Question 1

Interest Payments Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually),6.45 percent coupon Treasury note,and a corporate zero coupon bond maturing in 10 years.(Assume a $1,000 par value.)

Accepted Answer

- For the 5.5 percent coupon corporate bond, the semi-annual coupon payment would be: (5.5% * $1,000) / 2 = $27.50
- For the 6.45 percent coupon Treasury note, the semi-annual coupon payment would be: (6.45% * $1,000) / 2 = $32.25
- For the corporate zero coupon bond, there are no periodic coupon payments, so the interest payment would be $0.
Therefore, the correct choice is B, with the semi-annual interest payments of $27.50, $32.25, and $0 for the three bonds, respectively.

Question 2

Time to Maturity A bond issued by a corporation on June 15,2007,is scheduled to mature on June 15,2017.If today is December 16,2008,what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

To calculate the time to maturity, we need to calculate the number of years and months between the issue date and maturity date, and then subtract the time that has passed since the issue date.

Maturity date: June 15, 2017
Issue date: June 15, 2007

Number of years between issue date and maturity date = 2017 - 2007 = 10 years
Number of months between issue date and maturity date = 10 years x 12 months per year = 120 months

Today's date: December 16, 2008
Number of years since issue date = 2008 - 2007 = 1 year
Number of months since issue date = 1 year x 12 months per year + 12 months (for the partial year) = 24 months

Time to maturity = Number of months between issue date and maturity date - Number of months since issue date
Time to maturity = 120 months - 24 months = 96 months
Time to maturity in years and months = 96 months divided by 12 months per year = 8 years and 0 months, or 8 years, 6 months (rounded up).

Therefore, the best choice is C) 8 years, 6 months.

Question 3

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?

Accepted Answer

Municipal bonds are typically tax-exempt at the federal level, meaning investors don't have to pay federal income tax on the interest income earned from these bonds. This makes municipal bonds more attractive to investors and allows issuers to offer lower rates of interest income.

Question 4

Time to Maturity A bond issued by a corporation on May 1,1999,is scheduled to mature on May 1,2019.If today is May 2,2009,what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

The time to maturity is calculated by subtracting today's date (May 2, 2009) from the maturity date (May 1, 2019), which is 10 years. Therefore, the correct answer is option B) 10 years.

Question 5

Which of the following bonds carry significant risk that the issuer will not make current or future payments?

Accepted Answer

Junk bonds, also known as high-yield bonds, are issued by companies with a lower credit rating or higher default risk than investment-grade bonds. As a result, they typically offer higher yields to compensate investors for this risk. However, there is a greater chance that the issuer will not be able to make current or future payments, making junk bonds a high-risk investment.

Question 6

Time to Maturity A bond issued by a corporation on October 1,2007,is scheduled to mature on October 1,3007.If today is October 2,2009,what is this bond's time to maturity? (Assume annual interest payments.)

Accepted Answer

Today is October 2, 2009, which means the bond has already been outstanding for 2 years. The bond is not set to mature until October 1, 3007, which is 998 years away from the current date. Therefore, the time to maturity of the bond is 998 years.

Question 7

Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 87:25,and a corporate bond quoted at 102.42,and a municipal bond quoted at 101.45.If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000,what is the price of these three bonds in dollars?

Accepted Answer

To convert the bond quotes to dollar prices, we need to do the following:

Treasury note:
87:25 means 87 and 25/32, so the price is 87.8125% of par value.
Price = 0.878125 x $1,000 = $878.125 or $872.50 rounded to the nearest cent.

Corporate bond:
102.42% of par value.
Price = 1.0242 x $1,000 = $1,024.20.

Municipal bond:
101.45% of par value.
Price = 1.0145 x $5,000 = $5,072.50.

Therefore, the answer is C, $877.81 for the Treasury note, $1,024.20 for the corporate bond, and $5,072.50 for the municipal bond.

Question 8

Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 102:30,and a corporate bond quoted at 99.45,and a municipal bond quoted at 102.45.If the Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par value of $5,000,what is the price of these three bonds in dollars?

Accepted Answer

The answer of Bond Quotes Consider the following three bond...

Question 9

TIPS Interest and Par Value A 2.5 percent TIPS has an original reference CPI of 170.4.If the current CPI is 205.7,what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

To calculate the current interest payment, we need to first find the adjusted principal value, which is:
Adjusted principal value = (Current CPI/Original CPI) x Par Value
Adjusted principal value = (205.7/170.4) x $1,000 = $1,207.16
The current interest payment is then calculated as:
Current interest payment = (Adjusted principal value x Coupon rate)/2
Current interest payment = ($1,207.16 x 2.5%)/2 = $15.09 (rounded to two decimal places)
Therefore, the current interest payment is $15.09 and the par value of the TIPS is $1,207.16. However, the question asks for the par value of $1,000 as this is the standard par value for TIPS. Therefore, the correct answer is D, with the par value being $1,000 and the interest payment being $15.09/($1,207.16/$1,000) = $7.16 (rounded to two decimal places).

Question 10

Which of the following is an important advantage to the issuer of a bond with a call provision?

Accepted Answer

The call provision allows the issuer to refinance the bond at a lower interest rate should rates decline, providing a refinancing opportunity. This can lead to savings on interest payments and lower overall borrowing costs for the issuer.

Question 11

Interest Payments Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semi-annually),4.75 percent coupon Treasury note,and a corporate zero coupon bond maturing in 15 years.(Assume a $1,000 par value.)

Accepted Answer

The 4% coupon corporate bond pays $20.00 semi-annually (4% of $1,000 is $40 annually, divided by 2). The 4.75% Treasury note pays $23.75 annually (4.75% of $1,000). The zero coupon bond pays no interest until maturity.

Question 12

Call Premium A 5.5 percent corporate coupon bond is callable in four years for a call premium of one year of coupon payments.Assuming a par value of $1,000,what is the price paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)

Accepted Answer

The bondholder will receive the call premium of one year of coupon payments, which is 5.5% x $1,000 = $55. Therefore, the price paid to the bondholder if the issuer calls the bond is $1,000 + call premium of $55 = $1,055. Option D is the correct choice.

Question 13

Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in five years if the market interest rate is 7.50 percent.(Assume semi-annual compounding and $1,000 par value.)

Accepted Answer

We can use the formula for the present value of a zero coupon bond:

P = F/(1+r)^n

Where P is the price, F is the face value, r is the semi-annual interest rate, and n is the number of semi-annual periods.

In this case, F = $1,000, r = 0.075/2 = 0.0375, and n = 2*5 = 10.

Plugging in the values, we get:

P = 1000/(1+0.0375)^10 = $692.02

Therefore, the best choice is A, as it is the closest to the calculated price.

Question 14

TIPS Interest and Par Value A 3.75 percent TIPS has an original reference CPI of 175.8.If the current CPI is 207.7,what is the current interest payment and par value of the TIPS? (Assume semi-annual interest payments and $1,000 par value.)

Accepted Answer

The answer of TIPS Interest and Par Value A 3.75...

Question 15

Current Yield What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?

Accepted Answer

The current yield is calculated by dividing the annual interest by the current price of the bond. 
Annual interest = 6% of the face value = 0.06 x 1000 = $60 
Current price = 101.70% of the face value = 1.017 x 1000 = $1017 
Current yield = ($60/$1017) x 100% = 5.9% 
Therefore, the current yield is 5.9 percent, which is option A.

Question 16

Interest Payments Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semi-annually),3.15 percent coupon Treasury note,and a corporate zero coupon bond maturing in 10 years.(Assume a $1,000 par value.)

Accepted Answer

The corporate bond pays $12.50 semi-annually (2.5% of $1,000 divided by 2), the Treasury note pays $15.75 annually (3.15% of $1,000), and the zero coupon bond pays no interest until maturity.

Question 17

Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments.Assuming a par value of $1,000,what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

The call premium is one year of coupon payments which is 4.5% of $1,000, or $45. Therefore, the issuer would have to pay the bondholder the par value of $1,000 plus the call premium of $45 if they choose to call the bond. Thus, the price paid to the bondholder if the issuer calls the bond is $1,000 + $45 = $1,045. Therefore, the correct answer is D.

Question 18

Call Premium A 6 percent corporate coupon bond is callable in 10 years for a call premium of one year of coupon payments.Assuming a par value of $1,000,what is the price paid to the bondholder if the issuer calls the bond?

Accepted Answer

The call premium is one year of coupon payments, which is 6% of the par value or $60. Therefore, if the bond is called, the bondholder will receive the par value of $1,000 plus the call premium of $60, for a total payment of $1,060.

Question 19

Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 10 years if the market interest rate is 6 percent.(Assume semi-annual compounding and $1,000 par value.)

Accepted Answer

A zero coupon bond does not pay interest along the way, but is issued at a discount and redeemed at face value at maturity, so the price can be calculated using the following formula:
P = F / (1 + r/n)^(n*t)
Where P is the price of the bond, F is the face value of the bond, r is the market interest rate, n is the number of compounding periods per year, and t is the number of years to maturity.
Plugging in the given values, we get:
P = 1000 / (1 + 0.06/2)^(2*10) = 553.68
Therefore, the best choice is A) $553.68.

Question 20

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

Accepted Answer

Credit quality risk refers to the risk that the bond issuer may default on its payments. The other options refer to different types of risks associated with interest rates, but do not specifically relate to the issuer's ability to make timely payments.

Quiz 7: Valuing Bonds

Interest Payments Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semi-annually) ,6.45 percent coupon Treasury note,and a corporate zero coupon bond maturing in 10 years.(Assume a $1,000 par value.)