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.

a. True

b. False

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?

a. 31.16%

b. 11.44%

c. 13.39%

d. 26.77%

e. 22.87%

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.

a. True

b. False

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?

a. 26.65%

b. 16.30%

c. 14.85%

d. 19.39%

e. 34.11%

6. The rate of return earned on a bond if it is held until maturity is its:

a. yield-to-call.

b. coupon payment.

c. yield-to-maturity.

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?

a. 8%

b. 9%

c. 10%

d. 11%

e. 12%

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?

a. $892.48

b. $892.74

c. $1,119.13

d. $908.85

e. $1,752.67

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.

d. bond.

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?

a. $2,183.31

b. $540.31

c. $450.37

d. $2,376.94

e. $499.84

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 bond’s 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.)

a. 3.2%

b. 11%

c. 12%

d. 14.2%

e. 17.3%

14. A company’s bond rating is not affected by its financial performance and provisions in the bond contract.

a. True

b. False

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.