Chapter Eight Valuation of Known Cash Flows:Bonds Multiple Choice 1.A is a quantitative method used to infer an asset's value from market information about the prices of other assets and market interest rates. (a)fixed model (b)perpetual valuation model (c)valuation model (d)variable model Answer:(c) 2. are examples of fixed-income securities (a)Common stock and pension funds (b)Mortgages and pension annuities (c)Mutual funds and common stock (d)Preferred stock and common stock Answer:(b) 3. Consider a fixed-income security that promises to pay $150 each year for the next five years.How much is this five-year annuity worth if the appropriate discount rate is 7%per year? (a)$534.74 (b)$615.03 (c)$802.50 (d$867.96 Answer:(b) 8-1
8-1 Chapter Eight Valuation of Known Cash Flows: Bonds Multiple Choice 1. A ________ is a quantitative method used to infer an asset's value from market information about the prices of other assets and market interest rates. (a) fixed model (b) perpetual valuation model (c) valuation model (d) variable model Answer: (c) 2. ________ are examples of fixed-income securities. (a) Common stock and pension funds (b) Mortgages and pension annuities (c) Mutual funds and common stock (d) Preferred stock and common stock Answer: (b) 3. Consider a fixed-income security that promises to pay $150 each year for the next five years. How much is this five-year annuity worth if the appropriate discount rate is 7% per year? (a) $534.74 (b) $615.03 (c) $802.50 (d) $867.96 Answer: (b)
4.Consider a fixed-income security that promises to pay $120 each year for the next four years Calculate the value of this four-year annuity if the appropriate discount rate is 6%per year. (a)$415.81 (b)$508.80 (c)$531.85 (d$629.06 Answer:(a) 5.The price of any existing fixed-income security when market interest rates rise because investors will only be willing to them if they offer a competitive yield. (a)rises;buy (b)rises;sell (c)falls;buy (d)falls;sell Answer:(c) 6.A fall in interest rates causes a in the market value of a fixed-income security. (a)arise (b)a fall (c)no change (d)it cannot be determined from the information given Answer:(a) 7.A change in market interest rates causes in the market values of all existing contracts promising fixed payments in the future. (a)a change in the same direction (b)a change in the opposite direction (c)no change (d)an unpredictable variation Answer:(b) 8-2
8-2 4. Consider a fixed-income security that promises to pay $120 each year for the next four years. Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year. (a) $415.81 (b) $508.80 (c) $531.85 (d) $629.06 Answer: (a) 5. The price of any existing fixed-income security ________ when market interest rates rise because investors will only be willing to ________ them if they offer a competitive yield. (a) rises; buy (b) rises; sell (c) falls; buy (d) falls; sell Answer: (c) 6. A fall in interest rates causes a ________ in the market value of a fixed-income security. (a) a rise (b) a fall (c) no change (d) it cannot be determined from the information given Answer: (a) 7. A change in market interest rates causes ________ in the market values of all existing contracts promising fixed payments in the future. (a) a change in the same direction (b) a change in the opposite direction (c) no change (d) an unpredictable variation Answer: (b)
8.What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate rises from 5%to 6%per year? (a)A rise of 1%causes a drop of $4.87 in market value. (b)A rise of 1%causes a rise of $4.87 in market value. (c)A rise of 1%causes a drop of $8.09 in market value. (d)A rise of 1%causes a rise of $8.09 in market value. Answer:(c) 9.What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate falls from 6%to 5%per year? (a)A fall of 1%causes a drop of $4.87 in market value. (b)A fall of 1%causes a rise of $4.87 in market value. (c)A fall of 1%causes a drop of $8.09 in market value. (d)A fall of 1%causes a rise of $8.09 in market value. Answer:(d) 10.A zero-coupon bond is also known as (a)a perpetual bond (b)a pure discount bond (c)a market rebate (d)an infinite bond Answer:(b) 11.The promised cash payment on a pure discount bond is called its (a)face value (b)par value (c)fixed interest (d)both a and b Answer:(d) 8-3
8-3 8. What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate rises from 5% to 6% per year? (a) A rise of 1% causes a drop of $4.87 in market value. (b) A rise of 1% causes a rise of $4.87 in market value. (c) A rise of 1% causes a drop of $8.09 in market value. (d) A rise of 1% causes a rise of $8.09 in market value. Answer: (c) 9. What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate falls from 6% to 5% per year? (a) A fall of 1% causes a drop of $4.87 in market value. (b) A fall of 1% causes a rise of $4.87 in market value. (c) A fall of 1% causes a drop of $8.09 in market value. (d) A fall of 1% causes a rise of $8.09 in market value. Answer: (d) 10. A zero-coupon bond is also known as ________. (a) a perpetual bond (b) a pure discount bond (c) a market rebate (d) an infinite bond Answer: (b) 11. The promised cash payment on a pure discount bond is called its ________. (a) face value (b) par value (c) fixed interest (d) both a and b Answer: (d)
12.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000? (a)8.50% (b)9.09% (c)15.00% (d17.65% Answer:(d) 13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000? (a)5.26% (b)10.00% (c)11.11% (d15.79% Answer:(c) 14.Consider a four-year pure discount bond with a face value of $1,000.If its current price is $850, compute its annualized yield. (a)1.17% (b)4.15% (c)5.57% (d17.60% Answer:(b) 15.Consider a three-year pure discount bond with a face value of $1,000.If its current price is $900, compute its annualized yield. (a)1.036% (b)1.111% (c)3.57% (d5.41% Answer:(c) 8-4
8-4 12. What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000? (a) 8.50% (b) 9.09% (c) 15.00% (d) 17.65% Answer: (d) 13. What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000? (a) 5.26% (b) 10.00% (c) 11.11% (d) 15.79% Answer: (c) 14. Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850, compute its annualized yield. (a) 1.17% (b) 4.15% (c) 5.57% (d) 17.60% Answer: (b) 15. Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900, compute its annualized yield. (a) 1.036% (b) 1.111% (c) 3.57% (d) 5.41% Answer: (c)
16.Consider a five-year pure discount bond with a face value of $1,000.If its current price is $780,what is its annualized yield? (a)5.09% (b)2.82% (c)1.28% (d1.05% Answer:(a) 17.A obligates the issuer to make periodic payments of interest to the bondholder for the life of the bond and then to pay the face value of the bond when the bond matures. (a)pure discount (b)zero-coupon (c)perpetual bond (d)coupon bond Answer:(d) 18.The of the bond is interest rate applied to the of the bond to compute the periodic payment. (a)coupon rate:face value (b)maturity rate;face value (c)coupon rate;price (d)maturity rate;price Answer:(a) 19.For a bond with a face value of $1,000 and coupon rate of 11%,what is the annual coupon payment? (a)$100 (b)$110 (c)$1,000 (d$1,100 Answer:(b) 8-5
8-5 16. Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, what is its annualized yield? (a) 5.09% (b) 2.82% (c) 1.28% (d) 1.05% Answer: (a) 17. A ________ obligates the issuer to make periodic payments of interest to the bondholder for the life of the bond and then to pay the face value of the bond when the bond matures. (a) pure discount (b) zero-coupon (c) perpetual bond (d) coupon bond Answer: (d) 18. The ________ of the bond is interest rate applied to the ________ of the bond to compute the periodic payment. (a) coupon rate; face value (b) maturity rate; face value (c) coupon rate; price (d) maturity rate; price Answer: (a) 19. For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment? (a) $100 (b) $110 (c) $1,000 (d) $1,100 Answer: (b)
20.For a bond with a face value of $1,000 and a coupon rate of 9%,what is the annual coupon payment? (a)$90 (b)$99 (c)$1,000 (d$1,190 Answer:(a) 21.If the market price of a coupon bond equals its face value,it is also termed a (a)par bond (b)premium bond (c)discount bond (d)zero-discount bond Answer:(a) 22.If the bond's market price is higher than its face value,it is termed a (a)par bond (b)premium bond (c)discount bond (d)zero-discount bond Answer:(b) 23.If the bond's market price is lower than its face value,it is termed a (a)par bond (b)premium bond (c)discount bond (d)zero-par bond Answer:(c) 8-6
8-6 20. For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment? (a) $90 (b) $99 (c) $1,000 (d) $1,190 Answer: (a) 21. If the market price of a coupon bond equals its face value, it is also termed a ________. (a) par bond (b) premium bond (c) discount bond (d) zero-discount bond Answer: (a) 22. If the bond’s market price is higher than its face value, it is termed a ________. (a) par bond (b) premium bond (c) discount bond (d) zero-discount bond Answer: (b) 23. If the bond’s market price is lower than its face value, it is termed a ________. (a) par bond (b) premium bond (c) discount bond (d) zero-par bond Answer: (c)
24.If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000,what is its current yield? (a)8.00% (b)9.41% (c)17.65% (d27.05% Answer:(b) 25.If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000,what is its current yield? (a)8.90% (b)9.82% (c)10.71% (d)11.00% Answer:(b) 26.If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000,what is its current yield? (a)8.00% (b)8.89% (c)11.00% (d20.00% Answer:(b) 27.The is the discount rate that makes the present value of the bond's stream of promised cash payments equal to its price. (a)compound rate (b)yield to maturity (c)coupon rate (d)current yield Answer:(b) 8-7
8-7 24. If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what is its current yield? (a) 8.00% (b) 9.41% (c) 17.65% (d) 27.05% Answer: (b) 25. If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000, what is its current yield? (a) 8.90% (b) 9.82% (c) 10.71% (d) 11.00% Answer: (b) 26. If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what is its current yield? (a) 8.00% (b) 8.89% (c) 11.00% (d) 20.00% Answer: (b) 27. The ________ is the discount rate that makes the present value of the bond’s stream of promised cash payments equal to its price. (a) compound rate (b) yield to maturity (c) coupon rate (d) current yield Answer: (b)
28.Suppose you are considering buying a one-year 11%coupon bond with a face value of $1,000 and a current price of $1,020.What is its yield to maturity? (a)8.82% (b)9.00% (c)10.78% (d11.00% Answer:(a) 29.Suppose you are considering buying a one-year 11%coupon bond with a face value of $1,000 and a current price of $1,050.What is its yield to maturity? (a)4.76% (b)5.71% (c)6.00% (d)10.48% Answer:(b) 30.Suppose you are considering buying a five-year 11%coupon bond with a face value of $1,000 and a current price of $950.What is its yield to maturity? (a)5.62% (b)9.63% (c)11.58% (d12.40% Answer:(d) 31.Suppose you are considering buying a five-year 11%coupon bond with a face value of $1,000 and a current price of $1,100.What is its yield to maturity? (a)3.87% (b)8.47% (c)10.00% (d13.62% Answer:(b) 8-8
8-8 28. Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and a current price of $1,020. What is its yield to maturity? (a) 8.82% (b) 9.00% (c) 10.78% (d) 11.00% Answer: (a) 29. Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and a current price of $1,050. What is its yield to maturity? (a) 4.76% (b) 5.71% (c) 6.00% (d) 10.48% Answer: (b) 30. Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and a current price of $950. What is its yield to maturity? (a) 5.62% (b) 9.63% (c) 11.58% (d) 12.40% Answer: (d) 31. Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and a current price of $1,100. What is its yield to maturity? (a) 3.87% (b) 8.47% (c) 10.00% (d) 13.62% Answer: (b)
32.Suppose you are considering buying a six-year 10%coupon bond with a face value of $1,000 and a current price of $1,100.What are the current yield and yield to maturity of this bond? (a)CY=11.00%;YTM=12.23% (b)CY=12.23%,YTM=11.00% (c)CY=7.85%,YTM=9.09% (dCY=9.09%,YTM=7.85% Answer(d) 33.Suppose you are considering buying a seven-year 11%coupon bond with a face value of $1,000 and a current price of $950.What are the current yield and yield to maturity of this coupon bond? (a)CY=12.10%;YTM=11.58% (b)CY=11.58%,YTM=12.10% (c)CY=9.92%,YTM=10.45% (d)CY=10.45%,YTM=9.92% Answer:(b) 34.Over time bond prices their face value.Before maturity,bond prices can a great deal as a result of changes in market interest rates. (a)diverge from;fluctuate (b)converge toward:flatten out (c)converge toward;fluctuate (d)diverge from;flatten out Answer:(c) 35.When the yield curve is not flat,bonds of the same with different coupon rates have yields to maturity. (a)maturity,different (b)maturity,identical (c)callability,different (d)callability,identical Answer:(a) 8-9
8-9 32. Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and a current price of $1,100. What are the current yield and yield to maturity of this bond? (a) CY = 11.00%; YTM = 12.23% (b) CY = 12.23%; YTM = 11.00% (c) CY = 7.85%; YTM = 9.09% (d) CY = 9.09%; YTM = 7.85% Answer (d) 33. Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and a current price of $950. What are the current yield and yield to maturity of this coupon bond? (a) CY = 12.10%; YTM = 11.58% (b) CY = 11.58%; YTM = 12.10% (c) CY = 9.92%; YTM = 10.45% (d) CY = 10.45%; YTM = 9.92% Answer: (b) 34. Over time bond prices ________ their face value. Before maturity, bond prices can ________ a great deal as a result of changes in market interest rates. (a) diverge from; fluctuate (b) converge toward; flatten out (c) converge toward; fluctuate (d) diverge from; flatten out Answer: (c) 35. When the yield curve is not flat, bonds of the same ________ with different coupon rates have ________ yields to maturity. (a) maturity, different (b) maturity, identical (c) callability, different (d) callability, identical Answer: (a)
36.Bonds offering the same future stream of promised payments can differ in a number of ways,but the two most important are and (a)taxability,issue origin (b)type of issuer,default risk (c)type of issuer,taxability (d)taxability,default risk Answer:(d) 37.A is one that gives the holder of a bond issued by a corporation the right to convert the bond into a pre-specified number of shares of common stock. (a)callable bond (b)convertible bond (c)stock bond (d)preferred bond Answer:(b) 38.A is one that gives the issuer of the bond the right to redeem it before the final maturity date. (a)callable bond (b)convertible bond (c)stock bond (d)preferred bond Answer:(a) 39.Five years ago,English and Co.issued 25-year coupon bonds with par value $1,000.At the time of issuance,the yield to maturity was 6 percent and the bonds sold at par.The bonds are currently selling at 110 percent of their par value.Assuming that the coupon is paid annually,what is the current yield to maturity? (a3.77% (b)5.18% (c)5.27% (d5.46% Answer:(b) 8-10
8-10 36. Bonds offering the same future stream of promised payments can differ in a number of ways, but the two most important are ________ and ________. (a) taxability, issue origin (b) type of issuer, default risk (c) type of issuer, taxability (d) taxability, default risk Answer: (d) 37. A ________ is one that gives the holder of a bond issued by a corporation the right to convert the bond into a pre-specified number of shares of common stock. (a) callable bond (b) convertible bond (c) stock bond (d) preferred bond Answer: (b) 38. A ________ is one that gives the issuer of the bond the right to redeem it before the final maturity date. (a) callable bond (b) convertible bond (c) stock bond (d) preferred bond Answer: (a) 39. Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time of issuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity? (a) 3.77% (b) 5.18% (c) 5.27% (d) 5.46% Answer: (b)