CHAPTER 7
1) Allison just received the semiannual payment of $35 on a bond she owns. Which
term refers to this payment?
A) Coupon
B) Face value
C) Discount
D) Call premium
E) Yield
Answer: A
2) Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a
principal payment at maturity. What is the $1,000 called?
A) Coupon
B) Face value
C) Discount
D) Yield
E) Dirty price
Answer: B
3) A discount bond's coupon rate is equal to the annual interest divided by the:
A) call price.
B) current price.
C) face value.
D) clean price.
E) dirty price.
Answer: C
4) The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW
Industries. The 9.8 percent is referred to as the:
A) coupon rate.
B) face rate.
C) call rate.
D) yield to maturity.
E) current yield.
Answer: D
5) The current yield is defined as the annual interest on a bond divided by the:
A) coupon rate.
B) face value.
C) market price.
D) call price.
E) par value.
Answer: C
6) A $1,000 par value corporate bond that pays $60 annually in interest was issued
last year. Which one of these would apply to this bond today if the current price of the
bond is $996.20?
A) The bond is currently selling at a premium.
B) The current yield exceeds the coupon rate.
C) The bond is selling at par value.
D) The current yield exceeds the yield to maturity.
E) The coupon rate has increased to 7 percent.
Answer: B
7) DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the
market rate of interest increases, then the:
A) coupon rate will also increase.
B) current yield will decrease.
C) yield to maturity will be less than the coupon rate.
D) market price of the bond will decrease.
E) coupon payment will increase.
Answer: D
8) Which one of the following applies to a premium bond?
A) Yield to maturity > Current yield > Coupon rate
B) Coupon rate = Current yield = Yield to maturity
C) Coupon rate > Yield to maturity > Current yield
D) Coupon rate < Yield to maturity < Current yield
E) Coupon rate > Current yield > Yield to maturity
Answer: E
9) Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid
semiannually, and a face value of $1,000. The bonds will mature in 10 years and will
be sold at par. Given this, which one of the following statements is correct?
A) The bonds will become discount bonds if the market rate of interest declines.
B) The bonds will pay 10 interest payments of $60 each.
C) The bonds will sell at a premium if the market rate is 5.5 percent.
D) The bonds will initially sell for $1,030 each.
E) The final payment will be in the amount of $1,060.
Answer: C
10) A newly issued bond has a coupon rate of 7 percent and semiannual interest
payments. The bonds are currently priced at par. The effective annual rate provided
by these bonds must be:
A) 3.5 percent.
B) greater than 3.5 percent but less than 7 percent.
C) 7 percent.
D) greater than 7 percent.
E) less than 3.5 percent.
Answer: D
11) You own a bond that pays an annual coupon of 6 percent that matures five years
from now. You purchased this 10-year bond at par value when it was originally
issued. Which one of the following statements applies to this bond if the relevant
market interest rate is now 5.8 percent?
A) The current yield to maturity is greater than 6 percent.
B) The current yield is 6 percent.
C) The next interest payment will be $30.
D) The bond is currently valued at one-half of its issue price.
E) You will realize a capital gain on the bond if you sell it today.
Answer: E
12) Municipal bonds:
A) are totally risk free.
B) generally have higher coupon rates than corporate bonds.
C) pay interest that is federally tax free.
D) are rarely callable.
E) are free of default risk.
Answer: C
13) A bond is quoted at a price of $1,011. This price is referred to as the:
A) call price.
B) face value.
C) clean price.
D) dirty price.
E) maturity price.
Answer: C
14) Which one of the following rates represents the change, if any, in your purchasing
power as a result of owning a bond?
A) Risk-free rate
B) Realized rate
C) Nominal rate
D) Real rate
E) Current rate
Answer: D
15) Which one of the following statements is correct?
A) The risk-free rate represents the change in purchasing power.
B) Any return greater than the inflation rate represents the risk premium.
C) Historical real rates of return must be positive.
D) Nominal rates exceed real rates by the amount of the risk-free rate.
E) The real rate must be less than the nominal rate given a positive rate of inflation.
Answer: E
16) The Fisher effect primarily emphasizes the effects of ________ on an investor's
rate of return.
A) default
B) market movements
C) interest rate changes
D) inflation
E) the time to maturity
Answer: D
17) Which one of the following premiums is compensation for the possibility that a
bond issuer may not pay a bond's interest or principal payments as expected?
A) Default risk
B) Taxability
C) Liquidity
D) Inflation
E) Interest rate risk
Answer: A
18) You purchase a bond with an invoice price of $1,119. The bond has a coupon rate
of 6.25 percent, a face value of $1,000, and there are four months to the next
semiannual coupon date. What is the clean price of this bond?
A) $1,108.58
B) $1,052.17
C) $1,114.14
D) $1,087.75
E) $1,083.50
Answer: A
Explanation: Accrued interest = (.0625)($1,000)(1/2)(2/6)
Accrued interest = $10.42
Clean price = $1,119 − 10.42
Clean price = $1,108.58
19) A bond that pays interest annually yielded 7.37 percent last year. The inflation
rate for the same period was 2.4 percent. What was the actual real rate of return?
A) 4.19 percent
B) 4.25 percent
C) 4.85 percent
D) 4.41 percent
E) 4.49 percent
Answer: C
Explanation: r = 1.0737/1.024 − 1
r = .0485, or 4.85%
