Yields & Fixed Income exam examples

Answer Options:
Investment grade bonds are rated BB or higher by Standard & Poor’s
Bond ratings assess both interest rate risk and default risk
Split-rated bonds are called crossover bonds
The highest rating issued by Moody’s is AAA
A “fallen angel” is a term applied to all “junk” bonds

Answer: C — Split-rated bonds are called crossover bonds

Question: Last year, you purchased a TIPS at par. Since that time, both market interest rates and the inflation rate have increased by one percent. Your bond has most likely done which one of the following since last year?

Answer Options:
Decreased in value due to the change in inflation rates
Experienced an increase in its bond rating
Maintained a fixed real rate of return
Increased in value in response to the change in market rates
Increased in value due to a decrease in time to maturity

Answer: C — Maintained a fixed real rate of return

Question: Recently, you discovered a convertible, callable bond with a semiannual coupon of 7.2 percent. If you purchase this bond you will have the right to:

Answer Options:
force the issuer to repurchase the bond prior to maturity
convert the bond into equity shares
defer all taxable income until the bond matures
convert the bond into a perpetuity paying 7.2 percent
have the principal amount adjusted for inflation

Answer: B — convert the bond into equity shares

Question: An investor believes a firm is poised to vastly increase in value. The investor has decided to purchase the firm’s bonds because he needs a steady stream of income. However, he still wishes that he could share in the firm’s success along with the shareholders. Which one of the following bond features will help him fulfill his wish?

Answer Options:
Put provision
Positive covenant
Warrant
Crossover rating
Call provision

Answer: C — Warrant

Question: If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

Answer Options:
Call price
Par value
Bid price
Asked price
Bid-ask spread

Answer: C — Bid price

Question: Today, an investor paid a total of $1,082, including accrued interest, to purchase a 15-year bond that has 7 years left until maturity. This price is referred to as the:

Answer Options:
quoted price
spread price
clean price
dirty price
call price

Answer: D — dirty price

Question: A Treasury yield curve plots Treasury interest rates relative to:

Answer Options:
market rates
comparable corporate bond rates
the risk-free rate
inflation rates
time to maturity

Answer: E — time to maturity

Question: The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:

Answer Options:
interest rate risk and taxes
credit risk
default and interest rate risks
liquidity and inflation rate risks
default, inflation, and interest rate risks

Answer: B — credit risk

Question: A firm offers 4.5 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is $1,000?

Answer Options:
$822.34
$824.41
$896.04
$707.32
$496.78

Answer: A — $822.34

Question: A firm has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature?

Answer Options:
17.30 years
14.19 years
17.41 years
16.16 years
18.32 years

Answer: A — 17.30 years

Question: A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

Answer Options:
-1.79%
-1.38%
-1.64%
1.79%

Answer: A — -1.79%

Question: A firm’s $1,000 par value bonds have a coupon rate of 6 and are trading for $1,040.86. What is the current yield?

Answer Options:
2.76%
2.80%
5.76%
5.53%
2.88%

Answer: C — 5.76%

Question: A firm plans to issue 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in seven years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

Answer Options:
8.75%
9.23%
8.41%
8.62%
8.87%

Answer: D — 8.62%

Question: A firm issued 20-year bonds 3 years ago at a coupon rate of 8.5 percent. The bonds make semiannual payments. If these bonds currently sell for 91.4 percent of par value, what is the YTM?

Answer Options:
8.98%
9.53%
9.13%
9.27%
8.42%

Answer: B — 9.53%