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Flashcards in 10 calcslaztions Deck (43):
1

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.


A. , $30

B. , $33

C. , $32.78

D. , $30.90

C. , $32.78

($30)(1.02)(1.03)(1.04) = $32.78

2

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.


A. , both bonds will increase in value but bond A will increase more than bond B

B. , both bonds will increase in value but bond B will increase more than bond A

C. , both bonds will decrease in value but bond A will decrease more than bond B

D. , both bonds will decrease in value but bond B will decrease more than bond A

D. , both bonds will decrease in value but bond B will decrease more than bond A

3

A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________.


A. , $1,000

B. , $884

C. , $933

D. , $980

B. , $884

($26)(34) = $884

4

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________.


A. , $50

B. , $190

C. , $200

D. , $240

B. , $190


Conversion premium = 950 - 40(19) = 190

5

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.


A. , 7.2%

B. , 8.8%

C. , 9.1%

D. , 9.6%

D. , 9.6%


CALCUALTIONS #38

6

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.


A. , 6%

B. , 7.23%

C. , 8.12%

D. , 9.45%

C. , 8.12%

Calculator entries are N = 5, PV = -915.48, PMT = 60, FV = 1,000, CPT I/Y 8.12

7

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________.


A. , 6%

B. , 6.49%

C. , 6.73%

D. , 7%

B. , 6.49%

Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%

8

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________.


A. , 6%

B. , 6.58%

C. , 7.2%

D. , 8%

A. , 6%


CALCULATIONS #41


Calculator entries are N = 10, PV = -1,055.84, PMT = 60, FV = 1,100, CPT I/Y 6

9

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________.


A. , $1,000

B. , $1,062.81

C. , $1,081.82

D. , $1,100.03

B. , $1,062.81


Calculator entries are N = 16, I/Y = 3, PMT = 35, FV = 1,000, CPT PV -1,062.81


#42

10

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.


A. , $856.04

B. , $891.86

C. , $926.47

D. , $1,000

B. , $891.86


Calculator entries are N = 5, I/Y = 12, PMT = 90, FV = 1,000, CPT PV -891.86

11

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________.


A. , $1,140

B. , $1,170

C. , $1,180

D. , $1,200

C. , $1,180

Invoice price = 1.17(1,000) + 30(2/6) = 1180

12

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.


A. , $458.11

B. , $641.11

C. , $789.11

D. , $1,100.11

A. , $458.11


Calculator entries are N = 16, I/Y = 5, PMT = 0, FV = 1,000, CPT PV 458.11

13

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________.


A. , 5%

B. , 5.5%

C. , 7.6%

D. , 8.9%

C. , 7.6%


huge calculation #48

14

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

"PIC HERE" #50

The expected 1-year interest rate 1 year from now should be about _________.

C. , 9.02%



15

$1,000 par value zero-coupon bonds (ignore liquidity premiums)


"PIC HERE" #51

One year from now bond C should sell for ________ (to the nearest dollar).


A. , $857

B. , $842

C. , $835

D. , $821

B. , $842

16

$1,000 par value zero-coupon bonds (ignore liquidity premiums)

pic here #52

The expected 2-year interest rate 3 years from now should be _________.


A. , 9.55%

B. , 11.74%

C. , 14.89%

D. , 13.73%

C. , 14.89%

17

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?


A. , .72%

B. , 1.85%

C. , 2.58%

D. , 3.42%

B. , 1.85%


Calculator entries to find the YTM are N = 10, PV = -750, PMT = 80, FV = 1,000, CPT = I/Y 12.52
The current yield = 80/750 = 10.67%
Then we use the relationship YTM = Current yield + Capital gain yield
12.52% = 10.67% + Capital gain yield, so Capital gain yield = 1.85%

18

Consider the following $1,000 par value zero-coupon bonds:

PIC HERE #55

The expected 1-year interest rate 2 years from now should be _________.


A. , 7%

B. , 8%

C. , 9%

D. , 10%

C. , 9%

19

Consider the following $1,000 par value zero-coupon bonds:

#58 WITH PIC


The expected 1-year interest rate 3 years from now should be _________.


A. , 7%

B. , 8%

C. , 9%

D. , 10%

C. , 9%

20

Consider the following $1,000 par value zero-coupon bonds:

#59 PICTURE


The expected 1-year interest rate 4 years from now should be _________.


A. , 16%

B. , 18%

C. , 20%

D. , 22%

A. , 16%

21

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?


A. , 6.72%

B. , 9.17%

C. , 4.49%

D. , 8.98%

D. , 8.98%


HUGE CALCULATION #61

22

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.


A. , $97.22

B. , $104.49

C. , $364.08

D. , $732.14

A. , $97.22

Calculator entries are N = 40, I/Y = 6, PMT = 0, FV = 1,000, CPT PV -97.22

PICTURE OF FORMULA #66

23

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.


A. , $581.97

B. , $1,163.93

C. , $2,327.87

D. , $3,000

B. , $1,163.93


Accrued interest = 100,000(.06/2)(71/183) = 1163.93

24

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____.


A. , 4.8%

B. , 6.1%

C. , 7.7%

D. , 10.4%

A. , 4.8%

ytm = (1,000/625)^(1/10) - 1 = .048

Calculator entries are N = 10, PV = -625, PMT = 0, FV = 1,000, CPT I/Y 4.81

25

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

picture here #70

What is the nominal rate of return on the TIPS bond in the first year?


A. , 5%

B. , 5.15%

C. , 8.15%

D. , 9%

C. , 8.15%


HPRnom = (1030+51.50-1000)/1000 = 8.15%

26

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

pic here #71

What is the real rate of return on the TIPS bond in the first year?


A. , 5%

B. , 8.15%

C. , 7.15%

D. , 4%

A. , 5%

calculations

27

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

pic #72

Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.


A. , The price of the Wildwood bond would decline by more than the price of the Asbury bond.

B. , The price of the Wildwood bond would decline by less than the price of the Asbury bond.

C. , The price of the Wildwood bond would increase by more than the price of the Asbury bond.

D. , The price of the Wildwood bond would increase by less than the price of the Asbury bond.

C. , The price of the Wildwood bond would increase by more than the price of the Asbury bond.

28

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

pic #73

If interest rates are expected to rise, then Joe Hill should ____.


A. , prefer the Wildwood bond to the Asbury bond

B. , prefer the Asbury bond to the Wildwood bond

C. , be indifferent between the Wildwood bond and the Asbury bond

D. , The answer cannot be determined from the information given.

B. , prefer the Asbury bond to the Wildwood bond

29

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

small pic #74

If the volatility of interest rates is expected to increase, then Joe Hill should __.


A. , prefer the Wildwood bond to the Asbury bond

B. , prefer the Asbury bond to the Wildwood bond

C. , be indifferent between the Wildwood bond and the Asbury bond

D. , The answer cannot be determined from the information given.

B. , prefer the Asbury bond to the Wildwood bond

30

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?


A. , 2.07%

B. , 8.03%

C. , 9.01%

D. , 11.12%

C. , 9.01%

calculations

31

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.


A. , $9,828.12

B. , $9,809.38

C. , $9,840.62

D. , $9,813.42

C. , $9,840.62

[98+(13/32)] / 100] x 10,000


=$9,840.62

32

If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________.


A. , 102:10

B. , 102:11

C. , 102:12

D. , 102:13

C. , 102:12

picture of formula

33

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)


A. , $13.21

B. , $12.57

C. , $15.44

D. , $16.32

B. , $12.57

(75/2) × (61/182) = $12.57

34

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?


A. , $999.55

B. , $1,002.01

C. , $1,007.45

D. , $1,012.13

B. , $1,002.01

Invoice = 985 + (69)(90/365) = $1,002.01

35

If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.


A. , $9,828.12

B. , $9,925

C. , $9,934.37

D. , $9,955.43

B. , $9,925

calculation #80

36

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

A. , $4.81


Accrued interest = (50/2) × (35/182) = 4.81

37

You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?


A. , 10.4%

B. , 9.57%

C. , 7.45%

D. , 8.78%

D. , 8.78%

Total value in 6 years = 1,000 + 6(75) = 1,450
Calculator entries for EAR are N = 6, PV = -875, PMT = 0, FV = 1,450, CPT I/Y 8.78,
or (875)(1 + EAR)6 = 1,000 + (75)(6); EAR = 8.78%

38

You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.


A. , .61%

B. , -5.39%

C. , 1.28%

D. , -3.25%

A. , .61%


This year's price is 1,000. since the YTM equals the coupon rate.
Calculator entries for next year's price are N = 7, I/Y = 7, PMT = 60, FV = 1,000, CPT PV -46.11
At the end of 1 year you'll have 946.11 + 60 = 1,006.11
HPR = 1,006.11/1,000 - 1 = .6107%

39

You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______.


A. , $0

B. , $4.27

C. , $9.38

D. , $33.51

C. , $9.38
formula #85

40

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______.


A. , $9.10

B. , $4.25

C. , $7.68

D. , $5.20

C. , $7.68

#86

41

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?


A. , 4.8%

B. , 4.85%

C. , 9.6%

D. , 9.7%

B. , 4.85%

Current yield = 48/989.4 = .0485

42

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?


A. , 4.3%

B. , 4.5%

C. , 5.2%

D. , 5.5%


A. , 4.3%

A bond sells at a premium when the coupon rate > YTM.

43

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?


A. , 4.08%

B. , 4.5%

C. , 5.1%

D. , 5.6%

A. , 4.08%

HPR = [(975 + 45 - 980)/980] - 1 = 4.08%