Chapter 7 - BUS 361 Sample Test
1. All else equal, ___________ bonds have more reinvestment rate risk than ___________ bonds.
a. high-coupon; low-coupon
b. low-coupon; high-coupon
c. non-callable; corporate
d. callable; municipal
2. Bonds are traded primarily in the over-the-counter market.
3. Yes They May, Inc. has a bond issue outstanding with a $1,000 par value and a maturity of 20 years. The bonds have an annual coupon rate of 20.0% with semi-annual coupon payments. The current market price for the bonds is $876. The bonds may be called in 5 years for 120.0% of par. What is the quoted annual yield-to-maturity for the bonds?
4. Convertible bond are bonds that may be converted (exchanged) into shares of common stock, at a fixed price, at the option of the bondholder.
5. XZYY, Inc. currently has an issue of bonds outstanding that will mature in 23 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 13.0% with annual coupon payments. The bond is currently selling for $804. The bonds may be called in 3 years for 113.0% of the par value. What is your expected quoted annual rate of return if you buy the bonds and hold them until maturity?
6. The rate of return earned on a bond if it is held until maturity is its:
b. coupon payment.
d. sinking fund yield.
7. XZYY, Inc. currently has an issue of bonds outstanding that will mature in 25 years. The bonds have a face value of $1,000 and a stated annual coupon rate of 11.0% with annual coupon payments. The bond is currently selling for $1000. What is the yield-to-maturity for the bonds?
8. Within Year, Inc. has bonds outstanding with a $1,000 par value and a maturity of 39 years. The bonds have an annual coupon rate of 8.0% with semi-annual coupon payments. You would expect a quoted annual return of 9.0% if you purchased these bonds. What are the bonds worth to you?
9. A long-term contract under which a borrower agrees to make payments of interest and principal on specific dates is called a:
a. common stock.
b. preferred stock.
c. equity contract.
10. You are considering buying bonds in ACBB, Inc. The bonds have a par value of $1,000 and mature in 40 years. The annual coupon rate is 9.0% and the coupon payments are annual. If you believe that the appropriate discount rate for the bonds is 20.0%, what is the value of the bonds to you?
11. A bond that pays no annual interest but is sold at a discount below the par value is called:
a. an original maturity bond.
b. a floating rate bond.
c. a fixed maturity date bond.
d. a zero coupon bond.
12. If a bond is selling for a premium, this implies that the bondís yield to maturity:
a. exceeds its coupon rate.
b. is equal to its coupon rate
c. is less than its coupon rate
13. One year ago, Paul purchased a $1,000 face value corporate bond with a 12 percent annual coupon rate and a 10-year maturity. At the time of the purchase, the bonds had an expected yield-to-maturity of 10.5 percent. Today he sold the bond for $1125. What is the one-year return that Paul earned on this investment? (Hint: First solve for the bond's price. Then use the bond's coupon payment of $120 and the sale price of $1125 to solve for the one-year return.)
14. A companyís bond rating is not affected by its financial performance and provisions in the bond contract.
15. Bonds issued by corporations that are exposed to default risk are called:
a. Treasury bonds.
b. municipal bonds.
c. corporate bonds.
d. personal bonds.