Question 1

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?
A) $872.50, $1,000, $1,000, respectively
B) $1,000, $1,000, $1,000, respectively
C) $872.50, $1,024.20, $5,072.50, respectively
D) $1,000, $1,024.20, $1,001.45, respectively

Accepted Answer

Treasury note at 87.25: 87.25% × $1,000 = $872.50
Corporate bond at 102.42: 102.42% × $1,000 = $1,024.20
Municipal bond at 101.45: 101.45% × $5,000 = $5,072.50

Question 2

Which of the following is an important advantage to the issuer of a bond with a call provision?
A) They are able to avoid interest rate risk.
B) They are able to avoid reinvestment rate risk.
C) They are able to reduce their credit risk.
D) They allow for refinancing opportunities.

Accepted Answer

Bonds with a call provision allow the issuer the option to call (retire) the bond before maturity. This provides the issuer with the opportunity to refinance the bond at a lower interest rate if rates have declined, thereby reducing its borrowing costs.

Question 3

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.)
A) $553.68
B) $558.66
C) $940.00
D) $1,000.00

Accepted Answer

Use semi-annual compounding:
PV = 11ea8218_29c5_1869_bbd8_53c07f4455cc_TB1326_11 = 11ea8218_29c5_3f7a_bbd8_19c21e06c28b_TB1326_11 = 11ea8218_29c5_668b_bbd8_cf5e9578a267_TB1326_11 = $553.6792

Question 4

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.)
A) $692.04
B) $696.57
C) $962.50
D) $1,000.00

Accepted Answer

Use semi-annual compounding:
PV = 11ea8218_29c5_b4ac_bbd8_85106d631bcc_TB1326_11 = 11ea8218_29c5_dbbd_bbd8_d7d604aa2809_TB1326_11 = 11ea8218_29c6_02ce_bbd8_51553abdf784_TB1326_11 = $692.04

Question 5

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.)
A) 9 years
B) 10 years
C) 19 years
D) 20 years

Accepted Answer

May 1, 2019 minus May 2, 2009 = 10 years and 0 months

Question 6

What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?
A) 5.9 percent
B) 6.0 percent
C) 6.1 percent
D) 10.2 percent

Accepted Answer

6% ÷ 101.7% = 0.058997 = 5.9%

Question 7

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.)
A) $55
B) $220
C) $1,000
D) $1,055

Accepted Answer

principal + call premium = $1,000 + 5.5% × $1,000 = $1,055

Question 8

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.)
A) $5.50, $6.45, $0, respectively
B) $27.50, $32.25, $0, respectively
C) $27.50, $32.25, $100, respectively
D) $55.00, $64.50, $0, respectively

Accepted Answer

5.5 percent coupon corporate bond (paid semi-annually): 0.5 × 5.5% × $1,000 = $27.50
6.45 percent coupon Treasury note: 0.5 × 6.45% × $1,000 = $32.25
corporate zero coupon bond maturing in 10 years: 0% × $1,000 = $0

Question 9

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.)
A) $1,000, $18.75, respectively
B) $1,000, $37.50, respectively
C) $1,181.46, $22.15, respectively
D) $1,181.46, $37.50, respectively

Accepted Answer

par value = 207.7/175.8 × $1,000 = $1,181.4562
interest payment = 0.5 × 3.75% × $1,181.46 = $22.15

Question 10

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.)
A) $1,000, $7.16, respectively
B) $1,000, $15.09, respectively
C) $1,207.16, $7.16, respectively
D) $1,207.16, $15.09, respectively

Accepted Answer

par value = 205.7/170.4 × $1,000 = $1,207.16
interest payment = 0.5 × 2.5% × $1,207.16 = $15.09

Question 11

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?
A) $45
B) $225
C) $1,000
D) $1,045

Accepted Answer

principal + call premium = $1,000 + 4.5% × $1,000 = $1,045

Question 12

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.)
A) 2 years
B) 50 years
C) 998 years
D) 100 years

Accepted Answer

October 1, 3007 minus October 2, 2009 = 998 years

Question 13

Which of the following terms is the chance that the bond issuer will not be able to make timely payments?
A) Credit quality risk
B) Interest rate risk
C) Liquidity of interest rate risk
D) Term structure of interest rates

Accepted Answer

Credit quality risk refers to the possibility that the bond issuer may default on their payments or be unable to make timely payments. This risk is a significant factor to consider when investing in bonds. Interest rate risk refers to the potential for changes in interest rates to affect the bond's value, while liquidity risk is the risk of not being able to sell the bond quickly or easily. The term structure of interest rates relates to the relationship between interest rates and the maturity of a bond.

Question 14

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.)
A) $2.50, $3.15, $0, respectively
B) $12.50, $15.75, $0, respectively
C) $12.50, $15.75, $100, respectively
D) $25.00, $31.50, $0, respectively

Accepted Answer

2.5 percent coupon corporate bond (paid semi-annually): 0.5 × 2.5% × $1,000 = $12.50
3.15 percent coupon Treasury note: 0.5 × 3.15% × $1,000 = $15.75 corporate zero coupon bond maturing in 10 years: 0% × $1,000 = $0

Question 15

Which of the following bonds carry significant risk that the issuer will not make current or future payments?
A) Credit quality risk bonds
B) Interest rate risk bonds
C) Liquidity rate risk bonds
D) Junk bonds

Accepted Answer

Junk bonds carry significant risk that the issuer will not make current or future payments. Junk bonds are high-yield, high-risk debt securities issued by companies or entities that are perceived to be at a greater risk of default. They are often rated below investment grade and carry a higher default risk than investment-grade bonds. As such, investing in junk bonds carries a higher level of risk than investing in other types of bonds.

Question 16

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.)
A) 1 year, 6 months
B) 8 years
C) 8 years, 6 months
D) 10 years

Accepted Answer

June 15, 2017 minus December 16, 2008 = 8 years and 6 months

Question 17

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?
A) $1,002.30, $1,000, $1,000, respectively
B) $1,000, $1,000, $5,000, respectively
C) $1,002.30, $994.50, $5,012.25 respectively
D) $1,023.00, $994.50, $5,122.50, respectively

Accepted Answer

Treasury note at 102.30: 102.30% × $1,000 = $1023.00
Corporate bond at 99.45: 99.45% × $1,000 = $994.50
Municipal bond at 102.45: 102.45% × $5,000 = $5,122.50

Question 18

Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?
A) They are able to avoid interest rate risk.
B) They are able to avoid reinvestment rate risk.
C) They are able to offer reduced credit risk as they are backed by the federal government.
D) They are tax exempt - at least at the federal level.

Accepted Answer

Municipal bonds are tax-exempt at the federal level, which means they offer lower rates of interest income for investors. This is because investors do not have to pay federal taxes on the interest they earn from these bonds, making them a more attractive investment option.

Question 19

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.)
A) $4.00, $4.75, $0, respectively
B) $20.00, $23.75, $0, respectively
C) $20.00, $23.75, $150, respectively
D) $40.00, $47.50, $0, respectively

Accepted Answer

4 percent coupon corporate bond (paid semi-annually): 0.5 × 4% × $1,000 = $20.00
4.75 percent coupon Treasury note: 0.5 × 4.75% × $1,000 = $23.75 corporate zero coupon bond maturing in 10 years: 0% × $1,000 = $0

Question 20

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?
A) $60
B) $600
C) $1,000
D) $1,060

Accepted Answer

principal + call premium = $1,000 + 6% × $1,000 = $1,060

Quiz 7: Valuing Bonds

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

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.)

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.)

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.)

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

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.)

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.)

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.)

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.)

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?

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.)

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

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

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.)

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

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.)

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?