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