Question: Which one of the following relationships applies to a premium bond?
Answer Options:
Yield to maturity > Current yield > Coupon rate
Coupon rate = Current yield = Yield to maturity
Coupon rate < Yield to maturity < Current yield
Coupon rate > Current yield > Yield to maturity
Current yield > Coupon rate > Yield to maturity
Answer: D — Coupon rate > Current yield > Yield to maturity
Question: A newly issued bond sells at par value. Which one of the following must be true?
Answer Options:
The current yield exceeds the coupon rate
The yield to maturity equals the coupon rate
The current yield is less than the yield to maturity
The bond must be a zero coupon bond
The coupon rate exceeds the yield to maturity
Answer: B — The yield to maturity equals the coupon rate
Question: Bond price sensitivity to changes in market interest rates increases as:
Answer Options:
coupon rate increases and time to maturity decreases
coupon rate decreases and time to maturity increases
coupon rate increases and time to maturity increases
coupon rate decreases and time to maturity decreases
current yield increases
Answer: B — coupon rate decreases and time to maturity increases
Question: A bond has a face value of $1,000, an annual coupon rate of 7.4 percent, and a market price of $968.50. What is the current yield?
Answer Options:
6.88%
7.12%
7.64%
7.81%
8.05%
Answer: C — 7.64%
Question: If you expect market interest rates to decline and want to maximize your price gain, which bond should you buy?
Answer Options:
Short-term, high-coupon bond
Long-term, high-coupon bond
Short-term, zero coupon bond
Long-term, zero coupon bond
Short-term, low-coupon bond
Answer: D — Long-term, zero coupon bond
Question: A 9-year zero coupon bond with a face value of $1,000 is priced to yield 6.8 percent, compounded semiannually. What is the current price?
Answer Options:
$454.44
$547.81
$611.25
$389.60
$622.18
Answer: B — $547.81
Question: A zero coupon bond with a face value of $1,000 currently sells for $389.60. If the yield to maturity is 7.7 percent, compounded semiannually, how many years remain until maturity?
Answer Options:
10.48 years
14.25 years
12.48 years
9.60 years
17.20 years
Answer: C — 12.48 years
Question: Callable bonds are most likely to be called when:
Answer Options:
market interest rates rise
the bond rating declines
the yield curve becomes inverted
market interest rates fall
the issuing firm misses a coupon payment
Answer: D — market interest rates fall
Question: Which of the following is an example of a negative covenant in a bond indenture?
Answer Options:
The firm must maintain all collateral in good condition
The firm must furnish audited financial statements annually
The firm may not issue additional long-term debt without approval
The firm must maintain a minimum current ratio
The firm must maintain a cash balance of $250,000
Answer: C — The firm may not issue additional long-term debt without approval
Question: If bond interest payments are made directly to the owners of record, the bonds are most likely issued in:
Answer Options:
bearer form
registered form
callable form
debenture form
street form
Answer: B — registered form
Question: An unsecured corporate bond is best described as a:
Answer Options:
note
callable bond
premium bond
debenture
collateral trust bond
Answer: D — debenture
Question: The invoice price of a bond is also called the:
Answer Options:
clean price
quoted price
dirty price
call price
par price
Answer: C — dirty price
Question: If you sell a bond to a dealer, the price you receive is the:
Answer Options:
asked price
clean price
dirty price
bid price
call price
Answer: D — bid price
Question: Treasury Inflation-Protected Securities (TIPS) are designed to provide investors with a:
Answer Options:
fixed nominal return
fixed current yield
fixed real return
guaranteed capital gain
fixed market price
Answer: C — fixed real return
Question: A Treasury yield curve plots Treasury interest rates relative to:
Answer Options:
inflation rates
time to maturity
corporate bond prices
credit spreads
current yield
Answer: B — time to maturity