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A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?


A) 5.03 percent
B) 4.68 percent
C) 4.92 percent
D) 4.84 percent
E) 5.68 percent

F) A) and E)
G) None of the above

Correct Answer

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A $10,000 face value Treasury bond is quoted at a price of 101.6533 with a current yield of 4.87 percent. What is the coupon rate?


A) 5.20 percent
B) 4.48 percent
C) 5.41 percent
D) 4.95 percent
E) 4.27 percent

F) A) and B)
G) D) and E)

Correct Answer

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Nadine is a retired widow who is financially dependent upon the interest income produced by her bond portfolio. Which one of the following bonds is the least suitable for her to own?


A) 6-year, high-coupon, put bond
B) 5-year TIPS
C) 10-year AAA coupon bond
D) 5-year floating rate bond
E) 7-year income bond

F) B) and E)
G) A) and B)

Correct Answer

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Which one of the following statements is correct?


A) The risk-free rate represents the change in purchasing power.
B) Any return greater than the inflation rate represents the risk premium.
C) Historical real rates of return must be positive.
D) Nominal rates exceed real rates by the amount of the risk-free rate.
E) The real rate must be less than the nominal rate given a positive rate of inflation.

F) C) and D)
G) B) and C)

Correct Answer

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A bond has a yield to maturity of 8.97 percent. If the inflation rate is 1.2 percent, what is the real rate of return on the bond?


A) 8.97 percent
B) 7.90 percent
C) 7.57 percent
D) 7.68 percent
E) 7.95 percent

F) A) and C)
G) A) and B)

Correct Answer

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New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?


A) 6.36 percent
B) 6.42 percent
C) 5.61 percent
D) 5.74 percent
E) 5.18 percent

F) C) and D)
G) B) and C)

Correct Answer

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You will receive $5,000 a year in real terms for the next 5 years. Each payment will be received at the end of the period with the first payment occurring one year from today. The relevant nominal discount rate is 9.625 percent and the inflation rate is 2.3 percent. What are your winnings worth today in real dollars?


A) $20,413
B) $19,367
C) $20,781
D) $21,500
E) $19,137

F) C) and D)
G) All of the above

Correct Answer

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Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?


A) Risk-free rate
B) Realized rate
C) Nominal rate
D) Real rate
E) Current rate

F) A) and B)
G) C) and E)

Correct Answer

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Treasury bonds are:


A) issued by any governmental agency in the U.S.
B) issued only on the first day of each fiscal year by the U.S. Department of Treasury.
C) bonds that offer the best tax benefits of any bonds currently available.
D) generally issued as semiannual coupon bonds.
E) totally risk free.

F) All of the above
G) C) and D)

Correct Answer

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Bare Trees United 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?


A) 8.98 percent
B) 9.53 percent
C) 9.13 percent
D) 9.27 percent
E) 8.42 percent

F) A) and D)
G) A) and C)

Correct Answer

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Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?


A) 8.75 percent
B) 9.23 percent
C) 8.41 percent
D) 8.62 percent
E) 8.87 percent

F) B) and C)
G) B) and E)

Correct Answer

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World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?


A) 12.26 years
B) 12.53 years
C) 18.49 years
D) 24.37 years
E) 25.05 years

F) C) and D)
G) A) and C)

Correct Answer

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The 7 percent, semiannual coupon bonds offered by House Renovators are callable in two years at $1,035. What is the amount of the call premium if the bonds have a par value of $1,000?


A) $42
B) $35
C) $70
D) $67
E) $105

F) B) and D)
G) A) and B)

Correct Answer

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You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?


A) 8 percent
B) EAR of 8 percent compounded monthly
C) Comparable risk-free rate
D) Comparable real rate
E) Nominal rate minus the risk-free rate

F) B) and D)
G) B) and E)

Correct Answer

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A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?


A) The face value of the bond today is greater than it was when the bond was issued.
B) The bond is worth less today than when it was issued.
C) The yield to maturity is less than the coupon rate.
D) The coupon rate is less than the current yield.
E) The yield to maturity equals the current yield.

F) C) and D)
G) A) and E)

Correct Answer

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Global Exporters wants to raise $31.3 million to expand its business. To accomplish this, it plans to sell 15-year, $1,000 face value, zero coupon bonds. The bonds will be priced to yield 5.75 percent. What is the minimum number of bonds it must sell to raise the money it needs? Assume semiannual compounding.


A) 80,411
B) 69,800
C) 74,907
D) 86,029
E) 73,225

F) C) and E)
G) None of the above

Correct Answer

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A "fallen angel" is a bond that has moved from:


A) being publicly traded to being privately traded.
B) being a long-term obligation to being a short-term obligation.
C) being a premium bond to being a discount bond.
D) senior status to junior status for liquidation purposes.
E) investment grade to speculative grade.

F) A) and B)
G) None of the above

Correct Answer

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A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?


A) $5,005.46
B) $5,105.46
C) $5,073.11
D) $5,264.44
E) $5,215.00

F) B) and D)
G) A) and E)

Correct Answer

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Which one of the following statements concerning bond ratings is correct?


A) Investment grade bonds are rated BB or higher by Standard & Poor's.
B) Bond ratings assess both interest rate risk and default risk.
C) Split-rated bonds are called crossover bonds.
D) The highest rating issued by Moody's is AAA.
E) A "fallen angel" is a term applied to all "junk" bonds.

F) C) and D)
G) A) and E)

Correct Answer

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The outstanding bonds of Winter Tires Inc. provide a real rate of return of 3.6 percent. If the current rate of inflation is 2.68 percent, what is the actual nominal rate of return on these bonds?


A) 7.58 percent
B) 7.33 percent
C) 7.71 percent
D) 6.76 percent
E) 6.38 percent

F) B) and D)
G) A) and C)

Correct Answer

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