Midterm - Bonds

BONDS
1. Mary just purchased a bond which pays $80 a year in interest. What is this $80 called?
A. coupon
B. face value
C. discount
D. yield
2. Consider a zero coupon bond with 20 years to maturity and face value of $1,000. The
price will this bond trade if the YTM is 6% is closest to:
A. $215
B. $312
C. $335
D. $306
3. A bond's payment at the maturity is referred to as its face value.

A. True
B. False
4. The current yield measures the bond's total rate of return.
A. True
B. False
5. Zero-coupon bonds are issued at prices below face value, and the investor's return
comes from the difference between the purchase price and the payment of face value at
maturity.
A. True
B. False
6. Bond ratings measure the bond's default risk.
A. True
B. False
7. A bond's yield to maturity takes into consideration:
A. current yield but not price changes of a bond.
B. price changes but not current yield of a bond.
C. both current yield and price changes of a bond.
D. neither current yield nor price changes of a bond.
8. What happens to the coupon rate of a bond that pays $80 annually in interest if interest
rates change from 9% to 10%?
A. The coupon rate increases to 10%.
B. The coupon rate remains at 9%.
C. The coupon rate remains at 8%.
D. The coupon rate decreases to 8%.
9. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and
5 years to maturity if the interest rate is 12%?
A. $927.90
B. $981.40
C. $1,000.00
D. $1,075.82
10. Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity.
If the bond is currently trading for $459, then the yield to maturity on this bond is closest
to:
A. 7.5%
B. 10.4%
C. 9.7%
D. 8.1%
11. What is the coupon rate for a bond with 3 years until maturity, a price of $1,053.46,
and a yield to maturity of 6%?
A. 6%
B. 8%
C. 10%
D. 11%
12. What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with a
7% coupon and sells the bond 1 year later for $1,037.19?
A. 5.00%
B. 5.33%
C. 6.46%
D. 7.00%
13. If a 4-year bond with a 7% coupon and a 10% yield to maturity is currently worth
$904.90, how much will it be worth 1 year from now if interest rates are constant?
A. $904.90
B. $925.39
C. $947.93
D. $1,000.00
14. Which of the following is correct for a bond priced at $1,100 that has 10 years
remaining until maturity, and a 10% coupon, with semiannual payments?
A. Each payment of interest equals $50.
B. Each payment of interest equals $55.
C. Each payment of interest equals $100.
D. Each payment of interest equals $110.
15. If a bond is priced at par value, then:

A. it has a very low level of default risk.
B. its coupon rate equals its yield to maturity.
C. it must be a zero-coupon bond.
D. the bond is quite close to maturity.
Use the information for the question(s) below.
Walmart Inc. has a bond outstanding with a face value of $1,000 that reaches maturity in
15 years. The bond certificate indicates that the stated coupon rate for this bond is 8%
and that the coupon payments are to be made semiannually.
16. How much will each semiannual coupon payment be?

A. $60
B. $40
C. $120
D. $80
17. Assuming the appropriate YTM on the Walmart bond is 7.5%, then the price that this
bond trades for will be closest to:
A. $1,045
B. $691
C. $1,000
D. $957
18. Assuming the appropriate YTM on the Walmart bond is 9%, then this bond will trade
at:
A. a premium.
B. a discount.
C. par.
D. None of the above
19. Two years ago bonds were issued with 10 years until maturity, selling at par, and a
7% coupon. If interest rates for that grade of bond increase by 1.25%, what will be the
market price of these bonds?
A. $917.06
B. $928.84
C. $987.50
D. $1,000.00
20. What happens to the price of a 3-year bond (with par value $1,000) with an 8%
coupon when interest rates change from 8% to 6%?
A. A price increase of $51.54
B. A price decrease of $51.54
C. A price increase of $53.47
D. A price decrease of $53.47
21. McDonald’s Corp has a 7%, semiannual coupon bond outstanding with a current
market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of
6.72%. How many years is it until this bond matures?
A. 12.26 years
B. 12.53 years
C. 18.49 years
D. 24.37 years
22. Which of the following factors will change when interest rates change?
A. The expected cash flows from a bond
B. The present value of a bond's payments
C. The coupon payment of a bond
D. The maturity value of a bond
23. An investor holds two bonds, one with 5 years until maturity and the other with 20
years until maturity. Which of the following is more likely if interest rates suddenly
increase by 2%?
A. The 5-year bond will decrease more in price.
B. The 20-year bond will decrease more in price.
C. Both bonds will decrease in price similarly.
D. Neither bond will decrease in price, but yields will increase.
24. If a bond offers an investor 11% in nominal return during a year in which the rate of
inflation was 4%, then the investor's real return was:
A. 6.73%
B. 7.00%
C. 8.75%
D. 10.56%
25. If you purchase a 5-year, $1,000 par value zero-coupon bond for $500, how much
could it be sold for 3 years later if interest rates have remained stable?
A. $650.00
B. $723.05
C. $757.86
D. $800.00

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BONDS

3. A bond's payment at the maturity is referred to as its face value.

4. The current yield measures the bond's total rate of return.

6. Bond ratings measure the bond's default risk.

15. If a bond is priced at par value, then:

Use the information for the question(s) below.

16. How much will each semiannual coupon payment be?

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