Chapter 10 Bond Prices and Yields

Chapter 01 - Bond Prices and Yields Chapter 01 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 D. average of the bid and ask price Bodie - Chapter 10 #1 Difficulty: Medium 2. Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer Bodie - Chapter 10 #2 Difficulty: Easy 3. A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured Bodie - Chapter 10 #3 Difficulty: Easy 1 Chapter 01 - Bond Prices and Yields 4. A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured Bodie - Chapter 10 #4 Difficulty: Easy 5. A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured Bodie - Chapter 10 #5 Difficulty: Easy 6. Bonds issued in the U.S. are __________ and most bonds issued overseas are ___________. A. bearer bonds; registered bonds B. registered bonds; bearer bonds C. straight bonds; convertible bonds D. puttable bonds; callable Bodie - Chapter 10 #6 Difficulty: Easy 7. Floating rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield Bodie - Chapter 10 #7 Difficulty: Easy 2 Chapter 01 - Bond Prices and Yields 8. Inflation-indexed Treasury securities are commonly called ____. A. PIKs B. CARs C. TIPS D. STRIPS Bodie - Chapter 10 #8 Difficulty: Easy 9. When discussing bonds, convexity relates to the _______. A. shape of the bond price curve with respect to interest rates B. shape of the yield curve with respect to maturity C. slope of the yield curve with respect to liquidity premiums D. size of the bid-ask spread Bodie - Chapter 10 #9 Difficulty: Medium 10. A Japanese firm issued and sold a pound denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct? A. Both bonds are examples of Eurobonds. B. The Japanese bond is a Eurobond and the U.S. bond is termed a foreign bond. C. The U.S. bond is a Eurobond and the Japanese bond is termed a foreign bond. D. Neither bond is a Eurobond. Bodie - Chapter 10 #10 Difficulty: Hard 11. The primary difference between Treasury notes and bonds is ________. A. maturity at issue B. default risk C. coupon rate D. tax status Bodie - Chapter 10 #11 Difficulty: Easy 3 Chapter 01 - Bond Prices and Yields 12. TIPS offer investors inflation protection by ______________ by the inflation rate each year. A. increasing only the coupon rate B. increasing only the par value C. increasing both the par value and the coupon payment D. increasing the promised yield to maturity Bodie - Chapter 10 #12 Difficulty: Easy 13. You would typically find all but which one of the following in a bond contract? A. A dividend restriction clause B. A sinking fund clause C. A requirement to subordinate any new debt issued D. A price-earnings ratio Bodie - Chapter 10 #13 Difficulty: Easy 14. To earn a high rating from the bond rating agencies, a company would want to have _________. I. a low times interest earned ratio II. a low debt to equity ratio III. a high quick ratio A. I only B. II and III only C. I and III only D. I, II and III Bodie - Chapter 10 #14 Difficulty: Easy 4 Chapter 01 - Bond Prices and Yields 15. According to the liquidity preference theory of the term structure of interest rates an increase in the yield on long term corporate bonds versus short term bonds could be due to _______. A. declining liquidity premiums B. expectation of an upcoming recession C. a decline in future inflation expectations D. increase in expected interest rate volatility Bodie - Chapter 10 #15 Difficulty: Hard 16. __________ are examples of synthetically created zero coupon bonds. A. COLTS B. OPOSSMS C. STRIPS D. ARMs Bodie - Chapter 10 #16 Difficulty: Easy 17. A __________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury Bodie - Chapter 10 #17 Difficulty: Easy 18. TIPS are an example of _______________. A. Eurobonds B. convertible bonds C. indexed bonds D. catastrophe bonds Bodie - Chapter 10 #18 Difficulty: Easy 5 Chapter 01 - Bond Prices and Yields 19. Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________. A. Eurobonds B. Yankee bonds C. Samurai bonds D. foreign bonds Bodie - Chapter 10 #19 Difficulty: Easy 20. You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3% and 4% over the next three years. The total annual coupon income you will receive in year three is _________. A. $30.00 B. $33.00 C. $32.78 D. $30.90 ($30)(1.02)(1.03)(1.04) = $32.78 Bodie - Chapter 10 #20 Difficulty: Medium 21. The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's. The "C" rating indicates the bonds are _________. A. high grade B. intermediate grade C. investment grade D. junk bonds Bodie - Chapter 10 #21 Difficulty: Easy 6 Chapter 01 - Bond Prices and Yields 22. Bonds rated _____ or better by Standard and Poor's are considered investment grade. A. AA B. BBB C. BB D. CCC Bodie - Chapter 10 #22 Difficulty: Easy 23. Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________. A. a higher yield on short term bonds than long term bonds B. a higher yield on long term bonds than short term bonds C. the same yield on both short term bonds and long term bonds D. the liquidity preference theory cannot be used to make any of the other statements. Bodie - Chapter 10 #23 Difficulty: Easy 24. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pay interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________. A. both bonds will increase in value but bond A will increase more than bond B B. both bonds will increase in value but bond B will increase more than bond A C. both bonds will decrease in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A Bodie - Chapter 10 #24 Difficulty: Medium 7 Chapter 01 - Bond Prices and Yields 25. Everything else equal _________ bonds will require a higher promised YTM than ________ bonds. A. catastrophe; standard B. non-callable; callable C. mortgage; debenture D. AAA rated; BAA rated Bodie - Chapter 10 #25 Difficulty: Medium 26. Bonds with coupon rates that fall when the general level of interest rates rise are called _____________. A. asset-backed bonds B. convertible bonds C. inverse floaters D. index bonds Bodie - Chapter 10 #26 Difficulty: Easy 27. _______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters. A. Asset backed bonds B. TIPS C. Catastrophe D. Pay in Kind Bodie - Chapter 10 #27 Difficulty: Easy 8 Chapter 01 - Bond Prices and Yields 28. The issuer of a/an ________ bond may choose to pay interest either in cash or in additional bonds. A. asset backed bonds B. TIPS C. catastrophe D. pay in kind Bodie - Chapter 10 #28 Difficulty: Easy 29. Everything else equal the __________ the maturity of a bond and the __________ the coupon the greater the sensitivity of the bond's price to interest rate changes. A. longer; higher B. longer; lower C. shorter; higher D. shorter; lower Bodie - Chapter 10 #29 Difficulty: Medium 30. Which one of the following statements is correct? A. Invoice price = Flat price - Accrued Interest B. Invoice price = Flat price + Accrued Interest C. Flat price = Invoice price + Accrued Interest D. Invoice price = Settlement price - Accrued Interest Bodie - Chapter 10 #30 Difficulty: Easy 31. A __________ bond is a bond where the issuer has an option to retire the bond before maturity at a specific price after a specific date. A. callable B. coupon C. puttable D. treasury Bodie - Chapter 10 #31 Difficulty: Easy 9 Chapter 01 - Bond Prices and Yields 32. Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund Bodie - Chapter 10 #32 Difficulty: Easy 33. Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features Bodie - Chapter 10 #33 Difficulty: Medium 34. In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating rate bonds Bodie - Chapter 10 #34 Difficulty: Medium 10 Chapter 01 - Bond Prices and Yields 35. Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner Bodie - Chapter 10 #35 Difficulty: Medium 36. A convertible bond has a par value of $1,000 but its current market price is $975. The current price of the issuing company's stock is $26 and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980 ($26)(34) = $884 Bodie - Chapter 10 #36 Difficulty: Medium 37. A convertible bond has a par value of $1,000 but its current market price is $950. The current price of the issuing company's stock is $19 and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50.00 B. $190.00 C. $200.00 D. $240.00 Conversion Premium = 950 - 40(19) = 190.00 Bodie - Chapter 10 #37 Difficulty: Medium 11 Chapter 01 - Bond Prices and Yields 38. A coupon bond which pays interest of 4% annually, has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A. 7.2% B. 8.8% C. 9.1% D. 9.6% $785 = $40 Bodie - Chapter 10 #38 Difficulty: Hard 39. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $84.52 discount from par value. The approximate yield to maturity on this bond is _________. A. 6% B. 7% C. 8% D. 9% Bodie - Chapter 10 #39 Difficulty: Medium 12 Chapter 01 - Bond Prices and Yields 40. A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6.00% B. 6.49% C. 6.73% D. 7.00% Bodie - Chapter 10 #40 Difficulty: Medium 41. A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6.00% B. 6.58% C. 7.20% D. 8.00% 1055.84 = 60 Bodie - Chapter 10 #41 Difficulty: Medium 13 Chapter 01 - Bond Prices and Yields 42. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar). A. $1,000 B. $1,063 C. $1,081 D. $1,100 = 1,063 Bodie - Chapter 10 #42 Difficulty: Medium 43. A coupon bond which pays interest annually, has a par value of $1,000, matures in 5 years and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be approximately _________. A. $856 B. $892 C. $926 D. $1,000 PV0 = $90 Bodie - Chapter 10 #43 Difficulty: Medium 14 Chapter 01 - Bond Prices and Yields 44. A coupon bond pays semi-annual interest is reported as having an ask price of 117% of its $1,000 par value in the Wall Street Journal. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200 Invoice Price = Bodie - Chapter 10 #44 Difficulty: Medium 45. A treasury bond due in one year has a yield of 6.3% while a treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corporation has a yield of 9.6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6.8%. The default risk premiums on the one-year and 5-year bonds issued by High Country Marketing Corp. are respectively __________ and _________. A. 0.4%, 0.3% B. 0.4%, 0.5% C. 0.5%, 0.5% D. 0.5%, 0.8% Default premium for 1-Year Bond = .068 - .063 = .005 Default premium for 5-Year Bond = .096 - .088 = .008 Bodie - Chapter 10 #45 Difficulty: Medium 15 Chapter 01 - Bond Prices and Yields 46. A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.00 B. $641.00 C. $789.00 D. $1,100.00 PV0 = Bodie - Chapter 10 #46 Difficulty: Medium 47. Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as Bodie - Chapter 10 #47 Difficulty: Easy 16 Chapter 01 - Bond Prices and Yields 48. You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5.0% B. 5.5% C. 7.6% D. 8.9% PV0 = 60 PV1 = 60 Bodie - Chapter 10 #48 Difficulty: Hard 49. Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis Bodie - Chapter 10 #49 Difficulty: Easy $1,000 par value zero coupon bonds, ignore liquidity premiums Bodie - Chapter 10 17 Chapter 01 - Bond Prices and Yields 50. The expected one-year interest rate one year from now should be about _________. A. 6.00% B. 7.50 % C. 9.00% D. 10.00% Bodie - Chapter 10 #50 Difficulty: Hard 51. One year from now Bond C should sell for ________ (to the nearest dollar). A. $857 B. $842 C. $835 D. $821 1.07993 = (1.06)(1 + 1F3)2; (1 + 1F3)2 = 1.188 P1 = = $841.69 Bodie - Chapter 10 #51 Difficulty: Hard 52. The expected two year interest rate three years from now should be _________. A. 9.55% B. 11.74% C. 14.89% D. 13.73% (1 + 0R5)5 = (1 + 0R3)3(1 + 3F5)2 1.10705 = (1.07993)(1 + 3F5)2; 3F5 = 14.89% Bodie - Chapter 10 #52 Difficulty: Hard 18 Chapter 01 - Bond Prices and Yields 53. The __________ of a bond is computed as the ratio of coupon payments to market price. A. nominal yield B. current yield C. yield to maturity D. yield to call Bodie - Chapter 10 #53 Difficulty: Easy 54. A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the approximate capital gain yield of this bond over the next year? A. 0.7% B. 1.8% C. 2.5% D. 3.4% Bodie - Chapter 10 #54 Difficulty: Hard 19 Chapter 01 - Bond Prices and Yields 55. Consider the following $1,000 par value zero-coupon bonds: The expected one-year interest rate two years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00% Bodie - Chapter 10 #55 Difficulty: Hard 56. Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A putable mortgage bond C. A callable mortgage bond D. A putable debenture Bodie - Chapter 10 #56 Difficulty: Medium 57. A 1% decline in yield will have the least effect on the price of the bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100 Bodie - Chapter 10 #57 Difficulty: Medium 20 Chapter 01 - Bond Prices and Yields 58. Consider the following $1,000 par value zero-coupon bonds: The expected one-year interest rate three years from now should be _________. A. 7.00% B. 8.00% C. 9.00% D. 10.00% Bodie - Chapter 10 #58 Difficulty: Hard 59. Consider the following $1,000 par value zero-coupon bonds: The expected one-year interest rate four years from now should be _________. A. 16.00% B. 18.00% C. 20.00% D. 22.00% Bodie - Chapter 10 #59 Difficulty: Hard 21 Chapter 01 - Bond Prices and Yields 60. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate equal to its yield to maturity D. its coupon rate is less than its conversion value Bodie - Chapter 10 #60 Difficulty: Medium 61. A corporate bond has a 10 year maturity and pays interest semiannually. The quoted coupon rate is 6% and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98% 1000 = r = YTC = 8.98% Bodie - Chapter 10 #61 Difficulty: Hard 62. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate Bodie - Chapter 10 #62 Difficulty: Medium 22 Chapter 01 - Bond Prices and Yields 63. Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long-term part of the market Bodie - Chapter 10 #63 Difficulty: Medium 64. The yield to maturity on a bond is ________. I. above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium II. the discount rate that will set the present value of the payments equal to the bond price III. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II and III Bodie - Chapter 10 #64 Difficulty: Medium 65. Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection Bodie - Chapter 10 #65 Difficulty: Medium 23 Chapter 01 - Bond Prices and Yields 66. Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97 B. $104 C. $364 D. $732 Bodie - Chapter 10 #66 Difficulty: Medium 67. A discount bond that pays interest semiannually will ______. I. have a lower price than an equivalent annual payment bond II. have a higher EAR than an equivalent annual payment bond III. sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II and III Bodie - Chapter 10 #67 Difficulty: Hard 68. A 6% coupon U.S. treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on $100,000 face amount of this note is _________. A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000.00 Bodie - Chapter 10 #68 Difficulty: Medium 24 Chapter 01 - Bond Prices and Yields 69. The yield to maturity of an 10-year zero coupon bond, with a par value of $1,000 and a market price of $625, is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4% Bodie - Chapter 10 #69 Difficulty: Medium Consider a newly issued TIPS bond with a three year maturity, par value of $1000, and a coupon rate of 5%. Assume annual coupon payments. Bodie - Chapter 10 70. What is the nominal rate of return on the TIPS bond in the first year? A. 5.00% B. 5.15% C. 8.15% D. 9.00% HPRNom = Bodie - Chapter 10 #70 Difficulty: Medium 25 Chapter 01 - Bond Prices and Yields 71. What is the real rate of return on the TIPS bond in the first year? A. 5.00% B. 8.15% C. 7.15% D. 4.00% HPRNom = HPRreal = Bodie - Chapter 10 #71 Difficulty: Medium On May 1, 2007, Joe Hill is considering one of the following newly-issued 10 year AAA corporate bonds. Bodie - Chapter 10 72. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be: A. The price of Wildwood bond would decline by more than the Asbury bond. B. The price of Wildwood bond would decline by less than the Asbury bond. C. The price of Wildwood bond would increase by more than the Asbury bond. D. The price of Wildwood bond would increase by less than the Asbury bond. Bodie - Chapter 10 #72 Difficulty: Medium 73. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell Bodie - Chapter 10 #73 Difficulty: Medium 26 Chapter 01 - Bond Prices and Yields 74. If the volatility of interest rates is expected to increase, the Joe Hill should __. A. prefer the Wildwood bond to the Asbury bond B. prefer the Asbury bond to the Wildwood bond C. be indifferent between the Wildwood bond and the Asbury bond D. there is not enough information given to tell Bodie - Chapter 10 #74 Difficulty: Medium 75. One, two and three year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate, one year from today? A. 2.0% B. 8.0% C. 9.0% D. 11.1% Implied forward rate = I (1.07) (1 + I) = (1.08)2 Bodie - Chapter 10 #75 Difficulty: Medium 76. If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42 Bodie - Chapter 10 #76 Difficulty: Medium 27 Chapter 01 - Bond Prices and Yields 77. If the price of a $10,000 par Treasury bond is $10,237.50 the quote would be listed in the newspaper as ________. A. 102:10 B. 102:11 C. 102:12 D. 102:13 Bodie - Chapter 10 #77 Difficulty: Medium 78. A bond pays a semi-annual coupon and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? A. $13.21 B. $12.57 C. $15.44 D. $16.32 = $12.57 Bodie - Chapter 10 #78 Difficulty: Medium 28 Chapter 01 - Bond Prices and Yields 79. A bond has a flat price of $985 and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,007.45 D. $1,012.13 Invoice = 985 + (69) = $1,002.01 Bodie - Chapter 10 #79 Difficulty: Medium 80. If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925.00 C. $9,934.37 D. $9,955.43 Bodie - Chapter 10 #80 Difficulty: Medium 81. A bond has a 5% coupon rate. The coupon is paid semi-annually and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25.00 D. $50.00 Accrued interest = (50/2) x (35/182) = 4.81 Bodie - Chapter 10 #81 Difficulty: Medium 29 Chapter 01 - Bond Prices and Yields 82. The price on a treasury bond is 104:21 with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11 with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04% Credit risk premium = 4.59 - 3.45 = 1.14% Bodie - Chapter 10 #82 Difficulty: Medium 83. You buy a bond with a $1,000 par today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.40% B. 9.57% C. 7.45% D. 8.78% (875)(1 + EAR)6 = 1000 + (75)(6); EAR = 8.78% Bodie - Chapter 10 #83 Difficulty: Hard 30 Chapter 01 - Bond Prices and Yields 84. You buy an 8 year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon. In one year promised yields have risen to 7%. Your one year holding period return was ___. A. 0.61% B. -5.39% C. 1.28% D. -3.25% P1 = (60) HPR = = 0.61% Bodie - Chapter 10 #84 Difficulty: Hard 85. You buy a 10 year $1,000 par zero coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.27 C. $9.38 D. $33.51 Taxes owed ($591.90 - $558.39)(0.28) = $9.38 Bodie - Chapter 10 #85 Difficulty: Hard 31 Chapter 01 - Bond Prices and Yields 86. You buy a 10 year $1,000 par 4% annual payment coupon bond priced to yield 6%. You do not sell the bond at year end. If you are in a 15% tax bracket at year end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $7.68 D. $5.20 Taxes owed ($863.97 - $852.80 + $40)(0.15) = $7.68 Bodie - Chapter 10 #86 Difficulty: Hard 87. An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.80% B. 4.85% C. 9.60% D. 9.70% Current yield = 48/989.4 = .0485 Bodie - Chapter 10 #87 Difficulty: Medium 32 Chapter 01 - Bond Prices and Yields 88. If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.30% B. 4.50% C. 5.20% D. 5.50% A bond sells at premium when coupon rate > YTM. Bodie - Chapter 10 #88 Difficulty: Medium 89. The price of a bond at the beginning of a period is $980.00 and $975.00 at the end of the period. What is the holding period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.50% C. 5.10% D. 5.6% HPR = (975 - 980 + 45)/980 = 4.08% Bodie - Chapter 10 #89 Difficulty: Medium 90. A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding period return in an investor decides to sell now? A. Increased B. Decreased C. Stayed the same D. Can not be determined Bodie - Chapter 10 #90 Difficulty: Easy 33 Chapter 01 - Bond Prices and Yields 91. The ___________ is the document defining the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement Bodie - Chapter 10 #91 Difficulty: Easy 92. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. Mortgage bonds B. Senior debentures C. Preferred stock D. Equipment obligation bonds Bodie - Chapter 10 #92 Difficulty: Easy 93. If you are holding a premium bond you must expect a _______ each year until maturity. If you are holding a discount bond you must expect a _______ each year until maturity. A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss Bodie - Chapter 10 #93 Difficulty: Easy 34