds

Difficulty: Easy

##. Bonds rated _____ or better b% $tandard and Poor@s are considered investment !rade.
A. AA
B. BBB
C. BB
. CCC

Difficulty: Easy

10-#5
#'. Consider the liquidit% preference theor% of the term structure of interest rates. =n avera!e7
one &ould e2pect investors to require _________.
A. a hi!her %ield on short term bonds than lon! term bonds
B. a hi!her %ield on lon! term bonds than short term bonds
C. the same %ield on both short term bonds and lon! term bonds
. the liquidit% preference theor% cannot be used to ma"e an% of the other statements.

Difficulty: Easy

#(. Consider t&o bonds7 A and B. Both bonds presentl% are sellin! at their par value of
A17000. ;ach pa% interest of A1#0 annuall%. Bond A &ill mature in ) %ears &hile bond B &ill
mature in * %ears. 1f the %ields to maturit% on the t&o bonds chan!e from 1#B to 1(B7
_________.
A. both bonds &ill increase in value but bond A &ill increase more than bond B
B. both bonds &ill increase in value but bond B &ill increase more than bond A
C. both bonds &ill decrease in value but bond A &ill decrease more than bond B
D. both bonds &ill decrease in value but bond B &ill decrease more than bond A

Difficulty: Medium

#). ;ver%thin! else equal _________ bonds &ill require a hi!her promised YT? than
________ bonds.
A. catastrophe, standard
B. non-callable, callable
C. mort!a!e, debenture
. AAA rated, BAA rated

Difficulty: Medium

10-'0
#*. Bonds &ith coupon rates that fall &hen the !eneral level of interest rates rise are called
_____________.
A. asset-bac"ed bonds
C. inverse floaters
. inde2 bonds

Difficulty: Easy

#-. _______ bonds represent a novel &a% of obtainin! insurance from capital mar"ets a!ainst
specified disasters.
A. Asset bac"ed bonds
B. T1P$
C. Catastrophe
. Pa% in 3ind

Difficulty: Easy

#0. The issuer of aEan ________ bond ma% choose to pa% interest either in cash or in
additional bonds.
A. asset bac"ed bonds
B. T1P$
C. catastrophe
D. pa% in "ind

Difficulty: Easy

#5. ;ver%thin! else equal the __________ the maturit% of a bond and the __________ the
coupon the !reater the sensitivit% of the bond@s price to interest rate chan!es.
A. lon!er, hi!her
B. lon!er, lo&er
C. shorter, hi!her
. shorter, lo&er

Difficulty: Medium

10-'1
'0. 6hich one of the follo&in! statements is correct:
A. 1nvoice price F .lat price - Accrued 1nterest
B. 1nvoice price F .lat price G Accrued 1nterest
C. .lat price F 1nvoice price G Accrued 1nterest
. 1nvoice price F $ettlement price - Accrued 1nterest

Difficulty: Easy

'1. A __________ bond is a bond &here the issuer has an option to retire the bond before
maturit% at a specific price after a specific date.
A. callable
B. coupon
C. puttable
. treasur%

Difficulty: Easy

'#. 6hich of the follo&in! possible provisions of a bond indenture is desi!ned to ease the
burden of principal repa%ment b% spreadin! it out over several %ears:
A. Callable feature
B. Convertible feature
C. $ubordination clause
D. $in"in! fund

Difficulty: Easy

''. $erial bonds are associated &ith _________.
A. sta!!ered maturit% dates
B. collateral
C. coupon pa%ment dates
. conversion features

Difficulty: Medium

10-'#
'(. 1n an era of particularl% lo& interest rates7 &hich of the follo&in! bonds is most li"el% to
be called:
A. Hero coupon bonds
B. Coupon bonds sellin! at a discount
C. Coupon bonds sellin! at a premium
. .loatin! rate bonds

Difficulty: Medium

'). Consider the e2pectations theor% of the term structure of interest rates. 1f the %ield curve is
do&n&ard slopin!7 this indicates that investors e2pect short-term interest rates to __________
in the future.
A. increase
B. decrease
C. not chan!e
. chan!e in an unpredictable manner

Difficulty: Medium

'*. A convertible bond has a par value of A17000 but its current mar"et price is A5-). The
current price of the issuin! compan%@s stoc" is A#* and the conversion ratio is '( shares. The
bond@s mar"et conversion value is _________.
A. A17000
B. A00(
C. A5''
. A500
IA#*JI'(J F A00(

Difficulty: Medium

10-''
'-. A convertible bond has a par value of A17000 but its current mar"et price is A5)0. The
current price of the issuin! compan%@s stoc" is A15 and the conversion ratio is (0 shares. The
bond@s conversion premium is _________.
A. A)0.00
B. A150.00
C. A#00.00
. A#(0.00
Conversion Premium F 5)0 - (0I15J F 150.00

Difficulty: Medium

'0. A coupon bond &hich pa%s interest of (B annuall%7 has a par value of A170007 matures in
) %ears7 and is sellin! toda% at A-0). The actual %ield to maturit% on this bond is _________.
A. -.#B
B. 0.0B
C. 5.1B
D. 5.*B
A-0) F A(0

Difficulty: Hard

10-'(
'5. A coupon bond &hich pa%s interest of A*0 annuall%7 has a par value of A170007 matures in
) %ears7 and is sellin! toda% at a A0(.)# discount from par value. The appro2imate %ield to
maturit% on this bond is _________.
A. *B
B. -B
C. 0B
. 5B

Difficulty: Medium

(0. A coupon bond &hich pa%s interest of A*0 annuall%7 has a par value of A170007 matures in
) %ears7 and is sellin! toda% at a A-).#) discount from par value. The current %ield on this
bond is _________.
A. *.00B
B. *.(5B
C. *.-'B
. -.00B

Difficulty: Medium

10-')
(1. A callable bond pa%s annual interest of A*07 has a par value of A170007 matures in #0 %ears
but is callable in 10 %ears at a price of A171007 and has a value toda% of A10)).0(. The %ield to
call on this bond is _________.
A. *.00B
B. *.)0B
C. -.#0B
. 0.00B
10)).0( F *0

Difficulty: Medium

(#. A coupon bond &hich pa%s interest semi-annuall% has a par value of A170007 matures in 0
%ears7 and has a %ield to maturit% of *B. 1f the coupon rate is -B7 the intrinsic value of the
bond toda% &ill be __________ Ito the nearest dollarJ.
A. A17000
B. A170*'
C. A17001
. A17100
F 170*'

Difficulty: Medium

10-'*
('. A coupon bond &hich pa%s interest annuall%7 has a par value of A170007 matures in ) %ears
and has a %ield to maturit% of 1#B. 1f the coupon rate is 5B7 the intrinsic value of the bond
toda% &ill be appro2imatel% _________.
A. A0)*
B. A05#
C. A5#*
. A17000
PM
0
F A50

Difficulty: Medium

((. A coupon bond pa%s semi-annual interest is reported as havin! an as" price of 11-B of its
A17000 par value in the 6all $treet 9ournal. 1f the last interest pa%ment &as made # months
a!o and the coupon rate is *B7 the invoice price of the bond &ill be _________.
A. A171(0
B. A171-0
C. A17100
. A17#00
1nvoice Price F

Difficulty: Medium

10-'-
(). A treasur% bond due in one %ear has a %ield of *.'B &hile a treasur% bond due in ) %ears
has a %ield of 0.0B. A bond due in ) %ears issued b% Ki!h Countr% ?ar"etin! Corporation
has a %ield of 5.*B &hile a bond due in one %ear issued b% Ki!h Countr% ?ar"etin!
Corporation has a %ield of *.0B. The default ris" premiums on the one-%ear and )-%ear bonds
issued b% Ki!h Countr% ?ar"etin! Corp. are respectivel% __________ and _________.
A. 0.(B7 0.'B
B. 0.(B7 0.)B
C. 0.)B7 0.)B
D. 0.)B7 0.0B
efault premium for 1-Year Bond F .0*0 - .0*' F .00)
efault premium for )-Year Bond F .05* - .000 F .000

Difficulty: Medium

(*. A 8ero-coupon bond has a %ield to maturit% of )B and a par value of A17000. 1f the bond
matures in 1* %ears7 it should sell for a price of __________ toda%.
A. A()0.00
B. A*(1.00
C. A-05.00
. A17100.00
PM
0
F

Difficulty: Medium

(-. Yields on municipal bonds are t%picall% ___________ %ields on corporate bonds of
similar ris" and time to maturit%.
A. lo&er than
B. sli!htl% hi!her than
C. identical to
. t&ice as hi!h as

Difficulty: Easy

10-'0
(0. You purchased a )-%ear annual interest coupon bond one %ear a!o. 1ts coupon interest rate
&as *B and its par value &as A17000. At the time %ou purchased the bond7 the %ield to
maturit% &as (B. 1f %ou sold the bond after receivin! the first interest pa%ment and the bond@s
%ield to maturit% had chan!ed to 'B7 %our annual total rate of return on holdin! the bond for
that %ear &ould have been appro2imatel% _________.
A. ).0B
B. ).)B
C. -.*B
. 0.5B
PM
0
F *0
PM
1
F *0

Difficulty: Hard

(5. Anal%sis of bond returns over a multi%ear hori8on based on forecasts of the bond@s %ield to
maturit% and reinvestment rate of coupons is called ______.
A. multi%ear anal%sis
B. hori8on anal%sis
C. maturit% anal%sis
. reinvestment anal%sis

Difficulty: Easy

A17000 par value 8ero coupon bonds7 i!nore liquidit% premiums

10-'5
)0. The e2pected one-%ear interest rate one %ear from no& should be about _________.
A. *.00B
B. -.)0 B
C. 5.00B
. 10.00B

Difficulty: Hard

)1. =ne %ear from no& Bond C should sell for ________ Ito the nearest dollarJ.
A. A0)-
B. A0(#
C. A0')
. A0#1
1.0-55
'
F I1.0*JI1 G
1
.
'
J
#
, I1 G
1
.
'
J
#
F 1.100
P
1
F F A0(1.*5

Difficulty: Hard

)#. The e2pected t&o %ear interest rate three %ears from no& should be _________.
A. 5.))B
B. 11.-(B
C. 1(.05B
. 1'.-'B
I1 G
0
4
)
J
)
F I1 G
0
4
'
J
'
I1 G
'
.
)
J
#
1.10-0
)
F I1.0-55
'
JI1 G
'
.
)
J
#
,
'
.
)
F 1(.05B

Difficulty: Hard

10-(0
)'. The __________ of a bond is computed as the ratio of coupon pa%ments to mar"et price.
A. nominal %ield
B. current %ield
C. %ield to maturit%
. %ield to call

Difficulty: Easy

)(. A bond has a par value of A170007 a time to maturit% of 10 %ears7 and a coupon rate of 0B
&ith interest paid annuall%. 1f the current mar"et price is A-)07 &hat is the appro2imate capital
!ain %ield of this bond over the ne2t %ear:
A. 0.-B
B. 1.0B
C. #.)B
. '.(B

Difficulty: Hard

10-(1
)). Consider the follo&in! A17000 par value 8ero-coupon bondsL

The e2pected one-%ear interest rate t&o %ears from no& should be _________.
A. -.00B
B. 0.00B
C. 5.00B
. 10.00B

Difficulty: Hard

)*. 6hich of the follo&in! bonds &ould most li"el% sell at the lo&est %ield:
A. A callable debenture
B. A putable mort!a!e bond
C. A callable mort!a!e bond
. A putable debenture

Difficulty: Medium

)-. A 1B decline in %ield &ill have the least effect on the price of the bond &ith a
_________.
A. 10-%ear maturit%7 sellin! at 00
B. 10-%ear maturit%7 sellin! at 100
C. #0-%ear maturit%7 sellin! at 00
. #0-%ear maturit%7 sellin! at 100

Difficulty: Medium

10-(#

The e2pected one-%ear interest rate three %ears from no& should be _________.
A. -.00B
B. 0.00B
C. 5.00B
. 10.00B

Difficulty: Hard


The e2pected one-%ear interest rate four %ears from no& should be _________.
A. 1*.00B
B. 10.00B
C. #0.00B
. ##.00B

Difficulty: Hard

10-('
*0. You can be sure that a bond &ill sell at a premium to par &hen _________.
A. its coupon rate is !reater than its %ield to maturit%
B. its coupon rate is less than its %ield to maturit%
C. its coupon rate equal to its %ield to maturit%
. its coupon rate is less than its conversion value

Difficulty: Medium

*1. A corporate bond has a 10 %ear maturit% and pa%s interest semiannuall%. The quoted
coupon rate is *B and the bond is priced at par. The bond is callable in ' %ears at 110B of
par. 6hat is the bond@s %ield to call:
A. *.-#B
B. 5.1-B
C. (.(5B
D. 0.50B
1000 F
r F YTC F 0.50B

Difficulty: Hard

*#. Consider a --%ear bond &ith a 5B coupon and a %ield to maturit% of 1#B. 1f interest rates
remain constant7 one %ear from no& the price of this bond &ill be _________.
A. hi!her
B. lo&er
C. the same
. indeterminate

Difficulty: Medium

10-((
*'. +nder the pure e2pectations h%pothesis and constant real interest rates for different
maturities7 an up&ard slopin! %ield curve &ould indicate __________________.
A. e2pected increases in inflation over time
B. e2pected decreases in inflation over time
C. the presence of a liquidit% premium
. that the equilibrium interest rate in the short term part of the mar"et is lo&er than the
equilibrium interest rate in the lon!-term part of the mar"et

Difficulty: Medium

*(. The %ield to maturit% on a bond is ________.
1. above the coupon rate &hen the bond sells at a discount7 and belo& the coupon rate &hen
the bond sells at a premium
11. the discount rate that &ill set the present value of the pa%ments equal to the bond price
111. equal to the true compound return on investment onl% if all interest pa%ments received are
reinvested at the %ield to maturit%
A. 1 onl%
B. 11 onl%
C. 1 and 11 onl%
D. 17 11 and 111

Difficulty: Medium

*). Yields on municipal bonds are !enerall% lo&er than %ields on similar corporate bonds
because of differences in _________.
A. mar"etabilit%
B. ris"
C. ta2ation
. call protection

Difficulty: Medium

10-()
**. Assumin! semiannual compoundin!7 a #0-%ear 8ero coupon bond &ith a par value of
A17000 and a required return of 1#B &ould be priced at _________.
A. A5-
B. A10(
C. A'*(
. A-'#

Difficulty: Medium

*-. A discount bond that pa%s interest semiannuall% &ill ______.
1. have a lo&er price than an equivalent annual pa%ment bond
11. have a hi!her ;A4 than an equivalent annual pa%ment bond
111. sell for less than its conversion value
A. 1 and 11 onl%
B. 1 and 111 onl%
C. 11 and 111 onl%
. 17 11 and 111

Difficulty: Hard

*0. A *B coupon +.$. treasur% note pa%s interest on ?a% '1 and <ovember '0 and is traded
for settlement on Au!ust 10. The accrued interest on A1007000 face amount of this note is
_________.
A. A)01.5-
B. A171*'.5'
C. A#7'#-.0-
. A'7000.00

Difficulty: Medium

10-(*
*5. The %ield to maturit% of an 10-%ear 8ero coupon bond7 &ith a par value of A17000 and a
mar"et price of A*#)7 is _____.
A. (.0B
B. *.1B
C. -.-B
. 10.(B

Difficulty: Medium

Consider a ne&l% issued T1P$ bond &ith a three %ear maturit%7 par value of A10007 and a
coupon rate of )B. Assume annual coupon pa%ments.

-0. 6hat is the nominal rate of return on the T1P$ bond in the first %ear:
A. ).00B
B. ).1)B
C. 0.1)B
. 5.00B
KP4
<om
F

Difficulty: Medium

10-(-
-1. 6hat is the real rate of return on the T1P$ bond in the first %ear:
A. ).00B
B. 0.1)B
C. -.1)B
. (.00B
KP4
<om
F KP4
real
F

Difficulty: Medium

=n ?a% 17 #00-7 9oe Kill is considerin! one of the follo&in! ne&l%-issued 10 %ear AAA
corporate bonds.

-#. $uppose mar"et interest rates decline b% 100 basis points Ii.e.7 1BJ. The effect of this
decline &ould beL
A. The price of 6ild&ood bond &ould decline b% more than the Asbur% bond.
B. The price of 6ild&ood bond &ould decline b% less than the Asbur% bond.
C. The price of 6ild&ood bond &ould increase b% more than the Asbur% bond.
. The price of 6ild&ood bond &ould increase b% less than the Asbur% bond.

Difficulty: Medium

-'. 1f interest rates are e2pected to rise7 then 9oe Kill should ____.

Difficulty: Medium

10-(0
-(. 1f the volatilit% of interest rates is e2pected to increase7 the 9oe Kill should __.

Difficulty: Medium

-). =ne7 t&o and three %ear maturit%7 default-free7 8ero-coupon bonds have %ields-to-maturit%
of -B7 0B and 5B respectivel%. 6hat is the implied one-%ear for&ard rate7 one %ear from
toda%:
A. #.0B
B. 0.0B
C. 5.0B
. 11.1B
1mplied for&ard rate F 1
I1.0-J I1 G 1J F I1.00J
#

Difficulty: Medium

-*. 1f the quote for a Treasur% bond is listed in the ne&spaper as 50L05 bid7 50L1' as"7 the
actual price for %ou to purchase this bond !iven a A107000 par value is _____________.
A. A570#0.1#
B. A57005.'0
C. A570(0.*#
. A5701'.(#

Difficulty: Medium

10-(5
--. 1f the price of a A107000 par Treasur% bond is A107#'-.)0 the quote &ould be listed in the
ne&spaper as ________.
A. 10#L10
B. 10#L11
C. 10#L1#
. 10#L1'

Difficulty: Medium

-0. A bond pa%s a semi-annual coupon and the last coupon &as paid *1 da%s a!o. 1f the
annual coupon pa%ment is A-)7 &hat is the accrued interest:
A. A1'.#1
B. A1#.)-
C. A1).((
. A1*.'#
F A1#.)-

Difficulty: Medium

10-)0
-5. A bond has a flat price of A50) and it pa%s an annual coupon. The last coupon pa%ment
&as made 50 da%s a!o. 6hat is the invoice price if the annual coupon is A*5:
A. A555.))
B. A1700#.01
C. A1700-.()
. A1701#.1'
1nvoice F 50) G I*5J F A1700#.01

Difficulty: Medium

00. 1f the quote for a Treasur% bond is listed in the ne&spaper as 55L00 bid7 55L11 as"7 the
actual price %ou can sell this bond !iven a A107000 par value is _____________.
A. A570#0.1#
B. A575#).00
C. A575'(.'-
. A575)).('

Difficulty: Medium

01. A bond has a )B coupon rate. The coupon is paid semi-annuall% and the last coupon &as
paid ') da%s a!o. 1f the bond has a par value of A170007 &hat is the accrued interest:
A. A(.01
B. A1(.#(
C. A#).00
. A)0.00
Accrued interest F I)0E#J 2 I')E10#J F (.01

Difficulty: Medium

10-)1
0#. The price on a treasur% bond is 10(L#1 &ith a %ield to maturit% of '.()B. The price on a
comparable maturit% corporate bond is 10'L11 &ith a %ield to maturit% of (.)5B. 6hat is the
appro2imate percenta!e value of the credit ris" of the corporate bond:
A. 1.1(B
B. '.()B
C. (.)5B
. 0.0(B
Credit ris" premium F (.)5 - '.() F 1.1(B

Difficulty: Medium

0'. You bu% a bond &ith a A17000 par toda% for a price of A0-). The bond has * %ears to
maturit% and ma"es annual coupon pa%ments of A-) per %ear. You hold the bond to maturit%
but %ou do not reinvest an% of %our coupons. 6hat &as %our effective ;A4 over the holdin!
period:
A. 10.(0B
B. 5.)-B
C. -.()B
D. 0.-0B
I0-)JI1 G ;A4J
*
F 1000 G I-)JI*J, ;A4 F 0.-0B

Difficulty: Hard

10-)#
0(. You bu% an 0 %ear A1000 par value bond toda% that has a *B %ield and a *B annual
pa%ment coupon. 1n one %ear promised %ields have risen to -B. Your one %ear holdin! period
return &as ___.
A. 0.*1B
B. -).'5B
C. 1.#0B
. -'.#)B
P
1
F I*0J
KP4 F F 0.*1B

Difficulty: Hard

0). You bu% a 10 %ear A17000 par 8ero coupon bond priced to %ield *B. You do not sell the
bond. 1f %ou are in a #0B ta2 brac"et %ou &ill o&e ta2es on this investment after the first %ear
equal to _______.
A. A0
B. A(.#-
C. A5.'0
. A''.)1
Ta2es o&ed IA)51.50 - A))0.'5JI0.#0J F A5.'0

Difficulty: Hard

10-)'
0*. You bu% a 10 %ear A17000 par (B annual pa%ment coupon bond priced to %ield *B. You
do not sell the bond at %ear end. 1f %ou are in a 1)B ta2 brac"et at %ear end %ou &ill o&e ta2es
on this investment equal to _______.
A. A5.10
B. A(.#)
C. A-.*0
. A).#0
Ta2es o&ed IA0*'.5- - A0)#.00 G A(0JI0.1)J F A-.*0

Difficulty: Hard

0-. An investor pa%s A505.(0 for a bond. The bond has an annual coupon rate of (.0B. 6hat
is the current %ield on this bond:
A. (.00B
B. (.0)B
C. 5.*0B
. 5.-0B
Current %ield F (0E505.( F .0(0)

Difficulty: Medium

10-)(
00. 1f the coupon rate on a bond is (.)0B and the bond is sellin! at a premium7 &hich of the
follo&in! is the most li"el% %ield to maturit% on the bond:
A. (.'0B
B. (.)0B
C. ).#0B
. ).)0B
A bond sells at premium &hen coupon rate N YT?.

Difficulty: Medium

05. The price of a bond at the be!innin! of a period is A500.00 and A5-).00 at the end of the
period. 6hat is the holdin! period return if the annual coupon rate is (.)B:
A. (.00B
B. (.)0B
C. ).10B
. ).*B
KP4 F I5-) - 500 G ()JE500 F (.00B

Difficulty: Medium

50. A bond &as purchased at a premium and is no& sellin! at a discount because of a chan!e
in mar"et interest rates. 1f the bond pa%s a (B annual coupon7 &hat is the li"el% impact on the
holdin! period return in an investor decides to sell no&:
A. 1ncreased
B. ecreased
C. $ta%ed the same
. Can not be determined

Difficulty: Easy

10-))
51. The ___________ is the document definin! the contract bet&een the bond issuer and the
bondholder.
A. indenture
B. covenant a!reement
C. trustee a!reement
. collateral statement

Difficulty: Easy

5#. You hold a subordinated debenture in a firm. 1n the event of ban"ruptc% %ou &ill be paid
off before &hich one of the follo&in!:
A. ?ort!a!e bonds
B. $enior debentures
C. Preferred stoc"
. ;quipment obli!ation bonds

Difficulty: Easy

5'. 1f %ou are holdin! a premium bond %ou must e2pect a _______ each %ear until maturit%. 1f
%ou are holdin! a discount bond %ou must e2pect a _______ each %ear until maturit%.
A. capital !ain, capital loss
B. capital !ain, capital !ain
C. capital loss, capital !ain
. capital loss, capital loss

Difficulty: Easy

10-)*

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Chapter 10 - Bond Prices and Yields

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