CHAPTER 5

Interest Rate and Bond Valuation

Multiple Choice Questions

I. DEFINITIONS
COUPON
a 1. The stated interest payment, in dollars, made on a bond each period is called the bonds: a.
coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate. Difficulty level: Easy
FACE VALUE
b 2. The principal amount of a bond that is repaid at the end of the loan term is called the bonds: a.
coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate. Difficulty level: Easy
MATURITY
c 3. The specified date on which the principal amount of a bond is repaid is called the bonds: a.
coupon. b. face value. c. maturity. d. yield to maturity. e. coupon rate. Difficulty level: Easy
YIELD TO MATURITY
d 4. The rate of return required by investors in the market for owning a bond is called the: a. coupon.
b. face value. c. maturity. d. yield to maturity. e. coupon rate. Difficulty level: Easy
COUPON RATE
e 5. The annual coupon of a bond divided by its face value is called the bonds: a. coupon. b. face
value. c. maturity. d. yield to maturity. e. coupon rate. Difficulty level: Easy
PAR BONDS
a 6. A bond with a face value of $1,000 that sells for $1,000 in the market is called a _____ bond. a.
par value b. discount c. premium d. zero coupon e. floating rate Difficulty level: Easy
DISCOUNT BONDS
b 7. A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a
_____ bond.
a. par b. discount c. premium d. zero coupon e. floating rate Difficulty level: Easy
PREMIUM BONDS
c 8. A bond with a face value of $1,000 that sells for more than $1,000 in the market is called a
_____ bond.
a. par b. discount c. premium d. zero coupon e. floating rate Difficulty level: Easy
UNFUNDED DEBT
d 9. The unfunded debt of a firm is generally understood to mean the firms: a. preferred stock. b.
debts that mature in more than one year. c. debentures. d. debts that mature in less than one year.
e. secured debt. Difficulty level: Easy

INDENTURE
a 10. The written, legally binding agreement between the corporate borrower and the lender detailing
the terms of a bond issue is called the: a. indenture. b. covenant. c. terms of trade. d. form 5140.
e. call provision. Difficulty level: Easy
REGISTERED BONDS
b 11. The form of bond issue in which the registrar of the company records ownership of each bond,
with relevant payments made directly to the owner of record, is called the _____ form.
a. new-issue b. registered c. bearer d. debenture e. collateral Difficulty level: Medium
BEARER BONDS
c 12. The form of bond issue in which the bond is issued without record of the owners name, with
relevant payments made directly to whoever physically holds the bond, is called the _____ form.
a. new-issue b. registered c. bearer d. debenture e. collateral Difficulty level: Easy
DEBENTURES
e 13. The unsecured debts of a firm with maturities greater than 10 years are most literally called: a.
unfunded liabilities. b. sinking funds. c. bonds. d. notes. e. debentures. Difficulty level: Easy
NOTES
d 14. The unsecured debts of a firm with maturities less than 10 years are most literally called: a.
unfunded liabilities. b. sinking funds. c. bonds. d. notes. e. debentures. Difficulty level: Easy
SINKING FUND
a 15. An account managed by the bond trustee for early bond redemption payments is called a: a.
sinking fund. b. collateral payment account. c. deed in trust account. d. call provision. e. par value
fund. Difficulty level: Easy
CALL PROVISION
b 16. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior
to maturity is the _____ provision.
a. sinking fund b. call c. seniority d. collateral e. trustee Difficulty level: Easy
CALL PREMIUM
c 17. The amount by which the call price exceeds the bonds par value is the: a. coupon rate. b.
redemption value. c. call premium. d. original-issue discount. e. call rate. Difficulty level: Easy
SENIORITY
e 18. In the event of default, _____ debt holders must give preference to more _____ debt holders in
the priority of repayment distributions.
a. short-term; long-term b. long-term; short-term c. senior; junior d. senior; subordinated e.
subordinated; senior Difficulty level: Medium
DEFERRED CALL PROVISION

d 19. A deferred call provision refers to the: a. open market price of a callable bond on a certain date.
b. seniority of callable bonds to noncallable bonds in the event of corporate default. c. prohibition of a
company from ever redeeming callable bonds. d. prohibition of a company from redeeming callable
bonds prior to a certain date. e. amount by which the call price for a callable bond exceeds its par
value. Difficulty level: Easy
TREASURY BONDS
a 20. The long-term bonds issued by the United States government are called _____ bonds. a.
Treasury b. municipal c. floating-rate d. junk e. zero coupon Difficulty level: Easy
MUNICIPAL BONDS
b 21. The long-term bonds issued by state and local governments in the United States are called
_____ bonds.
a. Treasury b. municipal c. floating-rate d. junk e. zero coupon Difficulty level: Easy
ZERO COUPON BONDS
e 22. A bond that makes no coupon payments and is initially priced at a deep discount is called a
_____ bond.
a. Treasury b. municipal c. floating-rate d. junk e. zero coupon Difficulty level: Easy
FLOATING-RATE BONDS
c 23. A bond that pays a variable amount of coupon interest over time is called a _____ bond. a.
Treasury b. municipal c. floating-rate d. junk e. zero coupon Difficulty level: Easy
PROTECTIVE COVENANT
e 24. Parts of the indenture limiting certain actions that might be taken during the term of the loan to
protect the interests of the lender are called:
a. trustee relationships. b. sinking funds provisions. c. bond ratings. d. deferred call provisions.
e. protective covenants.
CONVERTIBLE BONDS
d 25. A bond which, at the election of the holder, can be swapped for a fixed number of shares of
common stock at any time prior to the bonds maturity is called a _____ bond.
a. zero coupon b. callable c. putable d. convertible e. warrant Difficulty level: Medium
PRICE TRANSPARENCY
a 26. A financial market is _____ if it is possible to easily observe its prices and trading volume. a.
transparent b. open c. ordered d. in equilibrium e. chaotic Difficulty level: Medium
CURRENT YIELD
b 27. The annual coupon payment of a bond divided by its market price is called the: a. coupon rate.
b. current yield. c. yield to maturity. d. bid-ask spread. e. capital gains yield. Difficulty level: Easy
TIP BONDS
b 28. A TIP bonds interest rate is linked to: a. income. b. inflation. c. liquidity. d. maturity of the

30 year government bond. e. corporate tax rates. Difficulty level: Medium

PUT BOND
a 29. A bond that allows the holder to force the issuer to buy back bonds at a stated rate is called a:
a. put bond. b. call bond. c. guaranteed bond. d. TIP bond. e. none of the above.
NOMINAL RATES
e 30. Interest rates or rates of return on investments that have not been adjusted for the effects of
inflation are called _____ rates.
a. coupon b. stripped c. effective d. real e. nominal Difficulty level: Medium
REAL RATES
a 31. Interest rates or rates of return on investments that have been adjusted for the effects of
inflation are called _____ rates.
a. real b. nominal c. effective d. stripped e. coupon Difficulty level: Medium
FISHER EFFECT
b 32. The relationship between nominal rates, real rates, and inflation is known as the: a. Miller and
Modigliani theorem. b. Fisher effect. c. Gordon growth model. d. term structure of interest rates. e.
interest rate risk premium. Difficulty level: Medium
TERM STRUCTURE OF INTEREST RATES
c 33. The relationship between nominal interest rates on default-free, pure discount securities and
the
time to maturity is called the:
a. liquidity effect. b. Fisher effect. c. term structure of interest rates. d. inflation premium. e.
interest rate risk premium. Difficulty level: Medium
INFLATION PREMIUM
d 34. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for expected future overall price appreciation.
a. default risk b. taxability c. liquidity d. inflation e. interest rate risk Difficulty level: Easy
DEFAULT RISK PREMIUM
a 35. The _____ premium is that portion of a nominal interest rate or bond yield that represents
compensation for the possibility of nonpayment by the bond issuer.
a. default risk b. taxability c. liquidity d. inflation e. interest rate risk Difficulty level: Easy
II. CONCEPTS
BOND FEATURES
d 36. A bond with a 7 % coupon that pays interest semi-annually and is priced at par will have a
market price of _____ and interest payments in the amount of _____ each.

a. $1,007; $70 b. $1,070; $35 c. $1,070; $70 d. $1,000; $35 e. $1,000; $70 Difficulty level:
Medium
BOND PRICES AND YIELDS
e 37. All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.
a. a premium; higher than b. a premium; equal to c. at par; higher than d. at par; less than e. a
discount; higher than Difficulty level: Medium
BOND PRICES AND YIELDS
d 38. All else constant, a coupon bond that is selling at a premium, must have: a. a coupon rate that
is equal to the yield to maturity. b. a market price that is less than par value. c. semi-annual interest
payments. d. a yield to maturity that is less than the coupon rate. e. a coupon rate that is less than
the yield to maturity. Difficulty level: Easy
BOND PRICES
c 39. The market price of a bond is equal to the present value of the: a. face value minus the
present value of the annuity payments. b. annuity payments plus the future value of the face
amount. c. face value plus the present value of the annuity payments. d. face value plus the future
value of the annuity payments. e. annuity payments minus the face value of the bond. Difficulty
level: Easy
BOND PRICES
a 40. As the yield to maturity increases, the: a. amount the investor is willing to pay to buy a bond
decreases. b. longer the time to maturity. c. lower the coupon rate desired by that investor. d.
higher the price the investor offers to buy a bond. e. lower the rate of return desired by the investor.
Difficulty level: Easy
SEMIANNNUAL BONDS
e 41. American Fortunes is preparing a bond offering with an 8 % coupon rate. The
bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest
semiannually. Given this, which of the following statements are correct? I. The initial selling price of
each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of
compounding periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40. IV. The yield to maturity when the bonds are first
issued is 8 %. a. I and II only b. II and III only c. II, III, and IV only d. I, II, and III only e. I, III, and IV
only Difficulty level: Medium
SEMIANNUAL BONDS AND EFFECTIVE ANNUAL RATE
d 42. The newly issued bonds of the Wynslow Corp. offer a 6 % coupon with semiannual interest
payments. The bonds are currently priced at par value. The effective annual rate provided by these
bonds must be:
a. equal to 3 %. b. greater than 3 % but less than 4 %. c. equal to 6 %. d. greater than 6 % but
less than 7 %. e. equal to 12 %. Difficulty level: Medium
INTEREST RATE RISK
d 43. Which one of the following statements is correct concerning interest rate risk as it relates to

bonds, all else equal? a. The shorter the time to maturity, the greater the interest rate risk. b. The
higher the coupon rate, the greater the interest rate risk. c. For a bond selling at par value, there is
no interest rate risk. d. The greater the number of semiannual interest payments, the greater the
interest rate risk. e. The lower the amount of each interest payment, the lower the interest rate risk.
Difficulty level: Medium
INTEREST RATE RISK
e 44. Which one of the following bonds has the greatest interest rate risk? a. 5-year; 9 % coupon b.
5-year; 7 % coupon c. 7-year; 7 % coupon d. 9-year; 9 % coupon e. 9-year; 7 % coupon Difficulty
level: Medium
INTEREST RATE RISK
b 45. Interest rate risk _____ as the time to maturity increases. a. increases at an increasing rate b.
increases at a decreasing rate c. increases at a constant rate d. decreases at an increasing rate e.
decreases at a decreasing rate Difficulty level: Medium
INTEREST RATE RISK
c 46. You own a bond that has a 7 % coupon and matures in 12 years. You purchased this bond at
par value when it was originally issued. If the current market rate for this type and quality of bond is
7.5 %, then you would expect: a. the bond issuer to increase the amount of each interest payment
on these bonds. b. the yield to maturity to remain constant due to the fixed coupon rate. c. to
realize a capital loss if you sold the bond at the market price today. d. todays market price to
exceed the face value of the bond. e. the current yield today to be less than 7 %. Difficulty level:
Medium
INTEREST RATE RISK
b 47. A brand with semi-annual interest payments, all else equal, would be priced _________ than
one with annual interest payments. a. higher b. lower c. the same d. it is impossible to tell e.
either higher or the same Difficulty level: Medium
YIELD TO MATURITY AND CURRENT YIELD
e 48. All else constant, as the market price of a bond increases the current yield _____ and the
yield to maturity _____ a. increases; increases. b. increases; decreases. c. remains constant;
increases. d. decreases; increases. e. decreases; decreases. Difficulty level: Medium
BOND FEATURES
d 49. Which of the following statements concerning bond features is (are) correct? I. Bondholders
generally have voting power in a corporation. II. Bond interest is tax-deductible as a business
expense. III. The repayment of the bond principle is tax-deductible. IV. Failure to pay either the
interest payments or the bond principle as agreed can cause a firm to go into bankruptcy. a. II only
b. I and II only c. III and IV only d. II and IV only e. II, III, and IV only Difficulty level: Medium
BOND INDENTURE
d 50. Which of the following items are generally included in a bond indenture? I. call provisions II.
security description III. current yield IV. protective covenants a. I and II only b. II and IV only c. II,
III, and IV only d. I, II, and IV only e. I, II, III, and IV Difficulty level: Medium
BOND CLASSIFICATIONS
e 51. Which one of the following statements is correct concerning bond classifications? a. A
debenture is a long-term bond secured by the fixed assets of a firm. b. A mortgage security is a bond

issued solely by a home builder. c. A note is a bond which has an original maturity date longer than
10 years. d. A subordinated bond receives preferential treatment over all other bonds in a
bankruptcy. e. A callable bond can be repurchased by the issuer prior to the initial maturity date.
Difficulty level: Medium
CALLABLE BONDS
b 52. Callable bonds generally: a. allow the bondholder to decide when the bond is to be called. b.
are associated with sinking funds. c. permit the issuer to repurchase the bonds at a discount. d. are
called within the first couple of years after issuance. e. are required to have a deferred call provision
if they have a make-whole call provision. Difficulty level: Medium
PROTECTIVE COVENANTS
c 53. Which of the following is a (are) positive covenant(s) that might be found in a bond indenture?
I. The company shall maintain a current ratio of 1.5 or better. II. The company must limit the amount
of dividends it pays according to the stated
formula. III. The company cannot lease any major
assets without approval by the lender. IV. The company must maintain the loan collateral in good
working order. a. I only b. I and II only c. I and IV only d. II and IV only e. I, II, and IV only Difficulty
level: Challenge
PROTECTIVE COVENANTS e 54. Protective covenants: a. are primarily designed to protect the issuing
corporation from unreasonable demands of bondholders. b. are consistent for all bonds issued by
a corporation within the United States. c. are limited to stating actions which a firm must take. d.
only apply to bonds that have a deferred call provision. e. are primarily designed to protect
bondholders from future actions of the bond issuer. Difficulty level: Medium
BOND RATINGS
b 55. Which one of the following statements concerning bond ratings is correct? a. Standard and
Poors and Value Line are the primary bond rating agencies. b. Bond ratings are solely an
assessment of the creditworthiness of the bond issuer. c. Investment grade bonds include only
those bonds receiving one of the highest three bond ratings. d. Bond ratings evaluate the expected
price volatility of a bond issue. e. All bonds receive the same rating classification from all rating
agencies. Difficulty level: Medium
BOND RATINGS
d 56. A fallen angel is a bond that: a. lowered its annual interest payment. b. has moved from
being a long-term obligation to being a short-term obligation. c. has moved from having a yield to
maturity in excess of the coupon rate to having a yield to maturity that is less than the coupon rate.
d. has moved from being an investment-grade bond to being a junk bond. e. is rated as Ba by one
rating agency and rated as BB by another rating agency. Difficulty level: Medium
TREASURY BONDS
a 57. Bonds issued by the U.S. government: I. are considered to be free of default risk. II. are
considered to be free of interest rate risk. III. provide totally tax-free income. IV. pay interest that is
exempt from federal income taxes. a. I only b. I and III only c. I and IV only d. II and III only e. II
and IV only Difficulty level: Medium
TREASURY BONDS
d 58. Treasury bonds are: a. those bonds issued by any governmental agency in the U.S. b. issued
only on the first day of each fiscal year by the U.S. Department of Treasury. c. preferred by highincome individuals because they offer the best tax benefits. d. generally issued as coupon bonds. e.
totally risk-free. Difficulty level: Medium

MUNICIPAL BONDS a 59. Municipal bonds: a. offer income tax advantages to individuals. b.
generally pay a higher rate of return than corporate bonds. c. are those bonds issued only by local
municipalities, such as a city or a borough. d. are rarely callable. e. pay interest that is always
exempt from both federal and state income taxes. Difficulty level: Easy
TAXABLE VERSUS MUNICIPAL BONDS
d 60. The break-even tax rate between a taxable corporate bond yielding 7 % and a comparable
nontaxable municipal bond yielding 5 % can be expressed as: a. .07 (1 - t*) = .05. b. .05 (1 t*) = .07. c. .07 + (1 - t*) = .05. d. .07 (1 - t*) = .05. e. .05 (1 - t*) = .07. Difficulty level:
Medium
ZERO COUPON BONDS e 61. A zero coupon bond: a. is sold at a large premium. b. has a price
equal to the future value of the face amount given a specified rate of return. c. can only be issued
by the U.S. Treasury. d. has less interest rate risk than a comparable coupon bond. e. has implicit
interest which is calculated by amortizing the loan. Difficulty level: Medium
ZERO COUPON BONDS
b 62. The total interest paid on a zero-coupon bond is equal to: a. zero. b. the face value minus the
issue price. c. the face value minus the market price on the maturity date. d. $1,000 minus the
face value. e. $1,000 minus the par value. Difficulty level: Medium
FLOATING-RATE BONDS
d 63. The collar of a floating-rate bond refers to the minimum and maximum: a. call periods. b.
maturity dates. c. market prices. d. coupon rates. e. yields to maturity. Difficulty level: Medium
FLOATING-RATE BONDS
d 64. Which of the following are common characteristics of floating-rate bonds? I. adjustable coupon
rates II. adjustable maturity dates III. put provision IV. coupon cap a. I and II only b. II and III only
c. I, II, and IV only d. I, III, and IV only e. I, II, III, and IV Difficulty level: Medium
FLOATING RATE BONDS
c 65. A corporation is more prone to issue floating-rate bonds when they expect future
interest
rates to _____ over the life of the bond. a. remain constant b. increase briefly and then decline
slightly c. continually decline d. decline briefly and then increase significantly e. continually increase
Difficulty level: Easy
YIELD TO MATURITY
e 66. The yield to maturity is
a. the rate that equates the price of the bond with the discounted cash flows. b. the expected rate
to be earned if held to maturity.
c. the rate that is used to determine the market price of the bond. d. equal to the current yield for
bonds priced at par. e. All of the above. Difficulty level: Medium
TYPES OF BONDS AND INVESTOR PREFERENCES c 67. Investors generally tend to buy: a. Treasury
bonds for their high yields. b. municipal bonds for their high yields. c. convertible bonds for their
potential price appreciation. d. corporate bonds for their liquidity. e. Treasury bonds for their
preferential tax treatment. Difficulty level: Medium
TYPES OF BONDS
b 68. A convertible bond is a bond that can be: a. exchanged for cash at prescribed points in time.

b. exchanged for a stated number of shares of common stock of the bond issuer. c. modified from a
fixed coupon bond into a floating coupon bond at prescribed points in time. d. submitted to the
issuer for redemption at the discretion of the bondholder. e. submitted for payment any time the
economy converts into a recessionary period. Difficulty level: Easy
PUT PROVISION
c 69. A put provision in a bond indenture allows: a. a bond issuer to recall the bond after a specified
period of time at a price that exceeds the face amount. b. a bondholder to force the issuer to
increase the coupon rate if inflation increases by more than a specified amount.
c. the bondholder to force the issuer to buy back the bond at a specified price prior to maturity. d.
the issuer to convert a coupon bond into a zero coupon bond at their discretion. e. the issuer to
suspend interest payments for any year in which the interest expense exceeds the net income of the
firm.
Difficulty level: Easy
FACE VALUE
e 70. Face value is
a. always higher than current price. b. always lower than current price. c. the same as the current
price. d. the coupon amount.
e. None of the above.
Difficulty level: Easy
BASIS POINT
a 71. One basis point is equal to: a. .01 %. b. .10 %. c. 1.0 %. d. 10 %. e. 100 %. Difficulty
level: Easy
CORPORATE BOND QUOTE
c 72. The EST SPREAD shown in The Wall Street Journal listing of corporate bonds represents the
estimated: a. yield to maturity. b. difference between the current yield and the yield to maturity. c.
difference between the bonds yield and the yield of a particular Treasury issue. d. range of yields to
maturity provided by the bond over its life to date. e. difference between the yield to call and the
yield to maturity. Difficulty level: Medium
COUPON PAYMENT
b 73. A bond is listed in The Wall Street Journal as a 12 3/4s of July 2009. This bonds pays a.
$127.50 in July and January. b. $63.75 in July and January. c. $127.50 in July. d. $63.75 in
July. e. None of the above. Difficulty level: Easy
YIELD TO MATURITY
c 74. If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in
market interest rates will _____.
a. discount; decrease this discount. b. discount; increase this discount. c. premium; decrease this
premium. d. premium; increase this premium. e. None of the above.

Difficulty level: Medium

CLEAN VERSUS DIRTY PRICES

c 75. Today, August 13, you want to buy a bond with a quoted price of 101.5. The bond pays
interest on February 1 and August 1. The price you will pay to purchase this bond is equal to the:
a. clean price. b. muddy price. c. dirty price. d. par value price. e. bid price. Difficulty level:
Medium
REAL RATE OF RETURN
d 76. The increase you realize in buying power as a result of owning a bond is referred to as the
_____ rate of return. a. inflated b. realized c. nominal d. real e. risk-free Difficulty level: Easy
FISHER EFFECT
e 77. The Fisher formula is expressed as: a. 1 + r = (1 + R) x(1 + h). b. 1 + r = (1 + R) X (1 + h). c.
1 + h = (1 + r) X (1 + R). d. 1 + R = (1 + r) X (1 + h). e. 1 + R = (1 + r) X (1 + h). Difficulty level:
Medium
FISHER EFFECT
d 78. The Fisher Effect primarily emphasizes the effects of _____ risk on an investors rate of
return. a. default b. market c. interest rate d. inflation e. maturity Difficulty level: Easy
TERM STRUCTURE OF INTEREST RATES
a 79. The term structure of interest rates reflects the: a. pure time value of money for various
lengths of time. b. actual risk premium being paid for corporate bonds of varying maturities. c. pure
inflation adjustment applied to bonds of various maturities. d. interest rate risk premium applicable
to bonds of varying maturities. e. nominal interest rates applicable to coupon bonds of varying
maturities. Difficulty level: Easy
BOND VALUES
a 80. The market price of _____ maturity bonds fluctuates _____ compared with _____ maturity
bonds as interest rates change.
a. shorter; less; longer b. longer; less; shorter c. shorter; more; longer d. Both B and c.
e. None of the above.

Difficulty level: Medium

CORPORATE VERSUS TREASURY BONDS

c 81. Two of the primary differences between a corporate bond and a Treasury bond with identical
maturity dates are related to: a. interest rate risk and time value of money. b. time value of money
and inflation. c. taxes and potential default. d. taxes and inflation. e. inflation and interest rate risk.
Difficulty level: Medium
III. PROBLEMS
BOND VALUATION
c 82. Consider a bond which pays 7% semiannually and has 8 years to maturity. The market requires
an interest rate of 8% on bonds of this risk. What is this bond's price?
a. $ 942.50 b. $ 911.52 c. $ 941.74 d. $1,064.81
e. None of the above.

Difficulty level: Easy

ZERO COUPON BOND

a 83. The value of a 20 year zero-coupon bond when the market required rate of return of 9%
(semiannual) is ____ .
a. $171.93 b. $178.43 c. $318.38 d. $414.64
e. None of the above.
Difficulty level: Easy
YIELD TO MATURITY
c 84. The bonds issued by Jensen & Son bear a 6 % coupon, payable semiannually. The bond
matures in 8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to
maturity?
a. 5.87 % b. 5.97 % c. 6.00 % d. 6.09 % e. 6.17 % Difficulty level: Medium
YIELD TO MATURITY
a 85. A General Co. bond has an 8 % coupon and pays interest annually. The face value is $1,000
and the current market price is $1,020.50. The bond matures in 20 years. What is the yield to
maturity?
a. 7.79 % b. 7.82 % c. 8.00 % d. 8.04 % e. 8.12 % Difficulty level: Easy
YIELD TO MATURITY
d 86. Winston Enterprises has a 15-year bond issue outstanding that pays a 9 % coupon. The bond is
currently priced at $894.60 and has a par value of $1,000. Interest is paid semiannually. What is the
yield to maturity?
a. 8.67 % b. 10.13 % c. 10.16 % d. 10.40 % e. 10.45 % Difficulty level: Medium
PRICE OF COUPON BOND
a 87. Wine and Roses, Inc. offers a 7 % coupon bond with semiannual payments and a yield to
maturity of 7.73 %. The bonds mature in 9 years. What is the market price of a $1,000 face value
bond?
a. $953.28 b. $953.88 c. $1,108.16 d. $1,401.26 e. $1,401.86
PRICE OF COUPON BOND
c 88. Party Time, Inc. has a 6 % coupon bond that matures in 11 years. The bond pays interest
semiannually. What is the market price of a $1,000 face value bond if the yield to maturity is 12.9
%?
a. $434.59 b. $580.86 c. $600.34 d. $605.92 e. $947.87 Difficulty level: Medium
PRICE OF COUPON BOND
d 89. Gugenheim, Inc. offers a 7 % coupon bond with annual payments. The yield to
maturity is
5.85 % and the maturity date is 9 years. What is the market price of a $1,000 face value bond?
a. $742.66 b. $868.67 c. $869.67 d. $1,078.73 e. $1,079.59 Difficulty level: Easy

TIME TO MATURITY OF COUPON BOND

a 90. The Lo Sun Corporation offers a 6 % bond with a current market price of $875.05. The yield
to maturity is 7.34 %. The face value is $1,000. Interest is paid semiannually. How many years is
it until this bond matures? a. 16 years b. 18 years c. 24 years d. 30 years e. 36 years Difficulty
level: Medium
TIME TO MATURITY OF COUPON BOND
b 91. High Noon Sun, Inc. has a 5 %, semiannual coupon bond with a current market price of
$988.52. The bond has a par value of $1,000 and a yield to maturity of 5.29 %. How many years
is it until this bond matures? a. 4.0 years b. 4.5 years c. 6.5 years d. 8.0 years e. 9.0 years
Difficulty level: Medium
PRICE OF ZERO COUPON BOND
a 92. Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8.8 %. What is the
current market price of a $1,000 face value bond? a. $430.24 b. $473.26 c. $835.56 d.
$919.12 e. $1,088.00 Difficulty level: Easy
PRICE OF ZERO COUPON BOND
b 93. Teds Co. offers a zero coupon bond with an 11.3 % yield to maturity. The bond matures in
16 years. What is the current price of a $1,000 face value bond? a. $178.78 b. $180.33 c.
$188.36 d. $190.09 e. $192.18 Difficulty level: Easy
TIME TO MATURITY OF ZERO COUPON BOND
c 94. The zero coupon bonds of Markco, Inc. have a market price of $394.47, a face value of
$1,000,
and a yield to maturity of 6.87 %. How many years is it until this bond matures?
a. 7 years b. 10 years c. 14 years d. 18 years e. 21 years Difficulty level: Easy
INTEREST RATE RISK
b 95. A 12-year, 5 % coupon bond pays interest annually. The bond has a face value of $1,000.
What is the change in the price of this bond if the market yield rises to 6 % from the current yield
of 4.5 %? a. 11.11 % decrease b. 12.38 % decrease c. 12.38 % increase d. 14.13 % decrease
e. 14.13 % increase Difficulty level: Medium
INTEREST RATE RISK
d 96. Jackson Central has a 6-year, 8 % annual coupon bond with a $1,000 par value. Earls
Enterprises has a 12-year, 8 % annual coupon bond with a $1,000 par value. Both bonds
currently have a yield to maturity of 6 %. Which of the following statements are correct if the market
yield increases to 7 %?
a. Both bonds would decrease in value by 4.61 %. b. The Earls bond will increase in value by
$88.25. c. The Jackson bond will increase in value by 4.61 %. d. The Earls bond will decrease in
value by 7.56 %. e. The Earls bond will decrease in value by $50.68. Difficulty level: Challenge
CURRENT YIELD
a 97. DAngelos bonds have a face value of $1,000 and a current market price of $1010. The
bonds

have a 7 % coupon rate. What is the current yield on these bonds?

a. 6.93 % b. 6.97 % c. 7.00 % d. 7.03 % e. 7.07 % Difficulty level: Easy
CURRENT YIELD
d 98. Mitzis, II. Bonds offer a 6 % coupon at a current market price of $989. The bonds have a face
value of $1,000 and a call price of $1,020. What is the current yield on these bonds?
a. 5.88 % b. 5.97 % c. 6.00 % d. 6.07 % e. 6.12 % Difficulty level: Easy
CALL PREMIUM
c 99. The bonds offered by Leos Pumps are callable in 3 years at a quoted price of 101. What is
the
amount of the call premium on a $1,000 par value bond?
a. $3.33 b. $5.00 c. $10.00 d. $13.33 e. $100.00 Difficulty level: Medium
CORPORATE BOND QUOTE
c 100. A corporate bond is quoted at a current price of 102.767. What is the market price of a
bond with a $1,000 face value? a. $1,000.28 b. $1,002.77 c. $1,027.67 d. $1,102.77 e.
$1,276.70 Difficulty level: Easy
ZERO COUPON BOND QUOTE
c
101. A $1,000 face value zero coupon bond is quoted at a price of 43.30. What is the amount you
would pay to purchase this bond? a. $43.30 b. $430.30 c. $433.00 d. $956.70 e. $1,043.30
Difficulty level: Easy
TREASURY BOND QUOTE
b 102. A Treasury bond is quoted at a price of 106:13. What is the market price of this bond if the
face
value is $1,000?
a. $106.13 b. $1,064.06 c. $1,106.13 d. $1,106.41 e. $1,142.64 Difficulty level: Medium
TREASURY BOND QUOTE AND COUPON RATE
c 103. A Treasury bond is quoted at a price of 101:00 with a current yield of 5.94 %. What is the
coupon rate?
a. 5.88 % b. 5.94 % c. 6.00 % d. 6.06 % e. 6.88 % Difficulty level: Medium
CORPORATE QUOTE AND CURRENT YIELD
e 104. A corporate bond is quoted at a price of 98.625 with a 7.875 coupon. The bond pays
interest
semiannually. What is the current yield on one of these bonds?
a. 7.50 % b. 7.76 % c. 7.88 % d. 7.97 % e. 7.98 % Difficulty level: Medium

TREASURY QUOTE AND CURRENT YIELD

a 105. A Treasury bond is quoted at a price of 103:23 with a 4.625 coupon. The bond pays interest
semiannually. What is the current yield on one of these bonds?
a. 4.46 % b. 4.54 % c. 4.63 % d. 4.68 % e. 4.74 %
Difficulty level: Medium
BID-ASK SPREAD
c 106. A Treasury bond is quoted as 101:18 asked and 101:16 bid. What is the bid-ask spread in
dollars on a $1,000 face value bond?
a. $.02 b. $.20 c. $.625 d. $2.00 e. $6.25 Difficulty level: Medium
EFFECTIVE ANNUAL RATES AND INTEREST PAYMENTS
a 107. The semiannual, ten-year bonds of Adep, Inc. are selling at par and have an effective
annual
yield of 4.295 %. What is the amount of each interest payment on a $1,000 Adep bond?
a. $21.25 b. $21.48 c. $21.50 d. $42.50 e. $42.95 Difficulty level: Medium
FISHER EFFECT
c 108. A bond that pays interest annually yields a 7.25 % rate of return. The inflation rate for the
same
period is 3.5 %. What is the real rate of return on this bond?
a. 3.50 % b. 3.57 % c. 3.62 % d. 3.72 % e. 3.75 % Difficulty level: Easy
FISHER EFFECT
b 109. The bonds of Franks Welding, Inc. pay an 8 % coupon, have a 7.98 % yield to maturity and
have a face value of $1,000. The current rate of inflation is 2.5 %. What is the real rate of return
on these bonds?
a. 5.32 % b. 5.35 % c. 5.37 % d. 5.42 % e. 5.48 % Difficulty level: Medium
FISHER EFFECT
d 110. The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 3.6 %. The
current
rate of inflation is 2.5 %. What is the nominal rate of return on these bonds? a. 6.10 % b. 6.13 %
c. 6.16 % d. 6.19 % e. 6.22 % Difficulty level: Easy
FISHER EFFECT
a 111. The nominal rate of return on the bonds of Stus Boats is 8.75 %. The real rate of return is
3.4 %. What is the rate of inflation?
a. 5.17 % b. 5.28 % c. 5.35 % d. 5.43 % e. 5.49 % Difficulty level: Easy
ZERO COUPON BOND AND IMPLICIT INTEREST

c 112. A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34.
The
bond matures in 25 years. What is the implicit interest, in dollars, for the first year of the bonds
life?
a. $9.08 b. $12.56 c. $14.48 d. $21.47 e. $31.25 Difficulty level: Medium
ZERO COUPON BOND PRICING
c 113. The MerryWeather Firm wants to raise $10 million to expand their business. To accomplish
this, they plan to sell 30-year, $1,000 face value zero-coupon bonds. The bonds will be priced to
yield 6 %. What is the minimum number of bonds they must sell to raise the $10 million they
need?
a. 47,411 b. 52,667 c. 57,435 d. 60,000 e. 117,435 Difficulty level: Medium
MUNICIPAL BONDS
d 114. If a taxable bond yields 10% and a municipal bond of comparable risk and maturity yields
7%,
at what tax rate is the investor indifferent to either bond? a. 20%. b. 25%. c. 28%. d. 30%.
e. 35%. Difficulty level: Medium
BOND VALUATION
c 115. Which of the following amounts is closest to the value of a bond described in The Wall
Street
Journal as 9s 2012? It is January 1, 2004 and the appropriate interest rate is 11%. Assume that
the bond matures in the same month as when the quote is given, that interest payments are made
twice a year, and that an interest payment has just been made.
a. $ 718.28 b. $ 874.17 c. $ 895.38 d. $ 922.20 e. $1,000.00 Difficulty level:
Medium
BOND VALUATION
d 116. Which of the following amounts is closest to the value of a bond that pays $55
semiannually
and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond
matures in 3 years. There are exactly six months before the first interest payment.
a. $ 888 b. $1,000 c. $1,014 d. $1,025 e. $1,055

Difficulty level: Medium

ZERO COUPON BOND

a 117. Zeta Corporation has issued a $1,000 face value zero-coupon bond. Which of the following
values is closest to the correct price for the bond if the appropriate discount rate is 4% and the
bond matures in 8 years?
a. $ 730.69 b. $ 968.00 c. $1,000.00 d. $1,032.00
e. This problem cannot be worked without the annual interest payments provided.
Medium

Difficulty level:

YIELD TO MATURITY
d 118. A corporate bond with a face value of $1,000 matures in 4 years and has a 8% coupon paid
at
the end of each year. The current price of the bond is $932. What is the yield to maturity for this
bond?
a. 5.05% b. 6.48% c. 8.58% d. 10.15% e. 11.92%