Question 1

The term structure of interest rates may be downward sloping if:

Accepted Answer

The term structure of interest rates, which is depicted by the yield curve, may be downward sloping if the market expects lower inflation in the future, which is reflected in a decreasing inflation premium with maturity. This expectation would lead to lower yields for longer-term bonds compared to short-term bonds.

Question 2

The National Post lists a bond with the following information: The bond has a closing price of 96.96, a coupon of 6.500, maturity date of May 09/10 and Yld% of 6.51%. Which one of the following statements about this bond is correct?

Accepted Answer

The yield to maturity (Yld%) is given as 6.51%, which directly matches the information provided in the bond listing.

Question 3

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:

Accepted Answer

EWhen the market interest rate exceeds the coupon rate of a bond, the bond's price falls below its face value, leading to a capital loss if sold at market price (C). Additionally, the current yield, which is the annual coupon payment divided by the bond's current price, increases when the bond's price decreases, but since the bond's coupon rate is fixed at 7% and its price has dropped, the current yield remains at 7%, not less (E).

Question 4

Mike purchased an ABC Co. bond that gives him the right to sell the bond to ABC Co. at a stated price. Mike bought a ______ bond.

Accepted Answer

A put bond gives the bondholder the right to force the issuer to buy back the bond at a stated price before maturity. This is what is described in the scenario.

Question 5

A deferred call provision refers to:

Accepted Answer

A deferred call provision is a feature of a callable bond that prohibits the issuer from redeeming the bond before a specified date, ensuring that investors receive interest payments for a certain period.

Question 6

A(n) ____________ bond is often putable and has a "collar".

Accepted Answer

Floating rate bonds often have features like putability and collars to protect both the investor and the issuer against interest rate fluctuations.

Question 7

Which of the following provisions would NOT be listed in the bond indenture?

Accepted Answer

The interest rate on similar risk bonds would not be listed in the bond indenture because the bond indenture typically includes specific details about the bond issue itself, such as the amount of bonds issued, repayment arrangements, protective covenants, and the interest rate of the bond being issued, not the rates of other bonds.

Question 8

Which of the following items does NOT generally appear in The National Post corporate bond quote?

Accepted Answer

Current yield is not typically listed in The National Post's corporate bond quotes. The other options, such as price, yield to maturity, coupon rate, and maturity date, are standard information provided in bond quotes. Current yield is a calculation based on the bond's price and its coupon payments, which can be derived from the listed information but is not directly quoted.

Question 9

The call premium is:

Accepted Answer

The call premium is the extra amount paid to bondholders when the issuer redeems the bond before its maturity date, serving as compensation for the bond being called away and the investor potentially losing out on future interest payments.

Question 10

Provide an appropriate definition of call premium.

Accepted Answer

The answer of Provide an appropriate definition of call premium....

Question 11

Which one of the following is correct concerning bond prices?

Accepted Answer

A higher coupon rate bond (12%) will sell at a higher price than a lower coupon rate bond (10%) when all else is equal, as it offers higher periodic interest payments.

Question 12

All else equal, the market value of a corporate bond is always inversely related to its:

Accepted Answer

The market value of a corporate bond is inversely related to its yield-to-maturity; as yields increase, bond prices decrease, and vice versa.

Question 13

For this coupon bond:

Accepted Answer

The answer of  For this coupon bond:
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Question 14

The rate of return earned by an investor who purchases a bond today and holds it for the remainder of the term is called the:

Accepted Answer

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. It includes all interest payments and the repayment of the principal, taking into account the time value of money.

Question 15

Provide an appropriate definition of bearer form.

Accepted Answer

The answer of Provide an appropriate definition of bearer form....

Question 16

The ask price is defined as the price:

Accepted Answer

The ask price is the price at which a dealer (or seller) is willing to sell a security or asset. It is the lowest price a seller is willing to accept for the asset.

Question 17

Suppose you are trying to price a bond. Which of the following is false?

Accepted Answer

B is false because bonds with lower coupon payments are generally more sensitive to changes in interest rates than bonds with higher coupon payments. This is because the present value of the lower coupon payments is more affected by changes in the discount rate.

Question 18

Provide an appropriate definition of call protected.

Accepted Answer

The answer of Provide an appropriate definition of call protected....

Question 19

A call provision grants a bond issuer the right to:

Accepted Answer

A call provision allows the issuer to repay the bond before its maturity date, typically to refinance the debt at a lower interest rate if market conditions are favorable.

Question 20

If the required return on a bond does not change from one year to the next, then ____________ over the same period (Ignore changes in default risk).

Accepted Answer

If the required return on a bond does not change, the price of a bond selling at par will remain unchanged because the bond's coupon rate is equal to the market interest rate, and there are no changes in default risk or market conditions to affect its price.

Quiz 7: Interest Rates and Bond Valuation