# FINANCE

99. A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is the bond’s annual coupon rate?

A. 7.45%

B. 8.03%

C. 9.39%

D. 10.82%

100. All of the following items would need to be included in the bond’s indenture agreement except _____.

A. The coupon rate

B. The call feature

C. The credit rating

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

101. Which of the following is not a correct statement?

A. Treasury inflation-protected securities have fixed coupon rates.

B. The federal government adjusts the par value of Treasury inflation-protected securities at the rate of inflation.

C. At maturity, investor in Treasury inflation-protected securities receives an inflation-adjusted principal amount.

D. All of these statements are correct.

102. Which of the following would NOT be an example of an agency bond?

A. Federal Home Loan Bank bond

B. Student Loan Marketing Association bond

C. Fannie Mae bond

D. Treasury bills

103. Which of the following statements is correct?

A. Bonds with short-term maturities will have very little interest rate risk.

B. Bonds with large coupon payments will have very little interest rate risk.

C. Bonds with higher credit ratings will have very little interest rate risk.

D. All of these statements are correct.

104. Which of the following statements is correct?

A. Long-term bonds have more reinvestment rate risk than short-term bonds.

B. Long-term bonds have more interest rate risk than short-term bonds.

C. Short-term bonds with high coupons have high interest rate risk.

D. Zero coupon bonds do not have interest rate risk.

105. Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1%?

A. 2-year, 5% coupon bond

B. 30-year, 10% coupon bond

C. 10-year, zero coupon

D. 30-year, zero coupon

106. Rank the following bonds, from highest to lowest interest rate risk: 2-year zero coupon, 2-year 5% coupon bond, 30-year 5% coupon bond, 30-year, zero coupon bond.

A. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year 5% coupon bond, 2-year zero coupon bond

B. 2-year 5% coupon bond, 2-year zero coupon bond, 30-year 5% coupon bond, 30-year zero coupon bond

C. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond, 2-year 5% coupon bond

D. 30-year, 5% coupon bond, 30-year zero coupon bond, 2-year 5% coupon bond, 2-year zero coupon bond

107. Which of the following statements is correct?

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

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

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

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

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

A. The bond issue is upgraded from A to AA.

B. The bond issue is downgraded from A to BBB.

C. Interest rates decrease due to decline in inflation.

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

109. Which of the following statements is correct?

A. There is an inverse relationship between bond prices and bond yields.

B. There is a positive relationship between bond prices and bond yields.

C. There is no relationship between bond prices and bond yields.

D. The relationship between bond prices and bond yields is dependent on the market interest rate.

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

A. its coupon rate must be greater than its yield

B. its coupon rate must be less than its yield

C. its coupon rate must be equal to its yield

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

111. The bond’s annual coupon rate divided by its market price is referred to as the __________.

A. Yield to Call

B. Yield to Maturity

C. Current Yield

D. Term Structure of Interest Rates

112. Possible shapes for the yield include all of the following except ____________.

A. Humped

B. Downward sloping

C. Flat

D. All of these are possible shapes.

113. Possible shapes for the yield curve include all of the following except ___________.

A. Upward sloping

B. Humped

C. Horizontal line

D. Vertical line

114. If a bond is selling at a discount, which of the following statements is correct?

A. The current yield must be greater than the coupon rate.

B. The coupon rate must be greater than the yield to maturity.

C. The bond must have a low bond rating.

D. All of the statements are correct.

115. If a bond is selling at par value, which of the following statements is correct?

A. The current yield must equal the coupon rate.

B. The current yield must equal the yield to maturity.

C. Both of these statements are correct.

D. None of these statements is correct.

116. To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac purchased home mortgages from banks and other lenders. They combined the mortgages into diversified portfolios of loans and issued ______________.

A. Trust securities

B. Mortgage-backed securities

C. Current yield securities

D. Treasury Inflation Protected Securities

117. Under what conditions is a bond likely to be called?

A. The firm is in financial duress.

B. The firm is planning a massive expansion and needs to raise a lot of capital.

C. Interest rates have significantly declined.

D. The firm wants to increase its debt ratio.

118. A 30-year bond with an 8% coupon has a yield to maturity of 6%. The bond could be called in 7 years and if called would generate a yield to call of 5.75%. What is this bond’s call premium? Assume the coupon payments are made annually and par value is $1,000.

A. $219.73

B. $152.64

C. $106.29

D. $301.76

119. A 15-year bond with a 10% coupon has a yield to maturity of 8%. The bond could be called in 4 years and if called would generate a yield to call of 6%. What is this bond’s call premium? Assume the coupon payments are made semi-annually and par value is $1,000.

A. $19.73

B. $81.87

C. $41.20

D. $66.03

120. A 5% coupon bond has 10 years to maturity and could be called in 2 years. If the bond is called, investors will earn 6.2%. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond’s yield to maturity?

A. 2.36%

B. 4.72%

C. 5.18%

D. 6.49%

121. A 7% coupon bond has 10 years to maturity and could be called in 3 years. If the bond is called, investors will earn 5.5%. The call premium is one year of coupon payments. If coupon payments are made semi-annually and par value is $1,000, what is the bond’s yield to maturity?

A. 2.84%

B. 3.17%

C. 5.38%

D. 5.69%

122. A 10% coupon bond has 15 years to maturity and could be called in 2 years. If the bond is called, investors will earn 4%. The call premium is one year of coupon payments. If coupon payments are made annually and par value is $1,000, what is the bond’s yield to maturity?

A. 6.19%

B. 6.82%

C. 7.65%

D. 7.98%

**Essay Questions**

123. Describe the relationship between interest rate changes and bond

124. Describe reasons that the U.S. Government and corporations would issue

125. Explain why high-income and wealthy people are more likely to buy a municipal bond than a corporate

126. **Yields of a Bond** A 4.75 percent coupon municipal bond has 20 years left to maturity and has a price quote of 98.9. The bond can be called in 5 years. The call premium is one year of coupon payments. Compute and discuss the bond’s current yield, yield to maturity, taxable equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call. (Assume interest payments are paid semi-annually and a par value of $

127. **Bond Ratings and Prices** A corporate bond with a 5.75 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to maturity of 6.25 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 6.75 percent. What will be the change in the bond’s price in dollars and percentage terms? (Assume interest payments are paid semi-annually and a par value of $

128. What does a call provision allow the issuer to do, and why would they do

129. All else equal, which bond’s price is more affected by a change in interest rates, a bond with a large coupon or a small coupon?

130. Explain how investors can assess bond market

131. What actions taken by the Federal Reserve preceded and possibly helped precipitate the recent financial crisis?