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Unformatted text preview: Chapter 6
Bonds, Bond Prices, and the Determination of Interest Rates
Multiple Choice Questions
1. If the annual interest rate is 5% (.05), the price of a one year Treasury bill would be:
(Hint: TBills have $100 face value)
A. $95.00
B. $97.50
C. $95.24
D. $96.10
Ans: C
Difficulty: Hard
Topic: Bond Prices.
2. If the annual interest rate is 5%, the price of a threemonth Treasury bill would be:
(Hint: TBills have $100 face value)
A. $98.79
B. $95.00
C. $98.75
D. $97.59
Ans: A
Difficulty: Hard
Topic: Bond Prices.
3. If a consol is offering an annual coupon of $50 and the annual interest rate is 6%, the price of
the consol is:
A. $47.17
B. $813.00
C. $833.33
D. None of the above
Ans: C
Difficulty: Hard
Topic: Bond Prices. 4. A $1000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years
to maturity has:
A. A current yield equal to 6.22%.
B. A current yield equal to 6.00%.
C. A coupon rate equal to 6.22%.
D. A yield to maturity and current yield equal to 6.00%.
E. A yield to maturity and coupon rate equal to 6.00%.
Ans: A
Difficulty: Medium
Topic: Bond Yields.
5. A $1000 face value bond, with an annual coupon of $40, one year to maturity and a purchase
price of $980:
A. Has a current yield that equals 4.00%.
B. Has a coupon rate that equals 4.80%.
C. Has a current yield that equals 4.08% and a yield to maturity that equals 6.12%.
D. Has a current yield that equals 4.08% and a yield to maturity that equals 4.0%.
Ans: C
Difficulty: Medium
Topic: Bond Yields.
6. If a one year bond has a face value of $100 and is purchased for $94, and is held to maturity:
A. The holding period return will equal the yield to maturity.
B. The yield to maturity will exceed the holding period return.
C. The yield to maturity will be 6.38%.
D. a and c.
Ans: B
Difficulty: Hard
Topic: Bond Yields.
7. A 30year Treasury bond as a face value of $1,000, price of $1,200 with a $50 coupon
payment. Assume the price of this bond decreases to $1,100 over the next year. The oneyear holding period return is equal to:
A. 9.17%
B. 8.33%
C. 4.17%
D. 3.79%
Ans: C
Difficulty: Medium
Topic: Bond Yields. 8. If a oneyear zerocoupon bond has a face value of $100, is purchased for $94, and is held to
maturity:
A. The holding period return will exceed the yield to maturity .
B. The yield to maturity will exceed the holding period return .
C. The yield to maturity will be 6.38% .
D. The holding period return will be 6.38% .
Ans: C
Difficulty: Hard
Topic: Bond Yields.
9. Consider a zerocoupon bond with a $1,100 payment in one year. Suppose the interest rate
decreases from 10% to 8%. The price of this bond:
A. Increases from $1,000 to $1,018.
B. Increases from $1,000 to $1,375.
C. Decreases from $110 to $88.
D. Decreases from $1,210 to $1,188.
Ans: A
Difficulty: Medium
Topic: Bond Yields.
10. Consider a $1,000 face value bond with a $55 coupon payment and 1 year to maturity.
Calculate the current yield, coupon rate and the yield to maturity if the bond is purchased
for $940.
A. Current yield = 5.50%, coupon rate = 5.50%, yield to maturity = 12.23%.
B. Current yield = 5.85%, coupon rate = 5.50%, yield to maturity = 12.23%.
C. Current yield = 5.85%, coupon rate = 5.00%, yield to maturity = 6.38%.
D. Current yield = 5.50%, coupon rate = 5.00%, yield to maturity = 6.38%.
Ans: B
Difficulty: Medium
Topic: Bond Yields.
11. Consider a $1,000 face value bond with a $55 coupon payment and 1 year to maturity.
Calculate the current yield, coupon rate and the yield to maturity if the bond is purchased
for $1,130.
A. Current yield = 5.50%, coupon rate = 4.87%, yield to maturity = 5.00%.
B. Current yield = 5.50%, coupon rate = 5.50%, yield to maturity = 6.64%.
C. Current yield = 4.87%, coupon rate = 5.50%, yield to maturity = 6.64%.
D. Current yield = 4.87%, coupon rate = 5.00%, yield to maturity = 5.00%.
Ans: C
Difficulty: Medium
Topic: Bond Yields. 58.If the U.S. government's borrowing needs increase, all other factors constant:
A. The demand for bonds will decrease.
B. The price of bonds will increase.
C. The supply of bonds will increase.
D. The yields on bonds will decrease.
Ans: C
Difficulty: Medium
Topic: The Bond Market and Determination of Interest Rates
13. Consider a twoyear, 4.5% coupon bond with a $500 face value that is originally purchased
for $475. Calculate the holding period return of this bond if it is sold after one year at a
price of $485.
A. 6.84%
B. 6.50%
C. 11.58%
D. 3.05%
Ans: A
Difficulty: Medium
Topic: Bond Yields.
14. Consider a twoyear, 8% coupon bond with a $1,500 face value that is originally purchased
for $1,490. Calculate the holding period return of this bond if it is sold after one year at a
price of $1,505.
A. 8.67%
B. 9.06%
C. 1.54%
D. 6.38%
Ans: B
Difficulty: Medium
Topic: Bond Yields.
15. If the risk on foreign government bonds increases relative to U.S. government bonds, the
price of U.S. government bonds should:
A. Not change since U.S. government bonds are free of default risk.
B. Decrease since people will bail out of all government bonds.
C. Increase as the demand for these bonds increases.
D. Not be affected because the two types of bonds are traded in different markets.
Ans: C
Difficulty: Medium
Topic: The Bond Market and the Determination of Interest Rates ...
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This document was uploaded on 10/26/2011 for the course FIN 320 at DePaul.
 Fall '11
 AndrewBateman
 Interest, Interest Rate

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