1. A bond will pay principal of $1,000 upon maturity in 10 years from now, plus it will pay $60 every six months, including the date of maturity and starting six months from now. What price would you expect to pay for the bond if comparable bonds yield 8 percent?
2. What is the yield to maturity on a municipal bond scheduled to pay $10,000 upon maturity 5 years from now? This is a zero-coupon bond selling for $8,220. Round the yield to maturity to
the nearest percent.
A. 8 percent
B. 5 percent
C. 4 percent
D. 3 percent
3. What is the yield to maturity on a corporate bond scheduled to pay annual interest of $100 and $1,000 upon maturity 3 years from now? The bond is selling for $1,025.31. Round the yield to maturity to the nearest percent.
A. 11 percent
B. 9 percent
C. 8 percent
D. 7 percent
4. What is the duration of a bond that will pay $50 per year in coupon payments and $1,000 after four years? Use a discount rate of 10 percent.
A. 8.4 years
B. 4.0 years
C. 3.7 years
D. 0.27 years
5. What is the present value of a share of preferred stock that you own indefinitely? The stock’s dividend is $5. The appropriate discount rate is 6 percent.
6. A perpetual bond annually pays interest of $35 and alternative investments yield 14 percent.
What is the present value of the bond?
7. Duration is a better way to compare cash flows than simply comparing present values because
A. duration incorporates cash flow volatility.
B. present value fails to incorporate the timing of cash flows.
C. when maturities differ among compared cash flows, present value inaccurately represents the yield to maturity.
D. duration effectively treats cash flows as a perpetuity, incorporating the reinvestment rate.
8. One of the benefits of the laddered approach to managing interest rate risk in a bond portfolio is that
A. reinvestment risk is eliminated because you standardize the timing of bond maturities.
B. the portfolio includes bonds issued by different organizations, thereby reducing default risk.
C. all bonds are liquidated if the investor elects to capitalize on an opportunity.
D. when bonds mature at different intervals, you diversify the timing of reinvestment.
9. If you want to maximize safety and earn federally tax-exempt interest, you should buy
A. municipal bonds backed by the revenue earned on the project funded by the bond.
B. municipal bonds backed by the taxing authority of the issuing government.
C. U.S. Treasury bonds backed by the taxing authority of the U.S. federal government.
D. U.S. Treasury bills backed by the taxing authority of the U.S. federal government.
10. To participate in the U.S. national mortgage market by investing in bonds, the best way would be to invest in
A. revenue bonds issued by a sprawling suburban city.
B. treasury bonds that ultimately depend on funding from households.
C. mortgage pass-through bonds issued by a federal government agency.
D. stocks issued by banks that make mortgage loans.
11. One strategy for diversifying government-issued bonds and earning tax-exempt interest is to invest in
A. U.S. Treasury bonds, notes, and bills with diverse maturities.
B. a state-specific municipal bond fund.
C. a combination of state and local bonds plus bonds issued by foreign governments.
D. money market mutual funds and U.S. Treasury bills.
12. What is the key distinction between Series EE bonds and Treasury bills?
A. Series EE bonds pay interest every six months.
B. Series EE bonds aren’t backed by the full faith and credit of the federal government.
C. Treasury bills are deeply discounted bonds with all interest paid upon maturity.
D. Treasury bills can be traded in the secondary market.
13. Why do bond issuers attach a call feature to their bonds?
A. Increases the marketability of the bond
B. Increases the likelihood of issuing bonds at face value or higher
C. Presents an opportunity to capitalize on rising interest rates
D. Frees the organization from high-interest debt if interest rates drop
14. If you were CEO and decided to finance retirement of a bond issue, you would be most likely to
A. issue collateral serial bonds, the proceeds of which would fund the bond retirement.
B. rewrite the debenture to include an option to exchange bonds for shares of stock.
C. set up a payment arrangement with a trustee to fund an account designated for bond retirement.
D. sell production assets and apply the proceeds to bond retirement.
15. If you owned bonds issued by a corporation that announced expectations for a protracted period of cash flow difficulties, what kind of risk would concern you most?
A. Default risk
B. Interest rate risk
C. Reinvestment rate risk
D. Price fluctuation
16. When an investor purchases a 12-month T-bill with the intention of selling it after a period of time, he’s
A. riding the yield curve and selling on a secondary market.
B. minimizing his return on a short-term investment.
C. ensuring that the sale is at maximum discount.
D. maximizing his return on a long-term investment.
17. Which of the following measures would increase the duration of a bond issue?
A. Exercising a call option
B. Offering bondholders early retirement of bonds
C. Prepaying interest
D. Exercising an extendible option
18. If a bond issuer failed to honor terms of the indenture prohibiting the corporation from merging with another corporation,
A. the bond issue would be considered a fallen angel.
B. the bond issue would be considered in default.
C. the corporation would be obliged to exercise an extendible option.
D. bondholders could exchange their bonds for stock of the issuing corporation.
19. Periods of a negatively sloped yield curve have also been times of
A. rising interest rates and inflation.
B. a bull market in stocks.
C. rapid economic growth that reduced the cost of long-term debt.
D. low commodity prices.
20. The impact of inflation as it relates to a bonding arrangement is most devastating to
C. corporations and governments.