Homework answers / question archive / Question 1 0 / 5 pts A weakness in assumptions underlying pricing bonds containing options is that a bond’s cash flows may not be known because:    The next coupon payment may not be six months away     All of the bond’s features may not be known    The bond’s issuer may call the bond before its maturity date    None of the above are correct     IncorrectQuestion 2 0 / 5 pts A bond’s price will change for one or more of the following reasons:    There is a change in the market’s required yield due to a change in the issuer’s credit quality    All the above are correct     There is a change in the bond price selling at a premium or a discount, without any change in the required yield because the bond is getting closer to its maturity date

Question 1 0 / 5 pts A weakness in assumptions underlying pricing bonds containing options is that a bond’s cash flows may not be known because:    The next coupon payment may not be six months away     All of the bond’s features may not be known    The bond’s issuer may call the bond before its maturity date    None of the above are correct     IncorrectQuestion 2 0 / 5 pts A bond’s price will change for one or more of the following reasons:    There is a change in the market’s required yield due to a change in the issuer’s credit quality    All the above are correct     There is a change in the bond price selling at a premium or a discount, without any change in the required yield because the bond is getting closer to its maturity date

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Question 1

0 / 5 pts

A weakness in assumptions underlying pricing bonds containing options is that a bond’s cash flows may not be known because:

  

The next coupon payment may not be six months away

   

All of the bond’s features may not be known

  

The bond’s issuer may call the bond before its maturity date

  

None of the above are correct

 

 

IncorrectQuestion 2

0 / 5 pts

A bond’s price will change for one or more of the following reasons:

  

There is a change in the market’s required yield due to a change in the issuer’s credit quality

  

All the above are correct

   

There is a change in the bond price selling at a premium or a discount, without any change in the required yield because the bond is getting closer to its maturity date.

   

There is a change in the required yield due to a change in the market’s required yield due to overall economic changes

 

Question 3

5 / 5 pts

With bond investments, the risk of having to sell a bond prior to the maturity date is:

  

Interest rate risk

   

Call risk

   

Credit risk

   

Exchange rate risk

 

 

Question 4

5 / 5 pts

The part of a bond’s risk premium attributable to default risk is called:

  

Upgrade spread

   

Default spread

   

Credit spread

   

Downgrade spread

 

 

IncorrectQuestion 5

0 / 5 pts

Knight Company issues bonds with the following terms: $100,000, 10-year, 6% coupon interest paid semiannually. The bonds are sold to yield 5%. What is the price of the bonds at issuance?

  

$107,795

   

$105,660

   

$102,135

   

$100,000

 

 

IncorrectQuestion 6

0 / 5 pts

Young company plans to build an R&D facility in five years. It is considering investing in one of the following bonds which all have the same credit quality. How does Young company choose which bond to invest in?
 

  

The bond that has the best expected reinvestment rate and yield at the end of the investment horizon

   

The bond with the maturity nearest to the end of its investment horizon

   

The bond with the highest coupon rate

   

The bond with the highest yield to maturity

 

 

IncorrectQuestion 7

0 / 5 pts

Melba Company is evaluating investing in a 10-year 4% coupon bond with a current market price of $851.23 which indicates the market expects a 6% yield to maturity for this bond.

 
Melba estimates it will be able to reinvest the coupon interest payments at an annual interest rate of 5% and at the end of the its planned investment horizon the bond will have six years until maturity and will be selling to achieve a 7% yield to maturity. This means the value of the bond will be $855.05 at the end of Mark’s investment horizon.

 
Calculate the combined dollar amount of coupon interest plus interest on interest:

  

$173.16

   

$170.22

   

$171.66

   

$174.72

 

 

Question 8

5 / 5 pts

The yield for a bond portfolio is computed by:

  

Computing the weighted average of the yield to maturity of the individual bond issues in the portfolio

   

Computing the average of the yield to maturity of the individual bond issues in the portfolio

   

Computing the interest rate that makes the present value of the periodic cash flows equal to the portfolio market value

   

Multiplying the market value weighted average of the individual bonds times the yield of the individual bonds in the portfolio

 

 

IncorrectQuestion 9

0 / 5 pts

Melba Company is evaluating investing in a 10-year 4% coupon bond with a current market price of $851.23 which indicates the market expects a 6% yield to maturity for this bond.

 
Melba estimates it will be able to reinvest the coupon interest payments at an annual interest rate of 5% and at the end of the its planned investment horizon the bond will have six years until maturity and will be selling to achieve a 7% yield to maturity. This means the value of the bond will be $855.05 at the end of Mark’s investment horizon.

 
If the combined dollar amount of coupon interest plus interest on interest is $172.22, how much is the interest on interest?

  

$12.22

   

$12.72

   

$11.16

   

$11.66

 

 

Question 10

5 / 5 pts

A bond’s rate of return that takes into account the current coupon income, capital gain or loss from holding a discount or premium bond to maturity, and the cash flow timing or time value of money is called:

  

Current yield

   

Yield to maturity

 

Required yield

  

Yield to call