Chapter 6 1
The _____ on government bonds provide a benchmark for all interest rates.
Collateral
Cost of capital
Inflation rates
Interest rates
The price of a bond can be quoted as a _____of face value.
Par value
Standard value
Future value
Percentage
A company issues a $1,000 bond with a coupon rate of 6% that matures in 5 years. The current
interest rate is 7%. How much will the bond issue sell for?
$1,006
$754
$959 Present Value of the interest payments = $1,000 x .06 = 60 x [1-(1/(1.07)5]/.07 =
$246.0118462
Present value of the face amount of the bond = $1,000/(1.07)5 = $712.9861795
Add the present value of the interest to the present value of the face of the bond =
$958.998
$1,000
When the interest rate is higher than a bond’s coupon rate, the bond will be priced at:
Face value
More than face value
Less than face value
A company issues a $5,000 bond that matures in 5 years with a coupon rate of 6% and a current
interest rate of 6%. The bond will sell for
$5,020
$4,998
$5,000 When the bond rate and the interest rate are the same, the bond will sell for face
value. No calculations are necessary.
Chapter 6 2
$4,980
A bond that is priced below its face value is said to sell for
A discount
Face value
A premium
The current yield on a bond is equal to
The current interest rate
The bond rate
Annual coupon payment divided by bond price
Current interest rate divided by bond price
A measure of return that takes account of both coupon payments and change in a bond’s value
over its life is a standard measure known as
Current yield
Bond rate
Current rate of interest
Yield to maturity
Marley Corporation’s bonds have four years left to maturity. Interest is paid annually, and the
bonds have a $1,000 par value and a coupon rate of 5%. If the price of the bond is $841.51, the
yield to maturity is _____. (Use trial and error to calculate yield).
5%
10% First, calculate the coupon payment: $1,000 x .05. Next, discount the payments at
each yield to determine the appropriate yield that gives a bond price of $841.51.
You will see that by doing trial and error on the 4 given yields in the multiple-
choice question (5%, 8%, 10%, and 12%, the correct yield is 10%:
$841.51 = $50/(1+.1) + $50/(1+.1)2+$50/(1+.1)3+$1,050/(1.1)4
8%
12%
A plot drawn to show the relationship between bond yields and maturity is known as the
Break-even point
Total cost curve
Chapter 6 3
Yield curve
Total revenue curve
Because the _____ rate is uncertain, so is the _____ rate of interest offered on bonds.
Nominal, inflation
Real, inflation
Inflation, real
Inflation, nominal
Changes in the supply of savings and the demand for new investment causes real interest rates to
Stay the same
Change
The risk that a bond issuer may not pay on its bonds in known as
Default risk
Risk deflection
Default premium risk
Risk aversion
Which of the following are steps bondholders can take to minimize default risk?
Buying junk bonds
Security
Protective covenants
Seniority
Debt that, in the event of default, has first claim on specified assets is known as
Collateral damage
Secured debt
Protective covenants
Senior debt
What is the term used in finance to represent simple, standard, and common?
Easy to understand
Evident
Chapter 6 4
Plain vanilla
Transparent
The price of a bond is equal to the
FV (coupon) plus FV (face value)
PV (coupon) minus PV (face value)
FV (coupon) minus FV (face value)
PV (coupon) plus PV (face value)
A $100,000 bond quoted at 120% will sell for
$20,000
$12,000
$80,000
$120,000 $100,000 x 1.20 = $120,000
When the coupon rate of a bond is equal to the current interest rate, the bond will sell for
More than face value
A discount
Face value
Less than face value
Mortor’s Corporation sold 6 year bonds for $1,072.62, with a face value of $1,000 and a coupon
rate of 8%. The annual yield to maturity is
6%
7%
7.5%
6.5% First, calculate the coupon payment: $1,000x.08=$80. Next, discount the payments
at each yield to determine the appropriate yield that gives a bond price of
$1,072.62. You will see that by doing trial and error on the 4 given yields in the
multiple-choice question (6%, 6.5%, 7%, and 7.5%, the correct yield is 6.5%:
$1,072.62=$80/(1+.065)+$80/(1+.065)2+$80/(1+.065)3+$80/(1.+.065)4+$80/
(1+.065)5+$1,080/(+.065)6
Even when the yield curve of a long-term bond is upward-sloping some investors prefer short-
term bonds. Which of the following reasons would explain why this statement is true?
Chapter 6 5
Long-term investors cannot profit if interest rates fall
Short-term investors can profit if interest rates rise
Prices of short-term bonds fluctuate more than prices of long-term bonds
Prices of long-term bonds fluctuate more than process of short-term bonds
The risk in bond prices due to fluctuations in interest rates is known as
Interest rate risk
Bond risk
Risk management
Systematic risk
The interest payments to the bondholder are called the
Face
Coupon
Par
Maturity
If interest rates fall, the rate of return on a bond will be _____ the yield to maturity.
Greater than
Equal to
Less than
The total income per period per dollar invested is known as the
Rate of return
Current yield
Bond’s rate
Yield to maturity
Bonds rated Ba or below by Moody’s or BB and below by Standards & Poors are known as
Junk bonds
Investment grade bonds
Best grade bonds
Low yield bonds
Chapter 6 6
1.
value:
1.00 points
A 25-year Treasury bond is issued with face value of $1,000, paying interest of $56 per year. If market
yields increase shortly after the T-bond is issued, what is the bond’s coupon rate? (Enter your answer
as a percent rounded to 1 decimal place.)
Coupon rate %
2.
value:
1.00 points
A General Power bond with a face value of $1,000 carries a coupon rate of 9.8%, has 9 years until
maturity, and sells at a yield to maturity of 8.8%. (Assume annual interest payments.)
a. What interest payments do bondholders receive each year?
Interest payments $
b. At what price does the bond sell? (Do not round intermediate calculations. Round your answer to
2 decimal places.)
Price $
c. What will happen to the bond price if the yield to maturity falls to 7.8%? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Price
will
b
y
$
3.
value:
1.00 points
One bond has a coupon rate of 5.4%, another a coupon rate of 8.2%. Both bonds pay interest annually,
have 13-year maturities, and sell at a yield to maturity of 7.5%.
a. If their yields to maturity next year are still 7.5%, what is the rate of return on each bond? (Do not
round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)
Rate of return
rise
Chapter 6 7
Bond 1 %
Bond 2 %
b. Does the higher-coupon bond give a higher rate of return?
Yes
No
4.
value:
1.00 points
General Matter’s outstanding bond issue has a coupon rate of 10.6%, and it sells at a yield to maturity of
8.70%. The firm wishes to issue additional bonds to the public at face value. What coupon rate must the
new bonds offer in order to sell at face value? (Round your answer to 2 decimal places.)
Coupon rate %
5.
value:
1.00 points
Consider three bonds with 5.9% coupon rates, all making annual coupon payments and all selling at a
face value of $1,000. The short-term bond has a maturity of 4 years, the intermediate-term bond has
maturity 8 years, and the long-term bond has maturity 30 years.
a. What will be the price of each bond if their yields increase to 6.9%? (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
4 Years 8 Years 30 Years
Bond price $ $ $
b. What will be the price of each bond if their yields decrease to 4.9%? (Do not round intermediate
calculations. Round your answers to 2 decimal places.)
4 Years 8 Years 30 Years
Bond price $ $ $
c. Are long-term bonds more or less affected than short-term bonds by a rise in interest rates?
More affected
Chapter 6 8
Less affected
d. Would you expect long-term bonds to be more or less affected by a fall in interest rates?
More affected
Less affected
6.
value:
1.00 points
The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment
at maturity. Calculate the interest rate offered by each of these strips.
Years to Maturity Price, %
1 97.952%
2 94.451
3 90.644
4 86.580
a. What is the 1-year interest rate? (Do not round intermediate calculations. Enter your answer as a
percent rounded to 2 decimal places.)
Interest rate %
b. What is the 4-year rate? (Do not round intermediate calculations. Enter your answer as a
percent rounded to 2 decimal places.)
Interest rate %
c. Is the yield curve upward-sloping, downward-sloping, or flat?
Upward-sloping
Downward-sloping
Flat
d. Is this the usual shape of the yield curve?
Yes
No
7.
Chapter 6 9
value:
1.00 points
a. Several years ago, Castles in the Sand Inc. issued bonds at face value of $1,000 at a yield to maturity
of 5.2%. Now, with 5 years left until the maturity of the bonds, the company has run into hard times
and the yield to maturity on the bonds has increased to 11%. What is the price of the bond now?
(Assume semiannual coupon payments.) (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
Bond price $
b. Suppose that investors believe that Castles can make good on the promised coupon payments but
that the company will go bankrupt when the bond matures and the principal comes due. The
expectation is that investors will receive only 80% of face value at maturity. If they buy the bond today,
what yield to maturity do they expect to receive? (Do not round intermediate calculations. Enter
your answer as a percent rounded to 2 decimal places.)
Yield to maturity %
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