BOND VALUATION

BOND CASH FLOWS, PRICES, AND YIELDS

1) Which of the following statements is false?

A) The principal or face value of a bond is the notional amount we use to compute the interest payments.
B) Payments are made on bonds until a final repayment date, called the term date of the bond.
C) The coupon rate of a bond is set by the issuer and stated on the bond certificate.
D) The promised interest payments of a bond are called coupons.

2) Which of the following statements is false?

A) The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the
bond.
B) The bond certificate indicates the amounts and dates of all payments to be made.
C) The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are
paid up until the maturity date.
D) Usually, the face value of a bond is repaid at maturity.

3) Which of the following statements is false?

A) The amount of each coupon payment is determined by the coupon rate of the bond.
B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
C) The simplest type of bond is a zero-coupon bond.
D) Treasury bills are U.S. government bonds with a maturity of up to one year.

4) Which of the following statements is false?

A) Bond traders typically quote bond prices rather than bond yields.
B) Treasury bills are zero-coupon bonds.
C) Zero-coupon bonds always trade at a discount.
D) The yield to maturity is typically stated as an annual rate by multiplying the calculated YTM by the number of
coupon payment per year, thereby converting it to an APR.

5) Which of the following statements is false?

A) One advantage of quoting the yield to maturity rather than the price is that the yield is
independent of the face value of the bond.
B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no simple formula to solve for the
yield to maturity directly.
C) Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used
interchangeably.
D) The IRR of an investment in a bond is given a special name, the yield to maturity (YTM).

6) Which of the following statements is false?

A) Zero-coupon bonds are also called pure discount bonds.
B) The IRR of an investment opportunity is the discount rate at which the NPV of the investment opportunity is
equal to zero.
C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond
to maturity and receiving the promised face value payment.
D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1000.

IBRAHIM ANSAH THEOPHILUS MENSAH

[0593126110] [0205391193]
7) Consider a zero-coupon bond with 20 years to maturity. The price will this bond trade if the YTM is 6% is
closest to:
A) $215
B) $312
C) $335
D) $306

8) Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the YTM of
this bond is 10.4%, then the price of this bond is closest to:
A) $1000
B) $602
C) $1040
D) $372

9) Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the bond is
currently trading for $459, then the yield to maturity on this bond is closest to:
A) 7.5%
B) 10.4%
C) 9.7%
D) 8.1%

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years.
The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are
to be made semi-annually.

10) How much will each semi-annual coupon payment be?

A) $60
B) $40
C) $120
D) $80

11) Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then the price that this bond trades
for will be closest to:
A) $1,045
B) $691
C) $1,000
D) $957

12) Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at
A) par.
B) a discount.
C) a premium.
D) None of the above

13) Assuming the appropriate YTM on the Sisyphean bond is 9.0%, then the price that this bond trades
for will be closest to:
A) $946
B) $919
IBRAHIM ANSAH THEOPHILUS MENSAH
[0593126110] [0205391193]
C) $1,086
D) $1,000

14) Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at
A) a premium.
B) a discount.
C) par.
D) None of the above

15) Assuming that this bond trades for $1,112, then the YTM for this bond is closest to:
A) 8.0%
B) 3.4%
C) 6.8%
D) 9.2%

16) Assuming that this bond trades for $903, then the YTM for this bond is closest to:
A) 8.0%
B) 6.8%
C) 9.9%
D) 9.2%

17) Which of the following statements is false?

A) If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the
coupons and from receiving a face value that exceeds the price paid forthe bond.
B) Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par.
C) Coupon bonds always trade for a discount.
D) At any point in time, changes in market interest rates affect a bondʹs yield to maturity and its price.

18) Which of the following statements is false?

A) When a bond is trading at a discount, the price drop when a coupon is paid will be larger than the price
increase between coupons, so the bondʹs discount will tend to decline as time passes.
B) When a bond trades at a price equal to its face value, it is said to trade at par.
C) As interest rates and bond yield rise, bond prices will fall.
D) Ultimately, the prices of all bonds approach the bond’s face value when the bonds mature and their last
coupon are paid.

19) Which of the following statements is false?

A) A bond trades at par when its coupon rate is equal to its yield to maturity.
B) The clean price of a bond is adjusted for accrued interest.
C) The price of the bond will drop by the amount of the coupon immediately after the coupon is paid.
D) If a coupon bond’s yield to maturity exceeds its coupon rate, the present value of its cash flows at the yield to
maturity will be greater than its face value.

20) Which of the following statements is false?

A) Bond prices converge to the bondʹs face value due to the time effect, but simultaneously move
up and down due to unpredictable changes in bond yields.
B) As interest rates and bond yields fall, bond prices will rise.
C) Bonds with higher coupon rates are more sensitive to interest rate changes.
IBRAHIM ANSAH THEOPHILUS MENSAH
[0593126110] [0205391193]
D) Shorter maturity zero coupon bonds are less sensitive to changes in interest rates than are longer-term zero
coupon bonds.

21) Which of the following statements is false?

A) If a bond trades at a premium, its yield to maturity will exceed its coupon rate.
B) A bond that trades at a premium is said to trade above par.
C) When a coupon-paying bond is trading at a premium, an investorʹs return from the coupons is diminished by
receiving a face value less than the price paid for the bond.
D) Holding fixed the bondʹs yield to maturity, for a bond not trading at par, the present value of the bondʹs
remaining cash flows changes as the time to maturity decreases.

22) Which of the following statements is false?

A) Prices of bonds with lower durations are more sensitive to interest rate changes.
B) When a bond is trading at a discount, the price increase between coupons will exceed the drop
when a coupon is paid, so the bond’s price will rise, and its discount will decline as time passes.
C) Coupon bonds may trade at a discount, at a premium, or at par.
D) The sensitivity of a bondʹs price changes in interest rates is the bondʹs duration.

23) If a bond is currently trading at its face (par) value, then it must be the case that
A) the bondʹs yield to maturity is less than its coupon rate.
B) the bondʹs yield to maturity is equal to its coupon rate.
C) the bondʹs yield to maturity is greater than its coupon rate.
D) the bond is a zero-coupon bond.

24) The discount rate that sets the present value of the promised bond payments equal to the current
market price of the bond is called
A) the current yield.
B) the yield to maturity.
C) the zero-coupon yield.
D) the discount yield.

25) Consider a zero coupon bond with 20 years to maturity. The amount that the price of the bond will
change if its yield to maturity decreases from 7% to 5% is closest to:
A) $120
B) -$53
C) $53
D) $673

26) Consider a zero-coupon bond with 20 years to maturity. The percentage change in the price of the
bond if its yield to maturity decreases from 7% to 5% is closest to:
A) 46%
B) 17%
C) 22%
D) 38%

27) Consider a bond that pays annually an 8% coupon with 20 years to maturity. The amount that the price of the
bond will change if its yield to maturity increases from 5% to 7% is closest to:
A) -$270
IBRAHIM ANSAH THEOPHILUS MENSAH
[0593126110] [0205391193]
B) -$225
C) -$310
D) -$250

28) Consider a bond that pays annually an 8% coupon with 20 years to maturity. The percentage change in the
price of the bond if its yield to maturity increases from 5% to 7% is closest to:
A) 22%
B) 24%
C) -22%
D) -24%
29) Which of the following statements is false?
A) Bond ratings encourage widespread investor participation and relatively liquid markets.
B) Bonds in the top four categories are often referred to as investment grade bonds.
C) A bond’s rating depends on the risk of bankruptcy as well as the bondholder’s ability to lay claim to the firm’s
assets in the event of a bankruptcy.
D) Debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same
company that have a higher priority in bankruptcy.

30) Which of the following statements is false?

A) Investors pay less for bonds with credit risk than they would for an otherwise identical default-free bond.
B) Credit spreads fluctuate as perceptions regarding the probability of default change.
C) Credit spreads are high for bonds with high ratings.
D) We refer to the difference between the yields of the corporate bonds and the Treasury yields as the default
spread or credit spread.

31) Consider a corporate bond with a $1000 face value, 10% coupon with semi-annual coupon payments, 5
years until maturity, and currently is selling for (has a cash price of) $1,113.80. The next coupon payment will be
made in 63 days and there are 182 days in the current coupon period. The clean price for this bond is closest to:
A) $1146.50
B) $1065.70
C) $1113.80
D) $1081.10

32) If the stock price falls and the call price rises, then what has happened to the call option's implied volatility
(assuming nothing else has changed)?
a) UP
b) Down
c) Same
d) Can't tell

33) Two-year zero-coupon securities have greater price volatility than one-year zero-coupon securities over an
identical one month period:
a) under all circumstances
b) when investors are risk averse
c) only for parallel shifts in a flat yield curve
d) as long as the law of one price holds

IBRAHIM ANSAH THEOPHILUS MENSAH

[0593126110] [0205391193]
34) The price (per $100 face value) of a 7% semi-annual pay bond with exactly 2-1/2 years to maturity and a yield
to maturity of 8.75% is:
a) 93.4381
b) 96.9111
c) 96.1454
d) none of the above

35) Assuming the plowback ratio (b) is greater than zero and less than one, if a company has a higher ROE on its
investments, then all else the same, which of the following must be true (more than one may be correct):
a) the P/E ratio of its stock will be higher
b) the stock’s beta will be higher
c) the company’s growth rate will be higher
d) the implied volatility of call options on the stock will be lower

36) The Dividend Discount Model (DDM)

a. is a valuation model only for companies that have paid dividends
b. is a dividend distribution model used by corporate managers for dividend decisions
c. is a valuation model for new issues only
d. accounts for risk by discounting with a risk adjusted discount rate

37) The efficient market hypothesis says

(a) No one can ever beat the market over a ten year period
(b) Insider trading should be illegal
(c) Everyone should hold the same portfolio
(d) None of the above

38) According to the liquidity premium theory, an upward sloping yield implies
(a) Short-term rates are expected to rise
(b) Long-term rates are expected to rise
(c) Short-term rates are not expected to decline
(d) You cannot tell

39) A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in 5 years, and is
selling today at a $72 discount from par value. The yield to maturity on this bond is
a) 6.00%
b) 8.33%
c) 10.39%
d) 12.00%

40. Which of the following five-year investments has the highest effective annual rate
(a) An 8 percent coupon annual pay bond selling at 97
(b) An 8 percent coupon semi-annual pay bond selling at par
(c) A zero coupon bond with $ 1 000 face value selling at $665
(d) They all have the same EAR

41. Suppose you buy a put option with a strike price of 100 for a premium of $10. Your maximum profit per share
is
(a) $10
IBRAHIM ANSAH THEOPHILUS MENSAH
[0593126110] [0205391193]
(b) $100
(c) $90
(d) $110

42. If securities returns are serially correlated then:

(a) the stock market is weak form efficient
(b) the stock market is semi-strong form efficient
(c) the stock market is strong form efficient
(d) the stock market is weak form inefficient

43. According to the expectations theory, an upward sloping yield curve implies
(a) Future short-term rates are expected to rise
(b) Long-term rates will be higher next year
(c) a and b
(d) You cannot tell

44. Which of the following is consistent with a random walk?

(a) Tomorrow's stock price level is independent of today's stock price level
(b) Tomorrow's returns are independent of today's returns
(c) News does not affect stock prices
(d) All of the above

45. Being long a call and short a put with the same exercise price and expiration is like:
a. Long stock
b. Short stock
c. Long stock on margin
d. Long a straddle

46. If the implied volatility of a call is greater than what you think is the actual volatility, you should:
a. Buy the call
b. Write the call
c. Buy the put
d. Sell the stock

47. In a swap agreement, the fixed rate payer/floating rate receiver has a position similar to:
a. Long the five-year, short the 6-month
b. Short the five-year, short the 6-month
c. Long the five-year, long the 6-month
d. Short the five-year, long the 6-month

48. If the expected one-year rate beginning next year is less than the forward rate, what should you think about
doing today if you are going to receive 1000 dollars in one year?
a. Nothing
b. Buy the one year zero, short the two year zero
c. Buy the two year zero, short the one year zero
d. Buy a futures contract on the 30-year bond and sell in two years

IBRAHIM ANSAH THEOPHILUS MENSAH

[0593126110] [0205391193]
49. According to the Black Scholes model, if N (d1) and N (d2) for a particular call option are both =O, which of
the following is most true
a. The call is worthless
b. The call will be exercised with certainty
c. The call will not equal the minimum value
d. The call will be less than the minimum value

50. Which of the following represents an arbitrage opportunity where you would do the following: buy the call,
sell the put and sell the stock. S=l10, E=100, r=0, t=1
a. P =2, C=12
b. P=5, C=15
c. P=12, C=23
d. P=5, C=12

51. Assume you bought an 8% coupon bearing bond with 4 years to maturity at par and then sold it at a premium
before maturity. If you were able to reinvest the coupons at the YTM, then:
a. Return = YTM
b. Return is less than YTM
c. Return is greater than YTM
d. You cannot tell

52. The Liquidity Premium theory says (2 are right):

a. The equilibrium 2 year rate = forward rate
b. The equilibrium 2 year rate is greater than the average of the current and
expected future short term rates
c. The expected future short term rate = the forward rate
d. The expected future short-term rate is less than the forward rate

53. The Liquidity Premium theory holds because investors are risk averse and because there are:
a. More 2 year investors than one year investors
b. More 2 year securities than “two-year” investors
c. More one year securities than one year investors
d. All of the above

54. Assume a zero coupon bond has duration = 10 years and a 30 year bond has an 18% coupon and a duration
=10 years. Assume further that the yields on both bonds are the same and then change by the identical
infinitesimally small amount. Then, the price volatility of the 30 year will be:
a. Equal to the price volatility of the zero
b. Less than the price volatility of the zero
c. Greater than the price volatility of the zero
d. Can't tell

55. The ability to replicate an option with a position in the underlying stock depends crucially on:
(a) dynamically adjusting the hedge ratio on a continuous basis
(b) correctly predicting tomorrow’s stock price
(c) properly estimating the stock's β
(d) all of the above

IBRAHIM ANSAH THEOPHILUS MENSAH

[0593126110] [0205391193]
56. In a downward sloping yield curve environment,
a) the liquidity premium cannot exist
b) according to the expectations approach, long-term rates are no longer an average of
current and expected future rates
c) expected future short term rates cannot be greater than the current short term rate
d) a and b are correct

57. According to the Expectations Approach to the term structure

a) the forward rate is not a good estimate of the expected future 1-year rate
b) investors are risk averse
c) when the term structure is in equilibrium, the forward rate is equal to the expected rate
d) none of the above

58. According to the liquidity premium approach to the term structure

a) The investors' subjective degree of risk aversion is embedded in the 2-year rate
b) the equilibrium 2-year rate > an average of 1-year and expected future 1-year rate
c) the forward rate > the expected rate due to a risk premium
d) all of the above

59. Which of the following statements is false:

a) When current yield is greater than yield to maturity, the bond is selling at a premium
b) The price of a semi-annual or an annual coupon paying bond will be the same if their coupon rate is the same
as yield to maturity regardless of differences in maturity
c) The concept of yield to maturity suffers from the reinvestment assumption for both semi-annual and annual
coupon paying bonds
d) If I invest $100 in a 10% coupon, 2-year bond at par, I will certainly get $121 at the end of the two years

A security that pays a constant dividend every year forever is known as:
a. A zero-coupon bond
b. Preferred stock
c. Class A Common stock
d. A Reverse Perpetual Mortgage obligation security
e. A callable bond

60. A 10-year annual coupon bond was issued four years ago at par. Since then the bond's yield to maturity
(YTM) has decreased from 9% to 7%. Which of the following statements is true about the current market price of
the bond?
a. The bond is selling at a discount
b. The bond is selling at par
c. The bond is selling at a premium
d. The bond is selling at book value
e. Insufficient information

61. What should be the price of a $1,000 par value, 10% annual coupon rate (coupon interest paid semi-
annually) bond with 30 years remaining to maturity, assuming a discount rate of 9%?
a. $1,101.88
b.$1,102.44
c. $1,103.19
IBRAHIM ANSAH THEOPHILUS MENSAH
[0593126110] [0205391193]
d.$1,104.48
e. $1,105.72

62. You have just discovered a $1,000 par value corporate bond with a maturity of 10 years.
The bond's yield to maturity is 9% and the bond is currently selling for $743.29. What is the bond's annual
coupon rate (the bond pays coupon payments annually)?
a.5%
b.6%
c.7%
d.8%
e. 9%

63. What is the yield to maturity of a $1,000 par value bond with a coupon rate of 10% (semi-annual coupon
payments) that matures in 30 years assuming the bond is currently selling for $838.13?
a.6.0%
b.6.2%
c.10.0%
d.12.0%
e.12.4%

64. XYZ, Inc. just paid a dividend of $3 per share. The industry analysts predict that XYZ's dividends will grow at a
constant rate of 4% forever. If the stock is currently trading at $25 per share, what is the required rate of return
on this stock?
a.8.48%
b.12.00%
c.12.48%
d.16.00%
e.16.48%

65. Unitongue Talk, Inc. just paid a $2.00 annual dividend. Investors believe that the dividends will grow at a rate
of 20% per year for each of the next two years and 5% per year thereafter. Assuming a discount rate of 10%, what
should the current price of the stock be?
a. $60.50
b.$57.60
c.$54.55
d.$49.87
c. $43,56

66. A 15-year annual coupon bond was issued four years ago at par. Since then the bond's yield to maturity
(YTM) has increased from 6% to 8%. Which of the following statements is true about the current market price of
the bond?
a. The bond is selling at a discount
b. The bond is selling at par
c. The bond is selling at a premium
d. The bond is selling at book value
e. Insufficient information

IBRAHIM ANSAH THEOPHILUS MENSAH

[0593126110] [0205391193]
67. A $1,000 par value, fixed coupon bond has 15 years remaining until maturity. The bond has a coupon rate of
6 percent, and it pays quarterly coupon payments. If the market rate for this bond is 8 percent, what is the price
of the bond?
a. $828.81
b. $826.20
c. $1,513.98
d. $195.52
c. $1,320.84

68. Compute the yield to maturity on a $5,000 par value bond with a coupon rate of 10 percent (semi-annual
coupon payments) that matures in 20 years and currently sells for $4,718.50.
a, 2.35%
b. 4.71%
с. 5.34%
d. 10.69%
e. 12.22%

69. You have just discovered a $1,000 par value corporate bond with a maturity of 8 years.
The bond's yield to maturity is 9% and the bond is currently selling for $1.280.85, What is the bond's annual
coupon rate (the bond pays coupon payments semi-annually)?
a. 12.5%
b. 13.0%
с. 13,5%
d. 14.0%
e. None of the above.

70. If an analyst uses the constant dividend growth model to value a stock (Le., PO = DI/(rs-g), which of the
following is certain to cause the analyst to decrease her estimate of the current value of the stock?
a. Decreasing the required rate of return for the stock.
b. Increasing the estimate of the amount of next year's dividend.
c. Decreasing the expected dividend growth rate.
d. Increasing the price earnings multiple.
e. An announcement that the President of the firm had Been

IBRAHIM ANSAH THEOPHILUS MENSAH

[0593126110] [0205391193]