Flashcards in 10 calcslaztions Deck (43):

1

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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$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

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$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

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$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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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