A 12-year bond has a 9 percent annual coupon, a yield to maturity of 8 percent, and a face value of $1,000. What is the price of the bond?

A 12-year bond has a 9 percent annual coupon, a yield to maturity of 8 percent, and a face value of $1,000.  What is the price of the bond?

a. $1,469
b. $1,000
c. $  928
d. $1,075
e. $1,957









Answer: D

An annual coupon bond with a $1,000 face value matures in 10 years. The bond currently sells for $903.7351 and has a 9 percent yield to maturity. What is the bond’s annual coupon rate?

An annual coupon bond with a $1,000 face value matures in 10 years.  The bond currently sells for $903.7351 and has a 9 percent yield to maturity. What is the bond’s annual coupon rate?

a. 6.7%
b. 7.0%
c. 7.2%
d. 7.5%
e. 7.7%









Answer: D

Which of the following statements is most correct?

Which of the following statements is most correct?

a. If a bond is selling at par value, its current yield equals its yield to maturity.
b. If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.
c. All else equal, bonds with longer maturities have more interest rate (price) risk than do bonds with shorter maturities.
d. All of the statements above are correct.
e. None of the statements above is correct.








Answer: D

A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently selling at par ($1,000). Which of the following statements is most correct?

A 10-year corporate bond has an annual coupon payment of 9 percent.  The bond is currently selling at par ($1,000).  Which of the following statements is most correct?

a. The bond’s yield to maturity is 9 percent.
b. The bond’s current yield is 9 percent.
c. If the bond’s yield to maturity remains constant, the bond’s price will remain at par.
d. Statements a and c are correct.
e. All of the statements above are correct.










Answer: E

Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent?

Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1 percent?

a. 20-year, zero coupon bond.
b. 10-year, zero coupon bond.
c. 20-year, 10 percent coupon bond.
d. 20-year, 5 percent coupon bond.
e. 1-year, 10 percent coupon bond.







Answer: A

Which of the following statements is most correct?

Which of the following statements is most correct?

a. Relative to short-term bonds, long-term bonds have less interest rate risk but more reinvestment rate risk.
b. Relative to short-term bonds, long-term bonds have more interest rate risk and more reinvestment risk.
c. Relative to coupon-bearing bonds, zero coupon bonds have more interest rate risk but less reinvestment rate risk.
d. If interest rates increase, all bond prices will increase, but the increase will be greatest for bonds that have less interest rate risk.
e. One advantage of zero coupon bonds is that you don’t have to pay any taxes until you sell the bond or it matures.







Answer: C

A 10-year Treasury bond has an 8 percent coupon. An 8-year Treasury bond has a 10 percent coupon. Both bonds have the same yield to maturity. If the yields to maturity of both bonds increase by the same amount, which of the following statements is most correct?

A 10-year Treasury bond has an 8 percent coupon.  An 8-year Treasury bond has a 10 percent coupon.  Both bonds have the same yield to maturity.  If the yields to maturity of both bonds increase by the same amount, which of the following statements is most correct?

a. The prices of both bonds will increase by the same amount.
b. The prices of both bonds will decrease by the same amount.
c. The prices of the two bonds will remain the same.
d. Both bonds will decline in price, but the 10-year bond will have a greater percentage decline in price than the 8-year bond.
e. Both bonds will decline in price, but the 8-year bond will have a greater percentage decline in price than the 10-year bond.








Answer: D

Assume that a 10-year Treasury bond has a 12 percent annual coupon, while a 15-year Treasury bond has an 8 percent annual coupon. The yield curve is flat; all Treasury securities have a 10 percent yield to maturity. Which of the following statements is most correct?

Assume that a 10-year Treasury bond has a 12 percent annual coupon, while a 15-year Treasury bond has an 8 percent annual coupon.  The yield curve is flat; all Treasury securities have a 10 percent yield to maturity.  Which of the following statements is most correct?

a. The 10-year bond is selling at a discount, while the 15-year bond is selling at a premium.
b. The 10-year bond is selling at a premium, while the 15-year bond is selling at par.
c. If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a larger percentage increase in price.
d. If the yield to maturity on both bonds remains at 10 percent over the next year, the price of the 10-year bond will increase, but the price of the 15-year bond will fall.







Answer: C

Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in three years. That cash flow will be sufficient to pay off the entire debt issue. The bond’s par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25. The firm’s marginal tax rate is 40 percent.

Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in three years.  That cash flow will be sufficient to pay off the entire debt issue.  The bond’s par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25.  The firm’s marginal tax rate is 40 percent.

What is the nominal dollar value of the interest tax savings to the firm in the third year of the issue?

a. $ 32.58
b. $ 40.29
c. $100.72
d. $ 60.43
e. $109.10



Answer: B

What is the expected after-tax cost of this debt issue?

a. 11.20%
b. 4.48%
c. 6.72%
d. 6.10%
e. 4.00%



Answer: C

Schiffauer Electronics plans to issue 10-year, zero coupon bonds with a par value of $1,000 and a yield to maturity of 9.5 percent. The company has a tax rate of 30 percent. How much extra in taxes would the company pay (or save) the second year (at t = 2) if they go ahead and issue the bonds?

Schiffauer Electronics plans to issue 10-year, zero coupon bonds with a par value of $1,000 and a yield to maturity of 9.5 percent.  The company has a tax rate of 30 percent.  How much extra in taxes would the company pay (or save) the second year (at t = 2) if they go ahead and issue the bonds?

a. Save $12.59
b. Save $13.79
c. Save $41.97
d. No savings
e. Pay $13.79









Answer: A

Assume that the City of Tampa sold an issue of $1,000 maturity value, tax exempt (muni), zero coupon bonds 5 years ago. The bonds had a 25-year maturity when they were issued, and the interest rate built into the issue was a nominal 10 percent, but with semiannual compounding. The bonds are now callable at a premium of 10 percent over the accrued value. What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

Assume that the City of Tampa sold an issue of $1,000 maturity value, tax exempt (muni), zero coupon bonds 5 years ago.  The bonds had a 25-year maturity when they were issued, and the interest rate built into the issue was a nominal 10 percent, but with semiannual compounding. The bonds are now callable at a premium of 10 percent over the accrued value.  What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

a. 12.01%
b. 10.25%
c. 10.00%
d. 11.63%
e. 12.37%







Answer: E

Assume that the State of Florida sold tax-exempt, zero coupon bonds with a $1,000 maturity value 5 years ago. The bonds had a 25-year maturity when they were issued, and the interest rate built into the issue was a nominal 8 percent, compounded semiannually. The bonds are now callable at a premium of 4 percent over the accrued value. What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

Assume that the State of Florida sold tax-exempt, zero coupon bonds with a $1,000 maturity value 5 years ago.  The bonds had a 25-year maturity when they were issued, and the interest rate built into the issue was a nominal 8 percent, compounded semiannually.  The bonds are now callable at a premium of 4 percent over the accrued value.  What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

a. 4.41%
b. 6.73%
c. 8.25%
d. 9.01%
e. 9.52%









Answer: D

A 4-year, zero coupon Treasury bond sells at a price of $762.8952. A 3-year, zero coupon Treasury bond sells at a price of $827.8491. Assuming the expectations theory is correct, what does the market believe the price of 1-year, zero coupon bonds will be in three years?

A 4-year, zero coupon Treasury bond sells at a price of $762.8952.  A 3-year, zero coupon Treasury bond sells at a price of $827.8491. Assuming the expectations theory is correct, what does the market believe the price of 1-year, zero coupon bonds will be in three years?

a. $921.66
b. $934.58
c. $938.97
d. $945.26
e. $950.47





Answer: A

A 2-year, zero coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387. A 1-year, zero coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671. If the pure expectations theory is correct, for what price should 1-year, zero coupon Treasury bonds sell one year from now?

A 2-year, zero coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387.  A 1-year, zero coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671.  If the pure expectations theory is correct, for what price should 1-year, zero coupon Treasury bonds sell one year from now?

a. $798.89
b. $824.66
c. $852.28
d. $930.23
e. $989.11







Answer: D

Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent. The bonds have a par value of $1,000 and were sold for $178.43 each. What is the expected interest expense on these bonds for Year 8?

Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent.  The bonds have a par value of $1,000 and were sold for $178.43 each.  What is the expected interest expense on these bonds for Year 8?

a. $29.35
b. $32.00
c. $90.00
d. $26.12
e. $25.79








Answer: A

A zero coupon bond with a face value of $1,000 matures in 15 years. The bond has a yield to maturity of 7 percent. If an investor buys the bond at the beginning of the year, how much money in taxes will the investor have to pay on the zero coupon bond the first year. Assume that the investor has a 25 percent marginal tax rate.

A zero coupon bond with a face value of $1,000 matures in 15 years.  The bond has a yield to maturity of 7 percent.  If an investor buys the bond at the beginning of the year, how much money in taxes will the investor have to pay on the zero coupon bond the first year.  Assume that the investor has a 25 percent marginal tax rate.

a. $5.25
b. $5.44
c. $5.99
d. $6.25
e. $6.34








Answer: E

Today is January 1, 2003 and you just purchased a 7-year, zero coupon bond with a face value of $1,000 and a yield to maturity of 6 percent. Your tax rate is 30 percent. How much in taxes will you have to pay on the bond the first year that you hold it?

Today is January 1, 2003 and you just purchased a 7-year, zero coupon bond with a face value of $1,000 and a yield to maturity of 6 percent. Your tax rate is 30 percent.  How much in taxes will you have to pay on the bond the first year that you hold it?

a. $ 11.97
b. $211.49
c. $ 12.69
d. $ 39.90
e. $199.52







Answer: A

Recycler Battery Corporation (RBC) issued zero coupon bonds 5 years ago at a price of $214.50 per bond. RBC’s zeros had a 20-year original maturity, with a $1,000 par value. The bonds were callable 10 years after the issue date at a price 7 percent over their accrued value on the call date. If the bonds sell for $239.39 in the market today, what annual rate of return should an investor who buys the bonds today expect to earn on them?

Recycler Battery Corporation (RBC) issued zero coupon bonds 5 years ago at a price of $214.50 per bond.  RBC’s zeros had a 20-year original maturity, with a $1,000 par value.  The bonds were callable 10 years after the issue date at a price 7 percent over their accrued value on the call date.  If the bonds sell for $239.39 in the market today, what annual rate of return should an investor who buys the bonds today expect to earn on them?

a. 15.7%
b. 12.4%
c. 10.0%
d. 9.5%
e. 8.0%

Answer: C

U.S. Delay Corporation, a subsidiary of the Postal Service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities. The $1,000 par value quarterly payment bonds would sell at $795.54, have a 10 percent annual coupon rate, and mature in 10 years. At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate as the quarterly payment bonds?

U.S. Delay Corporation, a subsidiary of the Postal Service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities.  The $1,000 par value quarterly payment bonds would sell at $795.54, have a 10 percent annual coupon rate, and mature in 10 years.  At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate as the quarterly payment bonds?

a. $274.50
b. $271.99
c. $198.89
d. $257.52
e. $254.84








Answer: D

On January 1st Julie bought a 7-year, zero coupon bond with a face value of $1,000 and a yield to maturity of 6 percent. Assume that Julie’s tax rate is 25 percent. How much tax will Julie have to pay on the bond the first year she owns it?

On January 1st Julie bought a 7-year, zero coupon bond with a face value of $1,000 and a yield to maturity of 6 percent.  Assume that Julie’s tax rate is 25 percent.  How much tax will Julie have to pay on the bond the first year she owns it?

a. $15.00
b. $25.00
c. $73.76
d. $ 9.98
e. $83.74








Answer: D

A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000. What is the amount of tax an investor in the 30 percent tax bracket will pay the first year of the bond?

A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000.  What is the amount of tax an investor in the 30 percent tax bracket will pay the first year of the bond?

a. $ 7.57
b. $10.41
c. $15.89
d. $20.44
e. $25.22








Answer: A

S. Claus & Company is planning a zero coupon bond issue. The bond has a par value of $1,000, matures in 2 years, and will be sold at a price of $826.45. The firm’s marginal tax rate is 40 percent. What is the annual after-tax cost of debt to the company on this issue?

S. Claus & Company is planning a zero coupon bond issue.  The bond has a par value of $1,000, matures in 2 years, and will be sold at a price of $826.45.  The firm’s marginal tax rate is 40 percent.  What is the annual after-tax cost of debt to the company on this issue?

a. 4.0%
b. 6.0%
c. 8.0%
d. 10.0%
e. 12.0%







Answer: B

You just purchased a zero coupon bond with a yield to maturity of 9 percent. The bond matures in 12 years, and has a face value of $1,000. Assume that your tax rate is 25 percent. What is the dollar amount of taxes you will pay at the end of the first year of holding the bond?

You just purchased a zero coupon bond with a yield to maturity of 9 percent.  The bond matures in 12 years, and has a face value of $1,000.  Assume that your tax rate is 25 percent.  What is the dollar amount of taxes you will pay at the end of the first year of holding the bond?

a. $5.00
b. $6.00
c. $7.00
d. $8.00
e. $9.00








Answer: D

At the beginning of the year, you purchased a 7-year, zero coupon bond with a yield to maturity of 6.8 percent. The bond has a face value of $1,000. Your tax rate is 30 percent. What is the total tax that you will have to pay on the bond during the first year?

At the beginning of the year, you purchased a 7-year, zero coupon bond with a yield to maturity of 6.8 percent.  The bond has a face value of $1,000.  Your tax rate is 30 percent.  What is the total tax that you will have to pay on the bond during the first year?

a. $20.40
b. $12.87
c. $30.03
d. $13.75
e. $11.45






Answer: B

McGwire Company’s pension fund projected that a significant number of its employees would take advantage of an early retirement program the company plans to offer in five years. Anticipating the need to fund these pensions, the firm bought zero coupon U.S. Treasury Trust Certificates maturing in five years. When these instruments were originally issued, they were 12 percent coupon, 30-year U.S. Treasury bonds. The stripped Treasuries are currently priced to yield 10 percent. Their total maturity value is $6,000,000. What is their total cost (price) to McGwire today?

McGwire Company’s pension fund projected that a significant number of its employees would take advantage of an early retirement program the company plans to offer in five years.  Anticipating the need to fund these pensions, the firm bought zero coupon U.S. Treasury Trust Certificates maturing in five years.  When these instruments were originally issued, they were 12 percent coupon, 30-year U.S. Treasury bonds.  The stripped Treasuries are currently priced to yield 10 percent.  Their total maturity value is $6,000,000.  What is their total cost (price) to McGwire today?

a. $  553,776
b. $5,142,600
c. $3,404,561
d. $4,042,040
e. $3,725,528







Answer: E

Hastings Motors has bonds outstanding with 12 years left until maturity. The bonds have a $1,000 par value and an 8 percent annual coupon. Currently, the bonds sell at a price of $1,025.

Hastings Motors has bonds outstanding with 12 years left until maturity.  The bonds have a $1,000 par value and an 8 percent annual coupon.  Currently, the bonds sell at a price of $1,025.

What is the annual coupon bond’s yield to maturity?

a. 7.67%
b. 7.80%
c. 8.00%
d. 8.13%
e. 8.33%


Answer: A

What will be the percentage increase in the annual coupon bond’s price if the yield to maturity were to immediately fall by one percentage point (100 basis points)?

a. 5.7%
b. 6.0%
c. 6.9%
d. 7.7%
e. 8.0%


Answer: E

A 15-year bond has a par value of $1,000 and a 10 percent semiannual coupon. (That is, the bond pays a coupon of $50 every six months.) The bond has a price of $1,190 and it is callable in 5 years at a call price of $1,050.

A 15-year bond has a par value of $1,000 and a 10 percent semiannual coupon. (That is, the bond pays a coupon of $50 every six months.)  The bond has a price of $1,190 and it is callable in 5 years at a call price of $1,050.

What is the semiannual coupon bond’s nominal yield to maturity (YTM)?

a. 6.37%
b. 6.73%
c. 7.60%
d. 7.83%
e. 8.25%



Answer: D

What is the semiannual coupon bond’s nominal yield to call (YTC)?

a. 6.37%
b. 6.73%
c. 7.60%
d. 7.83%
e. 8.25%



Answer: A

A 12-year bond has an 8 percent annual coupon and a face value of $1,000. The bond has a yield to maturity of 7 percent.

A 12-year bond has an 8 percent annual coupon and a face value of $1,000.
The bond has a yield to maturity of 7 percent.

What is the price of the annual coupon bond today?

a. $  924.64
b. $1,000.00
c. $1,070.24
d. $1,079.43
e. $1,099.21



Answer: D

If the yield to maturity remains at 7 percent, what will be the price of the bond three years from today?

a. $  937.53
b. $  963.94
c. $1,026.24
d. $1,052.68
e. $1,065.15



Answer: E

A bond that matures in 10 years sells for $925. The bond has a face value of $1,000 and an 8 percent annual coupon.

A bond that matures in 10 years sells for $925.  The bond has a face value of $1,000 and an 8 percent annual coupon.

What is the bond’s current yield?

a. 8.65%
b. 8.00%
c. 8.33%
d. 7.88%
e. 8.95%


Answer: A

What is the bond’s yield to maturity?

a. 9.00%
b. 9.55%
c. 9.18%
d. 8.75%
e. 9.33%



Answer: C

Assume that the yield to maturity remains constant for the next three years.  What will be the price of the bond three years from today?

a. $  925
b. $  956
c. $1,000
d. $  977
e. $  941



Answer: E

Semiannual payment bonds with the same risk (Aaa) and maturity (20 years) as your company’s bonds have a nominal (not EAR) yield to maturity of 9 percent. Your company’s treasurer is thinking of issuing at par some $1,000 par value, 20-year, quarterly payment bonds. She has asked you to determine what quarterly interest payment, in dollars, the company would have to set in order to provide the same effective annual rate (EAR) as those on the 20-year, semiannual payment bonds. What would the quarterly, dollar interest payment be?

Semiannual payment bonds with the same risk (Aaa) and maturity (20 years) as your company’s bonds have a nominal (not EAR) yield to maturity of 9 percent.  Your company’s treasurer is thinking of issuing at par some $1,000 par value, 20-year, quarterly payment bonds.  She has asked you to determine what quarterly interest payment, in dollars, the company would have to set in order to provide the same effective annual rate (EAR) as those on the 20-year, semiannual payment bonds.  What would the quarterly, dollar interest payment be?

a. $45.00
b. $25.00
c. $22.25
d. $27.50
e. $23.00








Answer: C

Fish & Chips Inc. has two bond issues outstand¬ing, and both sell for $701.22. The first issue has an annual coupon rate of 8 percent and 20 years to maturity. The second has an identical yield to maturity as the first bond, but only 5 years remain until maturity. Both issues pay interest annually. What is the annual interest payment on the second issue?

Fish & Chips Inc. has two bond issues outstand¬ing, and both sell for $701.22.  The first issue has an annual coupon rate of 8 percent and 20 years to maturity.  The second has an identical yield to maturity as the first bond, but only 5 years remain until maturity.  Both issues pay interest annually.  What is the annual interest payment on the second issue?

a. $120.00
b. $ 37.12
c. $ 56.42
d. $ 29.68
e. $ 11.16








Answer: B

GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds 15 years ago. The bonds are not callable, but they do have a sinking fund that requires GP&L to redeem 5 percent of the original face value of the issue each year ($50,000), beginning in Year 11. To date, 25 percent of the issue has been retired. The company can either call bonds at par for sinking fund purposes or purchase bonds on the open market, spending sufficient money to redeem 5 percent of the original face value each year. If the nominal yield to maturity (15 years remaining) on the bonds is currently 14 percent, what is the least amount of money GP&L must put up to satisfy the sinking fund provision?

GP&L sold $1,000,000 of 12 percent, 30-year, semiannual payment bonds 15 years ago.  The bonds are not callable, but they do have a sinking fund that requires GP&L to redeem 5 percent of the original face value of the issue each year ($50,000), beginning in Year 11.  To date, 25 percent of the issue has been retired.  The company can either call bonds at par for sinking fund purposes or purchase bonds on the open market, spending sufficient money to redeem 5 percent of the original face value each year.  If the nominal yield to maturity (15 years remaining) on the bonds is currently 14 percent, what is the least amount of money GP&L must put up to satisfy the sinking fund provision?

a. $43,856
b. $50,000
c. $37,500
d. $43,796
e. $39,422








Answer: D

Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred interest. If the required annual return is 20 percent, what should the bonds sell for in the market today?

Recently, Ohio Hospitals Inc. filed for bankruptcy.  The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect.  The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for 5 years.  Then, interest payments will be resumed for the next 5 years.  Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid.  However, no interest will be paid on the deferred interest.  If the required annual return is 20 percent, what should the bonds sell for in the market today?

a. $242.26
b. $281.69
c. $578.31
d. $362.44
e. $813.69








Answer: D

You are considering investing in a security that matures in 10 years with a par value of $1,000. During the first five years, the security has an 8 percent coupon with quarterly payments (that is, you receive $20 a quarter for the first 20 quarters). During the remaining five years the security has a 10 percent coupon with quarterly payments (that is, you receive $25 a quarter for the second 20 quarters). After 10 years (40 quarters) you receive the par value. Another 10-year bond has an 8 percent semiannual coupon (that is, the coupon payment is $40 every six months). This bond is selling at its par value, $1,000. This bond has the same risk as the security you are thinking of purchasing. Given this information, what should be the price of the security you are considering purchasing?

You are considering investing in a security that matures in 10 years with a par value of $1,000.  During the first five years, the security has an 8 percent coupon with quarterly payments (that is, you receive $20 a quarter for the first 20 quarters).  During the remaining five years the security has a 10 percent coupon with quarterly payments (that is, you receive $25 a quarter for the second 20 quarters).  After 10 years (40 quarters) you receive the par value.
Another 10-year bond has an 8 percent semiannual coupon (that is, the coupon payment is $40 every six months).  This bond is selling at its par value, $1,000.  This bond has the same risk as the security you are thinking of purchasing.  Given this information, what should be the price of the security you are considering purchasing?

a. $  898.65
b. $1,060.72
c. $1,037.61
d. $  943.22
e. $1,145.89







Answer: B

Assume that McDonald’s and Burger King have similar $1,000 par value bond issues outstanding. The bonds are equally risky. The Burger King bond has an annual coupon rate of 8 percent and matures 20 years from today. The McDonald’s bond has a coupon rate of 8 percent, with interest paid semiannually, and it also matures in 20 years. If the nominal required rate of return, kd, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds?

Assume that McDonald’s and Burger King have similar $1,000 par value bond issues outstanding.  The bonds are equally risky.  The Burger King bond has an annual coupon rate of 8 percent and matures 20 years from today.  The McDonald’s bond has a coupon rate of 8 percent, with interest paid semiannually, and it also matures in 20 years.  If the nominal required rate of return, kd, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds?

a. $ 0.50
b. $ 2.20
c. $ 3.77
d. $17.53
e. $ 6.28








Answer: D

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond?

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the nominal annual yield is 14 percent.  Given these facts, what is the annual coupon rate on this bond?

a. 10%
b. 12%
c. 14%
d. 17%
e. 21%









Answer: D

Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The nominal required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?

Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000).  The nominal required rate of return on these bonds is currently 10 percent, and interest is paid semiannually.  The bonds mature in 5 years, and their current market value is $768 per bond.  What is the annual coupon interest rate?

a. 8%
b. 6%
c. 4%
d. 2%
e. 0%







Answer: C

You just purchased a 15-year bond with an 11 percent annual coupon. The bond has a face value of $1,000 and a current yield of 10 percent. Assuming that the yield to maturity of 9.7072 percent remains constant, what will be the price of the bond one year from now?

You just purchased a 15-year bond with an 11 percent annual coupon.  The bond has a face value of $1,000 and a current yield of 10 percent. Assuming that the yield to maturity of 9.7072 percent remains constant, what will be the price of the bond one year from now?

a. $1,000
b. $1,064
c. $1,097
d. $1,100
e. $1,150








Answer: C

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation’s balance sheet as of today, January 1, 2003, is as follows:

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation’s balance sheet as of today, January 1, 2003, is as follows:

             Long-term debt (bonds, at par)   $10,000,000
             Preferred stock                    2,000,000
             Common stock ($10 par)            10,000,000
             Retained earnings                  4,000,000
             Total debt and equity            $26,000,000

The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000.  They mature on January 1, 2013.  The yield to maturity is 12 percent, so the bonds now sell below par.  What is the current market value of the firm’s debt?

a. $5,412,000
b. $5,480,000
c. $2,531,000
d. $7,706,000
e. $7,056,000








Answer: A

Matteo Toys has bonds outstanding that have a 9 percent annual coupon and a face value of $1,000. The bonds will mature in 10 years, although they can be called before maturity at a call price of $1,050. The bonds have a yield to call of 6.5 percent and a yield to maturity of 7.4 percent. How long until these bonds may first be called?

Matteo Toys has bonds outstanding that have a 9 percent annual coupon and a face value of $1,000.  The bonds will mature in 10 years, although they can be called before maturity at a call price of $1,050.  The bonds have a yield to call of 6.5 percent and a yield to maturity of 7.4 percent.  How long until these bonds may first be called?

a. 2.21 years
b. 3.16 years
c. 3.68 years
d. 5.37 years
e. 6.32 years









Answer: B

A 16-year bond with a 10 percent annual coupon has a current yield of 8 percent. What is the bond’s yield to maturity (YTM)?

A 16-year bond with a 10 percent annual coupon has a current yield of 8 percent.  What is the bond’s yield to maturity (YTM)?

a. 6.9%
b. 7.1%
c. 7.3%
d. 7.5%
e. 7.7%








Answer: C

Meade Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semiannual basis. What are the current yield and capital gains yield on the bonds for this year? (Assume that interest rates do not change over the course of the year.)

Meade Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent.  The par value of the bonds is $1,000.  The bonds have a 10 percent coupon rate and pay interest on a semiannual basis.  What are the current yield and capital gains yield on the bonds for this year? (Assume that interest rates do not change over the course of the year.)

a. Current yield =  8.50%; capital gains yield =  1.50%
b. Current yield =  9.35%; capital gains yield =  0.65%
c. Current yield =  9.35%; capital gains yield = -0.85%
d. Current yield = 10.00%; capital gains yield =  0.00%
e. Current yield = 10.50%; capital gains yield = -1.50%









Answer: C

You have just been offered a $1,000 par value bond for $847.88. The coupon rate is 8 percent, payable annually, and annual interest rates on new issues of the same degree of risk are 10 percent. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many interest payments remain?

You have just been offered a $1,000 par value bond for $847.88.  The coupon rate is 8 percent, payable annually, and annual interest rates on new issues of the same degree of risk are 10 percent.  You want to know how many more interest payments you will receive, but the party selling the bond cannot remember.  Can you determine how many interest payments remain?

a. 14
b. 15
c. 12
d. 20
e. 10









Answer: B

A bond that matures in 8 years has a 9.5 percent coupon rate, semiannual payments, a face value of $1,000, and an 8.2 percent current yield. What is the bond’s nominal yield to maturity (YTM)?

A bond that matures in 8 years has a 9.5 percent coupon rate, semiannual payments, a face value of $1,000, and an 8.2 percent current yield. What is the bond’s nominal yield to maturity (YTM)?

a. 7.20%
b. 7.45%
c. 6.55%
d. 6.89%
e. 8.20%










Answer: D

A 10-year bond has a face value of $1,000. The bond has a 7 percent semiannual coupon. The bond is callable in 7 years at a call price of $1,040. The bond has a nominal yield to call of 6.5 percent. What is the bond’s nominal yield to maturity?

A 10-year bond has a face value of $1,000.  The bond has a 7 percent semiannual coupon.  The bond is callable in 7 years at a call price of $1,040.  The bond has a nominal yield to call of 6.5 percent.  What is the bond’s nominal yield to maturity?

a. 3.14%
b. 6.05%
c. 7.62%
d. 6.27%
e. 6.55%







Answer: D

A 15-year bond with a 10 percent semiannual coupon has a par value of $1,000. The bond may be called after 10 years at a call price of $1,050. The bond has a nominal yield to call of 6.5 percent. What is the bond’s yield to maturity, stated on a nominal, or annual basis?

A 15-year bond with a 10 percent semiannual coupon has a par value of $1,000.  The bond may be called after 10 years at a call price of $1,050.  The bond has a nominal yield to call of 6.5 percent.  What is the bond’s yield to maturity, stated on a nominal, or annual basis?

a. 5.97%
b. 6.30%
c. 6.75%
d. 6.95%
e. 7.10%










Answer: D

A bond with a face value of $1,000 has a 10-year maturity and an 8.5 percent annual coupon. The bond has a current yield of 8 percent. What is the bond’s yield to maturity?

A bond with a face value of $1,000 has a 10-year maturity and an 8.5 percent annual coupon.  The bond has a current yield of 8 percent.  What is the bond’s yield to maturity?

a. 8.25%
b. 8.86%
c. 7.59%
d. 8.50%
e. 8.00%









Answer: C

A 10-year bond sells for $1,075. The bond has a 9 percent semiannual coupon and a face value of $1,000. (That is, the bond pays a $45 coupon every six months.) The bond is callable in 5 years and the call price is $1,035. What is the bond’s nominal yield to call?

A 10-year bond sells for $1,075.  The bond has a 9 percent semiannual coupon and a face value of $1,000.  (That is, the bond pays a $45 coupon every six months.)  The bond is callable in 5 years and the call price is $1,035.  What is the bond’s nominal yield to call?

a. 7.19%
b. 7.75%
c. 7.90%
d. 8.00%
e. 8.13%









Answer: B

A 12-year, $1,000 face value bond has an 8 percent semiannual coupon and a nominal yield to maturity of 6 percent. The bond is callable in 5 years at a call price of $1,040. What is the bond’s nominal yield to call?

A 12-year, $1,000 face value bond has an 8 percent semiannual coupon and a nominal yield to maturity of 6 percent.  The bond is callable in 5 years at a call price of $1,040.  What is the bond’s nominal yield to call?

a. 1.76%
b. 8.27%
c. 4.86%
d. 3.52%
e. 5.22%








Answer: C

A 12-year bond has a 10 percent semiannual coupon and a face value of $1,000. The bond has a nominal yield to maturity of 7 percent. The bond can be called in five years at a call price of $1,050. What is the bond’s nominal yield to call?

A 12-year bond has a 10 percent semiannual coupon and a face value of $1,000.  The bond has a nominal yield to maturity of 7 percent.  The bond can be called in five years at a call price of $1,050.  What is the bond’s nominal yield to call?

a. 5.29%
b. 5.40%
c. 5.33%
d. 5.76%
e. 4.56%







Answer: C

McGriff Motors has bonds outstanding that will mature in 12 years. The bonds pay a 12 percent semiannual coupon and have a face value of $1,000 (that is, the bonds pay a $60 coupon every six months). The bonds currently have a yield to maturity of 10 percent. The bonds are callable in 8 years and have a call price of $1,050. What is the bonds’ yield to call?

McGriff Motors has bonds outstanding that will mature in 12 years.  The bonds pay a 12 percent semiannual coupon and have a face value of $1,000 (that is, the bonds pay a $60 coupon every six months).  The bonds currently have a yield to maturity of 10 percent.  The bonds are callable in 8 years and have a call price of $1,050.  What is the bonds’ yield to call?

a. 8.89%
b. 9.89%
c. 9.94%
d. 10.00%
e. 12.00%








Answer: B

A corporate bond with an 11 percent semiannual coupon has a yield to maturity of 9 percent. The bond matures in 20 years but is callable in 10 years. The maturity value is $1,000. The call price is $1,055. What is the bond’s yield to call?

A corporate bond with an 11 percent semiannual coupon has a yield to maturity of 9 percent.  The bond matures in 20 years but is callable in 10 years.  The maturity value is $1,000.  The call price is $1,055. What is the bond’s yield to call?

a. 8.43%
b. 8.50%
c. 8.58%
d. 8.65%
e. 9.00%









Answer: C

A 12-year bond with a 10 percent semiannual coupon and a $1,000 par value has a nominal yield to maturity of 9 percent. The bond can be called in five years at a call price of $1,050. What is the bond’s nominal yield to call?

A 12-year bond with a 10 percent semiannual coupon and a $1,000 par value has a nominal yield to maturity of 9 percent.  The bond can be called in five years at a call price of $1,050.  What is the bond’s nominal yield to call?

a. 4.50%
b. 8.25%
c. 8.88%
d. 8.98%
e. 9.00%






Answer: D