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Which of the following statements is true of zero coupon bonds?


A) Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.
B) Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons.
C) The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department.
D) All of the above are true.

Correct Answer

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Suppose an investor earned a semiannual yield of 6.4 percent on a bond paying coupons twice a year. What is the effective annual yield (EAY) on this investment? (Round to two decimal places.)


A) 12.80%
B) 6.40%
C) 6.50%
D) 13.21%.

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Which one of the following statements is NOT true of realized yield?


A) The realized yield is the return earned on a bond given the cash flows actually received by the investor.
B) The realized yield is equal to the yield to maturity even if the bond is sold prior to maturity.
C) It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond.
D) All of the above are true.

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Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market.

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John Wong purchased a five-year bond today at $1,034.66. The bond pays 6.5 percent semiannually. What will be his yield to maturity? (Round to the closest answer.)


A) 6.7%
B) 6.2%
C) 3.25%
D) 5.7%

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Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.)


A) 10.4%
B) 9.5%
C) 8.4%
D) 7.5%

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A thin market for a security implies a high frequency of trades for that type of security in the markets.

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The three economic factors that affect the shape of the yield curve are:


A) the real rate of interest, the expected rate of inflation, and marketability.
B) the real rate of interest, the expected rate of inflation, and interest rate risk.
C) the nominal rate of interest, the expected rate of inflation, and default risk.
D) the real rate of interest, the nominal rate of interest, and currency risk.

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What is the marketability risk premium? Why should an issuing firm consider paying this premium?

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Marketability is the ability of an inves...

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Shana Norris wants to buy five-year zero coupon bonds with a face value of $1,000. Her opportunity cost is 8.5 percent. Assuming annual compounding, what would be the current market price of these bonds? (Round your answer to the nearest dollar.)


A) $1,023
B) $665
C) $890
D) $1,113

Correct Answer

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Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sells the bond today, what will be his realized yield? (Round to the nearest percent.)


A) 12%
B) 8%
C) 11%
D) 9%

Correct Answer

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Which of the following statements is true?


A) Downward sloping yield curves typically appear in the early to mid-period of a business expansion.
B) Interest rate risk premium always adds an upward bias to the slope of the yield curve.
C) If investors believe that inflation will be increasing in the near future, the yield curve will be downward sloping.
D) Downward-sloping yield curve is the yield curve most commonly observed.

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Higher coupon bonds have greater interest rate risk.

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As interest rates fall, the prices of bonds decline.

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Which of the following statements is NOT true?


A) The risk that the lender may not receive payments as promised is called default risk.
B) Investors must pay a premium to purchase a security that exposes them to default risk.
C) U.S. Treasury securities are the best proxy measure for the risk-free rate.
D) All of the above are true statements.

Correct Answer

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Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company's bonds be priced at today? Assume annual coupon payments. (Do not round intermediate computations. Round your final answer to the nearest dollar.)


A) $972
B) $1,066
C) $1,014
D) $923

Correct Answer

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The U.S. Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that the bond compounds interest semiannually. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round your answer to the nearest dollar.)


A) $684
B) $860
C) $515
D) $604

Correct Answer

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Which one of the following statements is NOT true?


A) The relationship between yield to maturity and marketability is known as the term structure of interest rates.
B) The shape of the yield curve is not constant over time.
C) As the general level of interest rises and falls over time, the yield curve shifts up and down and has different slopes.
D) Yield curves show graphically how market yields vary as term to maturity changes.

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Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)


A) $872
B) $1,066
C) $990
D) $945

Correct Answer

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U.S. Treasury securities are the best proxy measure for the risk-free rate.

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