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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Bond Prices and Yields

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	The current yield on a bond is equal to ________.
		A)	the internal rate of return
		B)	the yield to maturity
		C)	annual interest divided by the current market price
		D)	annual interest divided by the par value
		E)	none of the above


2	To earn a high rating from the bond rating agencies, a firm should have
		A)	a. a low times interest earned ratio
		B)	b. a low debt to equity ratio
		C)	c. a high quick ratio
		D)	b. and c.
		E)	a. and c.


3	Ceteris paribus, the price and yield on a bond are
		A)	negatively related.
		B)	positively related.
		C)	sometimes positively and sometimes negatively related.
		D)	not related.
		E)	indefinitely related.


4	A coupon bond is a bond that
		A)	does not pay interest on a regular basis but pays a lump sum at maturity
		B)	pays interest on a regular basis (typically every six months)
		C)	can always be converted into a specific number of shares of common stock in the issuing company
		D)	always sells at par
		E)	none of the above


5	The yield to maturity on a bond is
		A)	the discount rate that will set the present value of the payments equal to the bond price.
		B)	below the coupon rate when the bond sells at a discount, and equal to the coupon rate when the bond sells at a premium.
		C)	based on the assumption that any payments received are reinvested at the coupon rate.
		D)	all of the above.
		E)	none of the above


6	Consider two bonds, X and Y. Both bonds presently are selling at their par value of $1,000. Each pays interest of $150 annually. Bond A will mature in 6 years while bond B will mature in 7 years. If the yields to maturity on the two bonds change from 15% to 12%
		A)	both bonds will increase in value, but bond X will increase more than bond Y
		B)	both bonds will decrease in value, but bond X will decrease more than bond Y
		C)	both bonds will increase in value, but bond Y will increase more than bond X
		D)	both bonds will decrease in value, but bond Y will decrease more than bond X
		E)	none of the above


7	Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates remain constant, one year from now the price of this bond will be
		A)	$1,000
		B)	higher
		C)	lower
		D)	the same
		E)	cannot be determined


8	The bond indenture includes
		A)	the maturity date of the bond.
		B)	the par value of the bond.
		C)	the coupon rate of the bond.
		D)	all of the above.
		E)	none of the above.


9	Which one of the following statements about convertibles is true?
		A)	The longer the call protection on a convertible, the less the security is worth.
		B)	Convertibles are not callable.
		C)	The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth.
		D)	The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock.
		E)	The more volatile the underlying stock, the greater the value of the conversion feature.


10	What is the price of a $1,000 par value, 8% coupon bond with a yield to maturity of 8%?
		A)	$1,000
		B)	$974
		C)	$1,021
		D)	$80
		E)	$1,080

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