Chapter Eight
Valuation of Known Cash Flows: Bonds
This chapter contains 25 multiple choice questions.
Multiple Choice
1. A ________ is a quantitative method used to infer an asset's value from market
information about the prices of other assets and market interest rates.
(a) fixed model
(b) perpetual valuation model
(c) valuation model
(d) variable model
Answer: (c)
2. Consider a fixed-income security that promises to pay $150 each year for the next five
years. How much is this five-year annuity worth if the appropriate discount rate is 7%
per year?
(a) $534.74
(b) $615.03
(c) $802.50
(d) $867.96
Answer: (b)
3. The price of any existing fixed-income security ________ when market interest rates rise
because investors will only be willing to ________ them if they offer a competitive yield.
(a) rises; buy
(b) rises; sell
(c) falls; buy
(d) falls; sell
Answer: (c)
4. A change in market interest rates causes ________ in the market values of all existing
contracts promising fixed payments in the future.
(a) a change in the same direction
(b) a change in the opposite direction
(c) no change
(d) an unpredictable variation
Answer: (b)
5. What happens to the value of a four-year fixed-income security promising $100 per year
if the market interest rate falls from 6% to 5% per year?
(a) A fall of 1% causes a drop of $4.87 in market value.
(b) A fall of 1% causes a rise of $4.87 in market value.
(c) A fall of 1% causes a drop of $8.09 in market value.
(d) A fall of 1% causes a rise of $8.09 in market value.
Answer: (d)
6. The promised cash payment on a pure discount bond is called its ________.
(a) face value
(b) par value
(c) fixed interest
(d) both a and b
Answer: (d)
7. What is the yield of a 1-year pure discount bond with a price of $900 and a face value of
$1,000?
(a) 5.26%
(b) 10.00%
(c) 11.11%
(d) 15.79%
Answer: (c)
8. Consider a three-year pure discount bond with a face value of $1,000. If its current price
is $900, compute its annualized yield.
(a) 1.036%
(b) 1.111%
(c) 3.57%
(d) 5.41%
Answer: (c)
Answer: (a)
9. A ________ obligates the issuer to make periodic payments of interest to the bondholder
for the life of the bond and then to pay the face value of the bond when the bond matures.
(a) pure discount
(b) zero-coupon
(c) perpetual bond
(d) coupon bond
Answer: (d)
10. For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual
coupon payment?
(a) $100
(b) $110
(c) $1,000
(d) $1,100
Answer: (b)
11. If the market price of a coupon bond equals its face value, it is also termed a ________.
(a) par bond
(b) premium bond
(c) discount bond
(d) zero-discount bond
Answer: (a)
12. If the bond’s market price is lower than its face value, it is termed a ________.
(a) par bond
(b) premium bond
(c) discount bond
(d) zero-par bond
Answer: (c)
13. If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of
$1,000, what is its current yield?
(a) 8.90%
(b) 9.82%
(c) 10.71%
(d) 11.00%
Answer: (b)
14. The ________ is the discount rate that makes the present value of the bond’s stream of
promised cash payments equal to its price.
(a) compound rate
(b) yield to maturity
(c) coupon rate
(d) current yield
Answer: (b)
15. Suppose you are considering buying a one-year 11% coupon bond with a face value of
$1,000 and a current price of $1,050. What is its yield to maturity?
(a) 4.76%
(b) 5.71%
(c) 6.00%
(d) 10.48%
Answer: (b)
16. Suppose you are considering buying a five-year 11% coupon bond with a face value of
$1,000 and a current price of $1,100. What is its yield to maturity?
(a) 3.87%
(b) 8.47%
(c) 10.00%
(d) 13.62%
Answer: (b)
17. Suppose you are considering buying a seven-year 11% coupon bond with a face value of
$1,000 and a current price of $950. What are the current yield and yield to maturity of
this coupon bond?
(a) CY = 12.10%; YTM = 11.58%
(b) CY = 11.58%; YTM = 12.10%
(c) CY = 9.92%; YTM = 10.45%
(d) CY = 10.45%; YTM = 9.92%
Answer: (b)
18. When the yield curve is not flat, bonds of the same ________ with different coupon rates
have ________ yields to maturity.
(a) maturity, different
(b) maturity, identical
(c) callability, different
(d) callability, identical
Answer: (a)
19. A ________ is one that gives the holder of a bond issued by a corporation the right to
convert the bond into a pre-specified number of shares of common stock.
(a) callable bond
(b) convertible bond
(c) stock bond
(d) preferred bond
Answer: (b)
20. Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At
the time of issuance, the yield to maturity was 6 percent and the bonds sold at par. The
bonds are currently selling at 110 percent of their par value. Assuming that the coupon is
paid annually, what is the current yield to maturity?
(a) 3.77%
(b) 5.18%
(c) 5.27%
(d) 5.46%
Answer: (b)
21. Calculate the years to maturity for a bond based on the following information. The bond
trades at $950, it has a par value of $1,000, a coupon rate of 11%, and a required rate of
return of 12%.
(a) 8 years
(b) 12 years
(c) 15 years
(d) 16 years
Answer: (a)
22. Compute the yield to maturity of Arundel bonds based on the following information.
Arundel bonds have a $1,000 par value, 25 years remaining until maturity, an 11%
coupon rate, and a current market price of $1,187.
(a) 4.55%
(b) 9.08%
(c) 9.27%
(d) 13.17%
Answer: (b)
23. The ________ is the price at which dealers in Treasury bonds are willing to sell.
(a) bid price
(b) asked yield
(c) ask price
(d) maturity price
Answer: (c)
24. The bid price of a bond is always ________ the ask price.
(a) greater than
(b) less than
(c) identical to
(d) it varies from case to case
Answer: (b)
25. Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of
6% per year. A day later market interest rates drop to 5% and so does the yield on your
bond. What is the proportional change in the price of your bond?
(a) a decrease of 26.74%
(b) a decrease of 21.10%
(c) an increase of 26.74
(d) an increase of 21.20
Answer: (c)
