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Finance Flashcards

Finance Ch. 6 – Multiple Choice

23. The coupon rate of a bond equals: A. its yield to maturity.B. a percentage of its face value.C. the maturity value.D. a percentage of its price. b
24. Periodic receipts of interest by the bondholder are known as: A. the coupon rate.B. a zero-coupon.C. coupon payments.D. the default premium. c
25. Which of the following presents the correct relationship? As the coupon rate of a bond increases, the bond’s: A. face value increases.B. current price decreases.C. interest payments increase.D. maturity date is extended. c
26. What happens when a bond’s expected cash flows are discounted at a rate lower than the bond’s coupon rate? A. The price of the bond increases.B. The coupon rate of the bond increases.C. The par value of the bond decreases.D. The coupon payments will be adjusted to the new discount rate. a
27. When an investor purchases a $1,000 par value bond that was quoted at 97.16, the investor: A. receives 97.5% of the stated coupon payments.B. receives $975 upon the maturity date of the bond.C. pays 97.5% of face value for the bond.D. pays $1,025 for the bond. c
28. How much does the $1,000 to be received upon a bond’s maturity in four years add to the bond’s price if the appropriate discount rate is 6%? A. $209.91B. $260.00C. $760.00D. $792.09$1,000/(1.06)4 = $792.09 d
29. The numerator of the rate of return formula for bond consists of the following: A. coupon income.B. bond price change.C. both A and B.D. neither A nor B. c
30. How much should you pay for a $1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%? A. $ 927.90B. $ 981.40C. $1,000.00D. $1,075.82 aPrice = 100[1/.12 – 1/.12(1.12)^5] + 1000/(1.12)^5= 360.47 + 567.43= 927.90
31. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%? A. $696.74B. $1,075.82C. $1,082.00D. $1,123.01 c= 90 [1/.07 – 1/.07(1.07)^5] + 1000/(1.07)^5=369.02 + 712.98=1082
32. Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%? A. The face value of the bond has decreased.B. The bond’s maturity value exceeds the bond’s price.C. The bond’s internal rate of return is 7%.D. The bond’s maturity value is lower than the bond’s price. d
33. If an investor purchases a bond when its current yield is higher than the coupon rate, then the bond’s price will be expected to: A. decline over time, reaching par value at maturity.B. increase over time, reaching par value at maturity.C. be less than the face value at maturity.D. exceed the face value at maturity. b
34. The current yield of a bond can be calculated by: A. multiplying the price by the coupon rate.B. dividing the price by the annual coupon payments.C. dividing the price by the par value.D. dividing the annual coupon payments by the price. d
35. What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750? A. 6.0%B. 8.0%C. 12.0%D. 14.7% b$60/750 = 8%
36. A bond’s par value can also be called its: A. coupon payment.B. present value.C. default value.D. face value d
37. 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. c
38. The discount rate that makes the present value of a bond’s payments equal to its price is termed the: A. rate of return.B. yield to maturity.C. current yield.D. coupon rate. b
39. What is the coupon rate for a bond with three years until maturity, a price of $1,053.46, and a yield to maturity of 6%? A. 6%B. 8%C. 10%D. 11% b1053.46 = PMT [1/.06 – 1/.06(1.06)^3] + 1000/(1.06)^3=PMT[16.667 – 13.994] + 839.60213.86 = 2.673PMTPMT = 8080/1000 = 8%
40. What is the yield to maturity for a bond paying $100 annually that has six years until maturity and sells for $1,000? A. 6.0%B. 8.5%C. 10.0%D. 12.5% c1000 = 100[1/i – 1/i(1+i)^6 + 1000/(1+i)^6i=10% wince bond sells at par value
41. What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%? A. A price increase of $51.54B. A price decrease of $51.54C. A price increase of $53.47D. No change in price cPV = 80 [1/.06 – 1/.06i(1.06)^3] + 1000/(1.06)^3=80[16.667 – 13.994] + 1000/(1.06)^3=1053.47This represents a price change of $53.47, since the bond had sold for par.
42. Which of the following factors will change when interest rates change? A. The expected cash flows from a bondB. The present value of a bond’s paymentsC. The coupon payment of a bondD. The maturity value of a bond b
43. 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%. c
44. Which of the following is fixed (e.g., cannot change) for the life of a given bond? A. Current price.B. Current yield.C. Yield to maturity.D. Coupon rate. d
45. What is the rate of return for an investor who pays $1,054.47 for a three-year bond with a 7% coupon and sells the bond one year later for $1,037.19? A. 5.00%B. 5.33%C. 6.46%D. 7.00% aRate of Return = ($70.00 – $17.28)/$1,054.47= $52.72/$1,054.47= 5%
46. Which of the following is correct when a bond investor’s rate of return for a particular period equals the bond’s coupon rate? A. The bond increased in price during the period.B. The bond decreased in price during the period.C. The coupon payment increased during the period.D. The bond price remained unchanged during the period. d
47. What is the relationship between an investment’s rate of return and its yield to maturity for an investor that does not hold a bond until maturity? A. Rate of return is lower than yield to maturity.B. Rate of return is higher than yield to maturity.C. Rate of return equals yield to maturity.D. There is no predetermined relationship. d
48. If the coupon rate is lower than current interest rates, then the yield to maturity will be: A. lower than current interest rates.B. equal to the coupon rate.C. higher than the coupon rate.D. lower than the coupon rate. b
49. If a four year bond with a 7% coupon and a 10% yield to maturity is currently worth $904.90, how much will it be worth one year from now if interest rates are constant? A. $ 904.90B. $ 925.39C. $ 947.93D. $1,000.00 bif 904.90 = 70[1/.1 – 1/.1(1.1)^4 + 1000/(1.1)^4then 925.39 = 70[1/.1 – 1/.1(1.1)^4 + 1000/(1.1)^3
50. What price will be paid for a U.S. Treasury bond with an ask price of 135:20? A. $1,350.20B. $1,350.31C. $1,350.63D. $1,356.25 d135:20 = 135(20/32) x 1000 = 1356.25

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