FInance – An investor is in a 30% tax bracket. If corporate bonds offer 5% yields,

| January 30, 2017

Question
1.An investor is in a 30% tax bracket. If corporate bonds offer 5% yields, what must municipals offer for the investor to prefer them to corporate bonds? Round to two decimal places.

2.

Find the equivalent taxable yield of a short-term municipal bond currently offering yields of 2% for tax brackets of zero, 10%, 20%, and 30%.(Round your answers to 2 decimal places. Omit the “%” sign in your response.)

Equivalent Taxable Yield

Zero

%

10%

%

20%

%

30%

%

3. A bond with par value of $1,000 has an annual coupon rate of 4.2% and currently sells for $970. What is the bond’s current yield?(Round your answer to 2 decimal places. Omit the “%” sign in your response.)

4.

Treasury bonds paying an 9.4% coupon rate with semiannual payments currently sell at par value. What coupon rate would they have to pay in order to sell at par if they paid their coupons annually? (Hint: What is the effective annual yield on the bond?) (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Effective annual yield

%

5.The current yield on a bond is equal to

annual interest payment divided by the current market price.

the yield to maturity.

annual interest divided by the par value.

the internal rate of return.

None of the options

6.If a 7% coupon bond is trading for $975.00, it has a current yield of

7.00%.

6.53%.

7.24%.

8.53%.

7.18%.

7.A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of 11%, and has a yield to maturity of 12%. The current yield on this bond is

10.39%.

10.43%.

10.58%.

11.73%.

None of the options

8.Ceteris paribus, the price and yield on a bond are

positively related.

negatively related.

sometimes positively and sometimes negatively related.

not related.

indefinitely related.

9.The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

current yield

dividend yield

P/E ratio

yield to maturity

discount yield

10.A coupon bond is a bond that

pays interest on a regular basis (typically every six months).

does not pay interest on a regular basis, but pays a lump sum at maturity.

can always be converted into a specific number of shares of common stock in the issuing company.

always sells at par.

None of the options

11. Callable bonds

are called when interest rates decline appreciably.

have a call price that declines as time passes.

are called when interest rates increase appreciably.

are called when interest rates decline appreciably and have a call price that declines as time passes.

have a call price that declines as time passes and are called when interest rates increase appreciably.

12. A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in five years, and is selling today at a $72 discount from par value. The yield to maturity on this bond is

6.00%.

8.33%.

12.00%.

60.00%.

None of the options

13.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 five years, while bond B will mature in six years. If the yields to maturity on the two bonds change from 12% to 10%,

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

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

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

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

None of the options

14.A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in eight years, the bond should sell for a price of _______ today.

422.41

$501.87

$513.16

$483.49

None of the options

15.A coupon bond pays interest semi-annually, matures in five years, has a par value of $1,000 and a coupon rate of 12%, and an effective annual yield to maturity of 10.25%. The price the bond should sell for today is

$922.77.

$924.16.

$1,075.80.

$1,077.20.

None of the options

16.The ________ is used to calculate the present value of a bond.

nominal yield

current yield

yield to maturity

yield to call

None of the options

17.A bond will sell at a discount when

the coupon rate is greater than the current yield and the current yield is greater than yield to maturity.

the coupon rate is greater than yield to maturity.

the coupon rate is less than the current yield and the current yield is greater than the yield to maturity.

the coupon rate is less than the current yield and the current yield is less than yield to maturity.

None of the options is true.

18.Subordination clauses in bond indentures

may restrict the amount of additional borrowing the firm can undertake.

are always bad for investors.

provide higher priority to senior creditors in the event of bankruptcy.

All of the options are true.

may restrict the amount of additional borrowing the firm can undertake and provide higher priority to senior creditors in the event of bankruptcy.

19.Debt securities are often called fixed-income securities because

the government fixes the maximum rate that can be paid on bonds.

they are held predominantly by older people who are living on fixed incomes.

they pay a fixed amount at maturity.

they promise either a fixed stream of income or a stream of income determined by a specific formula.

they were the first type of investment offered to the public, which allowed them to “fix” their income at a higher level by investing in bonds.

20.What is the relationship between the price of a straight bond and the price of a callable bond?

The straight bond’s price will be higher than the callable bond’s price for low interest rates.

The straight bond’s price will be lower than the callable bond’s price for low interest rates.

The straight bond’s price will change as interest rates change, but the callable bond’s price will stay the same.

The straight bond and the callable bond will have the same price.

There is no consistent relationship between the two types of bonds.

21.A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in nine years, and is selling today at a $66 discount from par value. The yield to maturity on this bond is

9.00%.

10.15%.

11.25%.

12.32%.

None of the options

22.The curvature of the price-yield curve for a given bond is referred to as the bond’s

modified duration.

immunization.

sensitivity.

convexity.

tangency.

23. You purchased a share of stock for $12. One year later you received $0.25 as a dividend and sold the share for $12.92. What was your holding-period return?

9.75%

10.65%

11.75%

11.25%

None of the options

24.You have been given this probability distribution for the holding-period return for a stock:

What is the expected variance for the stock?

142.07%

189.96%

177.04%

128.17%

None of the options

25.You have been given this probability distribution for the holding-period return for GM stock:

What is the expected holding-period return for GM stock?

10.4%

11.4%

12.4%

13.4%

14.4%

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