Chapter 6

Valuing Bonds
1. Periodic receipts of interest by the bondholder are known as:
A. the coupon rate.
B. a zero-coupon.
C. coupon payments.
D. the default premium.
2. Which of the following presents the correct relationship? As the coupon rate of a bond
increases, the bond's:
A. face value increases.
B. current price decreases.
C. interest payments increase.
D. maturity date is extended.

3. The current yield of a bond can be calculated by:

A. multiplying the price by the coupon rate.
B. dividing the price by the annual coupon payments.
C. dividing the price by the par value.
D. dividing the annual coupon payments by the price.

4. 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.

5. What happens to the coupon rate of a bond with a face value of $1,000 that pays $80 annual
coupons if the yield to maturity changes 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%.

6. Which of the following is fixed (i.e., cannot change) for the life of a given bond?
A. Current price
B. Current yield
C. Yield to maturity
D. Coupon rate

7. Which of the following would not be associated with a zero-coupon bond?

A. Yield to maturity
B. Discount bond
C. Current yield
D. Interest rate risk

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Chapter 6 – Valuing Bonds

8. Where does a "convertible bond" get its name?

A. The option of converting into shares of common stock
B. The option of increasing its coupon payments when interest rates increase
C. The option of converting from zero-coupon to coupon-paying bond
D. The option of increasing yield without decreasing price
9. Which of the following identifies the distinction between a U.S. Treasury bond and a U.S.
Treasury note?
A. Bonds make coupon payments; notes do not.
B. Bonds have default risk; notes do not.
C. Notes have default risk; bonds do not.
D. Bonds initially have more than 10 years until maturity; notes have fewer than 10 years
initially.

10. Assume that a bond has been owned by four different investors during its 20-year history.
Which of the following is not likely to have been the same for these different owners?
A. Coupon rate
B. Coupon payments
C. Par value
D. Yield to maturity

11. 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 are adjusted to the new discount rate.

12. How much does the $1,000 to be received upon a bond's maturity in 4 years contribute to
the bond's price if the appropriate discount rate is 6%?
A. $209.91
B. $260.00
C. $760.00
D. $792.09

13. 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

14. Which of the following statements is correct for a 10% coupon bond that has a current
yield of 7%?
A. The face value of the bond has decreased.
B. The bond's maturity value exceeds the bond's price.
C. The bond's yield to maturity is 7%.
D. The bond's maturity value is lower than the bond's price.

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Chapter 6 – Valuing Bonds

15. 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.

16. What is the current yield of a bond with a 6% coupon, 4 years until maturity, a face value
of $1,000 and a price of $750?
A. 6.0%
B. 8.0%
C. 12.0%
D. 14.7%

17. What is the coupon rate for a bond with 3 years until maturity, a par value of $1,000, a
price of $1,053.46, and a yield to maturity of 6%?
A. 6%
B. 8%
C. 10%
D. 11%

18. What is the yield to maturity for a bond (with a par value of $1,000) paying $100 annual
coupons that has 6 years until maturity and sells for $1,000?
A. 6.0%
B. 8.5%
C. 10.0%
D. 12.5%

19. What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with a face
value of $1,000 and a coupon rate of 7%, and sells the bond 1 year later for $1,037.19?
A. 5.00%
B. 5.33%
C. 6.46%
D. 7.00%

20. Which of the following is correct for a bond priced at $1,100 with a par value of $1,000
that has 10 years remaining until maturity and a 10% coupon, with semiannual payments?
A. Each payment of interest equals $50.
B. Each payment of interest equals $55.
C. Each payment of interest equals $100.
D. Each payment of interest equals $110.

21. If a 4-year bond with a 7% coupon rate, a 10% yield to maturity, and a face value of
$1,000 is currently worth $904.90, how much will it be worth 1 year from now if interest rates
are constant?
A. $904.90
B. $925.39
C. $968.24
D. $995.39

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Chapter 6 – Valuing Bonds

22. The yield curve depicts the current relationship between:

A. bond yields and default risk.
B. bond maturity and bond ratings.
C. bond maturity and bond yields.
D. promised yields and default premiums.

23. 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.

24. Which of the following is correct for a bond currently selling at a premium to par?
A. Its current yield is higher than its coupon rate.
B. Its current yield is lower than its coupon rate.
C. Its yield to maturity is higher than its coupon rate.
D. Its default risk is extremely low.

25. What is the yield to maturity of a bond with a face value of $1,000 if the coupon rate is
8% with semiannual payments, current price is $960, and there are 3 years until maturity?
A. 4.78%
B. 5.48%
C. 9.57%
D. 12.17%

26. Capital losses will automatically be the case for bond investors who buy:
A. discount bonds.
B. premium bonds.
C. zero-coupon bonds.
D. junk bonds.
27. By how much will a bond increase in price over the next year if it currently sells for $925,
has 5 years until maturity, an annual coupon rate of 7% and a par value of $1,000?
A. $8.26
B. $8.92
C. $12.55
D. $15.00

28. If a bond is priced at par value, then:

A. it has a very low level of default risk.
B. its coupon rate equals its yield to maturity.
C. it must be a zero-coupon bond.
D. the bond is quite close to maturity.

29. What is the amount of the annual coupon payments for a bond that has 6 years until
maturity, a par value of $1,000, a yield to maturity of 9.37%, and sells for $1,050?
A. $87.12
B. $93.70
C. $100.00
D. $105.00

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Chapter 6 – Valuing Bonds

30. Two years ago bonds were issued with 10 years until maturity, selling at a par value of
$1,000, and a 7% coupon rate. If the yield for those bonds is currently 8.25%, what is the
market price of these bonds today?
A. $917.06
B. $928.84
C. $987.50
D. $1,000.00

31. How much will an investor lose if she purchased a 30-year zero-coupon bond with a
$1,000 par value and 10% yield to maturity, if the yield increases to 12% 1 year later?
A. $19.93
B. $20.00
C. $23.93
D. $25.66

32. How much should you be prepared to pay for a 10-year bond with a par value of $1,000, a
6% coupon rate with semiannual payments, and a semiannually compounded yield of 7.5%?
A. $895.78
B. $897.04
C. $938.40
D. $1,312.66

33. What is the rate of return to an investor who buys a bond for $1,100 that has a 9% coupon
rate, $1,000 face value and 5 years remaining until maturity, if the investor sells the bond after
1 year for $1,085?
A. 6.82%
B. 6.91%
C. 7.64%
D. 9.00%

34. An investor buys a 10-year, 7% coupon bond (with a par value of $1,000) for $1,050,
holds it for 1 year, and then sells it for $1,040. What was the investor's rate of return?
A. 5.71%
B. 6.00%
C. 6.67%
D. 7.00%

35. What happens to the price of a 3-year bond (with a par value of $1,000) with an 8%
coupon rate when yields change from 8 to 6%?
A. A price increase of $51.54
B. A price decrease of $51.54
C. A price increase of $53.47
D. A price decrease of $53.47

36. Which of the following factors regarding a bond will change when the yield to maturity
changes?
A. The expected cash flows from a bond
B. The present value of a bond's payments
C. The coupon payment of a bond
D. The maturity value of a bond

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Chapter 6 – Valuing Bonds

37. The purpose of a floating-rate bond is to:

A. save interest expense for corporate issuers.
B. avoid making interest payments until maturity.
C. shift the yield curve.
D. offer coupon rates adjusted to current market conditions.

38. 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
39. If an investor purchases a 3% coupon, 2-year TIPS with a principal value of $1,000, and
the CPI increases 3% over each of the next 2 years, how much does the investor receive at
maturity?
A. $1,000.00
B. $1,030.00
C. $1,060.90
D. $1,092.73
40. An investor holds two bonds, one with 5 years until maturity and the other with 20 years
until maturity. Which of the following is more likely if yields suddenly increase by 2%?
A. The 5-year bond will decrease more in price.
B. The 20-year bond will decrease more in price.
C. Both bonds will decrease in price similarly.
D. Neither bond will decrease in price.

41. A bond with 10 years until maturity, a par value of $1,000, an 8% coupon rate, and an 8%
yield to maturity increased in price to $1,107.83 yesterday. What apparently happened to its
yield yesterday?
A. Rates increased by 2.0%.
B. Rates decreased by 2.0%.
C. Rates increased by .72%.
D. Rates decreased by 1.5%.

42. When the market yield exceeds a bond's coupon rate, the bond will:
A. sell for less than par value.
B. sell for more than par value.
C. decrease its coupon rate.
D. increase its coupon rate.

43. If a bond offers an investor 11% in nominal return during a year in which the rate of
inflation was 4%, then the investor's real return was:
A. 6.73%
B. 7.00%
C. 8.75%
D. 10.56%

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Chapter 6 – Valuing Bonds

44. How much would an investor need to receive in nominal return if he desires a real return
of 4% and the rate of inflation is 5%?
A. 4.20%
B. 8.64%
C. 9.00%
D. 9.20%

45. Which one of the following bonds has the greatest interest rate risk?
A. 5-year; 9 percent coupon
B. 5-year; 7 percent coupon
C. 7-year; 7 percent coupon
D. 9-year; 7 percent coupon

46. If you purchase a 5-year, zero-coupon bond (with a par value of 1,000) for $500, how
much could it be sold for 3 years later if interest rates have remained stable?
A. $650.00
B. $723.05
C. $757.86
D. $800.00

47. If you purchase a 3-year, 9% coupon bond (with a par value of $1,000) for $950, how
much could it be sold for 2 years later if yields have remained stable?
A. $964.95
B. $981.56
C. $983.33
D. $1,000.00

48. Treasury bonds do not contain a:

A. coupon payment.
B. maturity value.
C. default premium.
D. yield to maturity.

49. Investors who own bonds having lower credit ratings should expect:
A. lower yields to maturity.
B. higher default possibilities.
C. lower coupon payments.
D. higher present value of cash flows.

50. Which of the following is likely to be correct for a CCC-rated bond, compared to a BBB-
rated bond?
A. The CCC bond will sell for a higher price.
B. The CCC bond will sell for a lower price.
C. The CCC bond will offer a higher promised yield to maturity.
D. The CCC bond will offer a lower promised yield to maturity.