FIN350 In Class Work No.

2---Bond& Interest Rate

1. The discount rate that makes the present value of a bond’s payments equal to its price
is termed the:
A) capital gain yield.
B) yield to maturity.
C) current yield.
D) coupon rate.

2. The coupon rate of a bond equals:

A) its yield to maturity.
B) coupon as a percentage of its face value.
C) the maturity value.
D) coupon as a percentage of its price.

3. The face value of a bond is received by the bondholder:

A) at the time of purchase.
B) annually.
C) whenever coupon payments are made.
D) at maturity.
E) none of the above

4. 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) $696.74
B) $1,075.82
C) $1,082.00
D) $1,123.01

 1 1  $1,000
  5   5
 .07 .07(1.07)  (1.07)
PV = $90
$1,000
= $90 [14.2857 – 10.1855] + 1.4026
= $369.02 + $712.98
= $1,082.00

5. Which of the following is correct for a bond currently selling at a premium to par?
A) Its current yield is higher than its coupon rate.
B) Its current yield is lower than its coupon rate.
C) Its yield to maturity is higher than its coupon rate.
D) Its default risk is extremely low.

6. Which of the following bonds would be likely to exhibit a greater degree of interest-rate

1
 risk? That is, which bond's price will be most sensitive to changes in interest rate?
A) A zero-coupon bond with 30 years until maturity.
B) A coupon-paying bond with 20 years until maturity.
C) A floating-rate bond with 20 years until maturity.
D) A zero-coupon bond with 20 years until maturity.

7. U.S. Treasury bond yields do not contain a:

A) coupon interest payment.
B) nominal interest rate.
A) yield to maturity.
C) default premium.

8. What is the current yield of a bond with a 6% coupon, four years until maturity, and a
price of $750?

A) 6%
B) 8%
C) 12%
D) 14.7%

9. If a bond has a Standard & Poor's rating of BBB, it is referred to as a(n) ____.

a. Junk bond
b. James Bond.
c. High GPA bond.
d. Barry's bond.
e. Investment grade bond.

10. When the yield curve is upward-sloping, then:

A) short-maturity bonds offer high coupon rates.
B) long-maturity bonds are priced above par value.
C) short-maturity bonds yield less than long-maturity bonds.
D) long-maturity bonds increase in price when interest rates increase.

11. Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds
have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is
the yield to maturity on the bonds?

A) 10.09%
B) 11.13%
C) 9.25%
D) 9.89%

2
 12. Assume interest rates on long-term Treasury bond and two corporate bonds are as
follows:
Treasury bond : 7.72%
Corpate bond with rating A : 9.64%
Corpate bond with rating BBB : 10.18%
All three bonds will mature in 20 years ; they all have very good liquidity.
The differences in interest rates among these bonds are caused primarily by

a. Inflation differences.
b. inflation premium.
c. Default risk differences.
d. Maturity risk differences.

13. If the Treasury yield curve is downward sloping, what is the yield to maturity on a
10-year Treasury bond, relative to that on a 1-year Treasury bond?

a. The yields on the two bonds are equal.

b. The yield on a 10-year Treasury bond will always be higher than the yield
on a 1-year Treasury bond.
c. It is impossible to tell without knowing the coupon rates of the bonds.
d. The yield on the 10-year Treasury bond is less than the yield on
a 1-year Treasury bond.
e. e. It is impossible to tell without knowing the relative default
risks of the two Treasury bonds.

14. Find the current yield and the capital gains yield for a 10-year, 10% annual coupon
bond that sells for $900, and has a face value of $1,000.

A. 10%;0.67%
B. 11.11%;0.64%
C. 9%;0.76%
D. 9%;0.67%

current yield=coupon/price= 100/900=11.11%

yield to maturity=from calculator=1 1.75%
capital gain yield= yield to maturity-current yield=0.64%

3
15. 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) increase over time, reaching par value at maturity.

B) decline over time, reaching par value at maturity.
C) be less than the face value at maturity.
D) exceed the face value at maturity.

16. In finance, a ________bond is a type of bond that can be converted into shares of
stock in the issuing company, usually at some pre-announced ratio. It is a hybrid security
with debt- and equity-like features. A convertible bond typically has a ____yield to
maturity than that of an otherwise comparable bond.
A) callable; lower
B) indexed bond; lower
C) putable bond; higher
D) convertible; lower
E) municipal bond; higher

17. A(n) ____ is a type of debt security in which only the face value of the bond is
promised to be paid to the investor, with any coupon payments being paid only if the
issuing company has enough earnings to pay for the coupon payment.
A) callable bond
B) putable bond
C) indexed bond
D) income bond

18. Risk premiums for different types of bond should be: (IP=inflation
premium, MRP=maturity risk premium, DRP=default risk premium,
LP=liquidity premium.)
IP MRP DRP LP
A)
S-T Treasury  

L-T Treasury 

S-T Corporate   

L-T Corporate    

B)
IP MRP DRP LP

S-T Treasury  

L-T Treasury  

S-T Corporate   

L-T Corporate   

4
C)

IP MRP DRP LP

S-T Treasury 

L-T Treasury  

S-T Corporate   

L-T Corporate    

19. Please use the following information to value a 10% coupon rate, four
years maturity bond, if the term structure is:

Year Spot rate

1 5%
2 5.4%
3 5.7%
4 5.9%
The bond should sell for:
(0.05  0.054  0.057  0.059) / 4 = 0.055
100 100 100 (100  1, 000)
P=   
a. (1  .055) (1  .055) (1  .055)
1 2 3
(1  .055) 4
100 100 100 1, 000
b.
P=   
(1  .05) (1  .054) (1  .057) (1  .059) 4
1 2 3

c. 100 100 100 (100  1, 000)

P=   
(1  .05) (1  .054) (1  .057)
1 2 3
(1  .059) 4

100 100 100 (100  1,000)

P=   
d. (1  .059) (1  .059) (1  .059)
1 2 3
(1  .059) 4
20. What is the value of a 10-year, 10% semiannual coupon bond, if nominal discount
rate rd = 13%? (Hint: lecture slides example.)

a. $834.72
b. $843.27
c. $1000.00
d. $884.96
e. $887.00

21. Sometimes a security cannot be sold in a market quickly unless the seller cuts price.
This may happen because there are not many buyers /sellers in the market. This
kind of risk is called:

5
 A) inflation risk
B) default risk
C) liquidly risk
D) Interest rate risk
E) volume risk

22. In a liquidation process, priority of claims should be paid in the following order:
A)
1. Trustee’s costs
2. Secured creditors from sales of secured assets.
3. Wages, subject to limits
4. Taxes
5. Unfunded pension liabilities
6. Unsecured creditors
7. Preferred stock
8. Common stock

B)
1. Secured creditors from sales of secured assets.
2. Trustee’s costs
3. Wages, subject to limits
4. Taxes
5. Unfunded pension liabilities
6. Unsecured creditors
7. Preferred stock
8. Common stock

C)
1. Unfunded pension liabilities
2. Secured creditors from sales of secured assets.
3. Trustee’s costs
4. Wages, subject to limits
5. Taxes
6. Unsecured creditors
7. Preferred stock
8. Common stock

D)
1. Preferred stock
2. Secured creditors from sales of secured assets.
3. Trustee’s costs
4. Wages, subject to limits
5. Taxes
6. Unfunded pension liabilities
7. Unsecured creditors
8. Common stock

Key: BBDCB ADBEC ACDBA DDCCA CB

6
FIN350 In Class Work No. 2---Bond

1. The discount rate that makes the present value of a bond’s payments equal to its price
is termed the:
A) capital gain yield.
B) yield to maturity.
C) current yield.
D) coupon rate.

2. The coupon rate of a bond equals:

A) its yield to maturity.
B) coupon as a percentage of its face value.
C) the maturity value.
D) coupon as a percentage of its price.

3. The face value of a bond is received by the bondholder:

A) at the time of purchase.
B) annually.
C) whenever coupon payments are made.
D) at maturity.
E) none of the above

4. 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) $696.74
B) $1,075.82
C) $1,082.00
D) $1,123.01

 1 1  $1,000
  5   5
 .07 .07(1.07)  (1.07)
PV = $90
$1,000
= $90 [14.2857 – 10.1855] + 1.4026
= $369.02 + $712.98
= $1,082.00

5. Which of the following is correct for a bond currently selling at a premium to par?
A) Its current yield is higher than its coupon rate.
B) Its current yield is lower than its coupon rate.
C) Its yield to maturity is higher than its coupon rate.
D) Its default risk is extremely low.

6. Which of the following bonds would be likely to exhibit a greater degree of interest-rate

7
 risk? That is , which bond's price will be most sensitive to changes in interest rate?
A) A zero-coupon bond with 30 years until maturity.
B) A coupon-paying bond with 20 years until maturity.
C) A floating-rate bond with 20 years until maturity.
D) A zero-coupon bond with 20 years until maturity.

7. U.S. Treasury bond yields do not contain a:

A) coupon interest payment.
B) nominal interest rate.
B) yield to maturity.
C) default premium.

8. What is the current yield of a bond with a 6% coupon, four years until maturity, and a
price of $750?

A) 6%
B) 8%
C) 12%
D) 14.7%

9. If a bond has a Standard & Poor's rating of BBB, it is referred to as a(n) ____.

a. Junk bond
b. James Bond.
c. High GPA bond.
d. Barry's bond.
e. Investment grade bond.

10. When the yield curve is upward-sloping, then:

A) short-maturity bonds offer high coupon rates.
B) long-maturity bonds are priced above par value.
C) short-maturity bonds yield less than long-maturity bonds.
D) long-maturity bonds increase in price when interest rates increase.

11. Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds
have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is
the yield to maturity on the bonds?

A) 10.09%
B) 11.13%
C) 9.25%
D) 9.89%

8
 12. Assume interest rates on long-term Treasury bond and two corporate bonds are as
follows:
Treasury bond : 7.72%
Corpate bond with rating A : 9.64%
Corpate bond with rating BBB : 10.18%
All three bonds will mature in 20 years ; they all have very good liquidity.
The differences in interest rates among these bonds are caused primarily by

a. Inflation differences.
b. inflation premium.
c. Default risk differences.
d. Maturity risk differences.

13. If the Treasury yield curve is downward sloping, what is the yield to maturity on a
10-year Treasury bond, relative to that on a 1-year Treasury bond?

a. The yields on the two bonds are equal.

b. The yield on a 10-year Treasury bond will always be higher than the yield
on a 1-year Treasury bond.
c. It is impossible to tell without knowing the coupon rates of the bonds.
d. The yield on the 10-year Treasury bond is less than the yield on
a 1-year Treasury bond.
e. e. It is impossible to tell without knowing the relative default
risks of the two Treasury bonds.

14. Find the current yield and the capital gains yield for a 10-year, 10% annual coupon
bond that sells for $900, and has a face value of $1,000.

A. 10%;0.67%
B. 11.11%;0.64%
C. 9%;0.76%
D. 9%;0.67%

current yield=coupon/price= 100/900=11.11%

yield to maturity=from calculator=1 1.75%
capital gain yield= yield to maturity-current yield=0.64%

9
15. 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) increase over time, reaching par value at maturity.

B) decline over time, reaching par value at maturity.
C) be less than the face value at maturity.
D) exceed the face value at maturity.

16. In finance, a ________bond is a type of bond that can be converted into shares of
stock in the issuing company, usually at some pre-announced ratio. It is a hybrid security
with debt- and equity-like features. A convertible bond typically has a ____yield to
maturity than that of an otherwise comparable bond.
F) callable; lower
G) indexed bond; lower
H) putable bond; higher
I) convertible; lower
J) municipal bond; higher

17. A(n) ____ is a type of debt security in which only the face value of the bond is
promised to be paid to the investor, with any coupon payments being paid only if the
issuing company has enough earnings to pay for the coupon payment.
A) callable bond
B) putable bond
C) indexed bond
D) income bond

18. Risk premiums for different types of bond should be: (IP=inflation
premium, MRP=maturity risk premium, DRP=default risk premium,
LP=liquidity premium.)
IP MRP DRP LP
A)
S-T Treasury  

L-T Treasury 

S-T Corporate   

L-T Corporate    

B)
IP MRP DRP LP

S-T Treasury  

L-T Treasury  

S-T Corporate   

L-T Corporate   

10
C)

IP MRP DRP LP

S-T Treasury 

L-T Treasury  

S-T Corporate   

L-T Corporate    

19. Please use the following information to value a 10% coupon rate, four
years maturity bond, if the term structure is:

Year Spot rate

1 5%
2 5.4%
3 5.7%
4 5.9%
The bond should sell for:
(0.05  0.054  0.057  0.059) / 4 = 0.055
100 100 100 (100  1, 000)
P=   
a. (1  .055) (1  .055) (1  .055)
1 2 3
(1  .055) 4
100 100 100 1, 000
b.
P=   
(1  .05) (1  .054) (1  .057) (1  .059) 4
1 2 3

c. 100 100 100 (100  1, 000)

P=   
(1  .05) (1  .054) (1  .057)
1 2 3
(1  .059) 4

100 100 100 (100  1,000)

P=   
d. (1  .059) (1  .059) (1  .059)
1 2 3
(1  .059) 4
20. What is the value of a 10-year, 10% semiannual coupon bond, if nominal discount
rate rd = 13%? (Hint: lecture slides example.)

a. $834.72
b. $843.27
c. $1000.00
d. $884.96
e. $887.00

21. Sometimes a security cannot be sold in a market quickly unless the seller cuts price.
This may happen because there are not many buyers /sellers in the market. This
kind of risk is called:

A) inflation risk
B) default risk

11
 C) liquidly risk
D) Interest rate risk
E) volume risk

22. In a liquidation process, priority of claims should be paid in the following order:
A)
9. Trustee’s costs
10. Secured creditors from sales of secured assets.
11. Wages, subject to limits
12. Taxes
13. Unfunded pension liabilities
14. Unsecured creditors
15. Preferred stock
16. Common stock

B)
9. Secured creditors from sales of secured assets.
10. Trustee’s costs
11. Wages, subject to limits
12. Taxes
13. Unfunded pension liabilities
14. Unsecured creditors
15. Preferred stock
16. Common stock

C)
9. Unfunded pension liabilities
10. Secured creditors from sales of secured assets.
11. Trustee’s costs
12. Wages, subject to limits
13. Taxes
14. Unsecured creditors
15. Preferred stock
16. Common stock

D)
9. Preferred stock
10. Secured creditors from sales of secured assets.
11. Trustee’s costs
12. Wages, subject to limits
13. Taxes
14. Unfunded pension liabilities
15. Unsecured creditors
16. Common stock

Key: BBDCB ADBEC ACDBA DDCCA CB

12