CHAPTER 14 BOND PRICES AND YIELDS

1. The current yield on a bond is equal to ________.

A. annual interest payment divided by the current market price

2. If a 7% coupon bond is trading for $975.00, it has a current yield of ____________ percent.
E. 7.18 ​ 70/975 = 7.18.

3. If a 7.25% coupon bond is trading for $982.00, it has a current yield of ____________ percent.
A. 7.38

4. If a 6.75% coupon bond is trading for $1016.00, it has a current yield of ____________ percent.
B. 6.64

5. If a 7.75% coupon bond is trading for $1019.00, it has a current yield of ____________ percent.
D. 7.61

6. If a 6% coupon bond is trading for $950.00, it has a current yield of ____________ percent.
B. 6.3

7. If an 8% coupon bond is trading for $1025.00, it has a current yield of ____________ percent.
A. 7.8

8. If a 7.5% coupon bond is trading for $1050.00, it has a current yield of ____________ percent.
C. 7.1

9. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of
10%, and has a yield to maturity of 12%. The current yield on this bond is ___________.
A. 10.65%​ FV = 1000, n = 4, PMT = 100, i = 12, PV = 939.25; $100/$939.25 = 10.65%.

10. A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of
8.25%, and has a yield to maturity of 8.64%. The current yield on this bond is ___________.
D. 8.36% ​ => FV = 1000, n = 4, PMT = 82.50, i = 8.64, PV = 987.26; $82.50/$987.26 = 8.36%.

11. 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 ___________.
D. 10.66% ​ => FV = 1000, n = 12, PMT = 110, i = 12, PV= 938.06; $100/$938.06 = 10.66%.

12. A coupon bond pays annual interest, has a par value of $1,000, matures in 12 years, has a coupon rate of
8.7%, and has a yield to maturity of 7.9%. The current yield on this bond is ___________.
A. 8.39% C. 8.83% E. None of these is correct.
B. 8.43% D. 8.66%

13. Of the following four investments, ________ is considered the safest.​ ​ E. Treasury bills

14. Of the following four investments, ________ is considered the least risky. ​ A. Treasury bills

15. To earn a high rating from the bond rating agencies, a firm should have
D. both a low debt to equity ratio and a high quick ratio.

16. A firm with a low rating from the bond rating agencies would have
E. both a low times interest earned ratio and a low quick ratio.
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17. At issue, coupon bonds typically sell ________. ​ C. at or near par value

18. Accrued interest

B. must be paid by the buyer of the bond and remitted to the seller of the bond.

19. The invoice price of a bond that a buyer would pay is equal to
A. the asked price plus accrued interest.

20. An 8% coupon U. S. Treasury note pays interest on May 30 and November 30 and is traded for settlement
on August 15. The accrued interest on the $100,000 face value of this note is _________.
D. $1,661.20​ 76/183($4,000) = $1,661.20.
Approximation: .08/12*100,000 = 666.67 per month. 666.67/month * 2.5 months = 1.666.67.

21. A coupon bond is reported as having an ask price of 108% of the $1,000 par value in the Wall Street
Journal. If the last interest payment was made one month ago and the coupon rate is 9%, the invoice price of
the bond will be ____________.
A. $1,087.50 ​ ​ =>$1,080 + $7.5 (accrued interest) = $1,087.50.

22. A coupon bond is reported as having an ask price of 113% of the $1,000 par value in the Wall Street
Journal. If the last interest payment was made two months ago and the coupon rate is 12%, the invoice price
of the bond will be ____________.
C. $1,150 ​ ​ => $1,130 + $20

23. The bonds of Ford Motor Company have received a rating of "B" by Moody's. The "B" rating indicates
E. both that the bonds are junk bonds and the bonds are referred to as "high yield" bonds.

24. The bond market

D. can be quite "thin" and primarily consists of a network of bond dealers in the over the counter
market.

25. Ceteris paribus, the price and yield on a bond are ​ B. negatively related.

26. 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.​ ​ D. yield to maturity

27. The _________ gives the number of shares for which each convertible bond can be exchanged.
A. conversion ratio

28. A coupon bond is a bond that _________.

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

29. A ___________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a
specified price after a specific date. ​ C. put

30. Callable bonds

D. are called when interest rates decline appreciably and have a call price that declines as time passes.
.
31. A Treasury bond due in one year has a yield of 5.7%; a Treasury bond due in 5 years has a yield of 6.2%.
A bond issued by Ford Motor Company due in 5 years has a yield of 7.5%; a bond issued by Shell Oil due in
one year has a yield of 6.5%. Default risk premiums on the bonds issued by Shell and Ford, respectively, are
D. 0.8% and 1.3% ​ ​ => Shell: 6.5% − 5.7% = .8%; Ford: 7.5% − 6.2% = 1.3%.
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32. A Treasury bond due in one year has a yield of 4.6%; a Treasury bond due in 5 years has a yield of 5.6%.
A bond issued by Lucent Technologies due in 5 years has a yield of 8.9%; a bond issued by Exxon due in one
year has a yield of 6.2%. The default risk premiums on the bonds issued by Exxon and Lucent Technologies,
respectively, are:
A. 1.6% and 3.3% ​ ​ => Exxon: 6.2% − 4.6% = 1.6%; Lucent Technologies: 8.9% − 5.6% = 3.3%.
B. 0.5% and 0.7%
C. 3.3% and 1.6%
D. 0.7% and 0.5%
E. None of these is correct.

33. A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in 5 years has a yield of 6.7%.
A bond issued by Xerox due in 5 years has a yield of 7.9%; a bond issued by Exxon due in one year has a
yield of 7.2%. The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are
A. 1.0% and 1.2% ​ ​ = Exxon: 7.2% − 6.2% = 1.0%; Xerox: 7. 9% − 6.7% = 1.2%.

34. A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in 5 years has a yield of 5.06%.
A bond issued by Boeing due in 5 years has a yield of 7.63%; a bond issued by Caterpillar due in one year has
a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are
B. 2.57% and 2.86% ​​ = Boeing: 7.63% − 5.06% = 2.57%; Caterpillar: 7. 16% − 4.30% = 2.86%.

35. Floating-rate bonds are designed to ___________ while convertible bonds are designed to __________.
A. minimize the holders' interest rate risk; give the investor the ability to share in the price
appreciation of the company's stock

36. A coupon bond that pays interest annually is selling at par value of $1,000, matures in 5 years, and has a
coupon rate of 9%. The yield to maturity on this bond is:
C. 9.0%

37. A coupon bond that pays interest semi-annually is selling at par value of $1,000, matures in 7 years, and
has a coupon rate of 8.6%. The yield to maturity on this bond is:
B. 8.6%

38. 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 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7%.
D. $886.28 ​ ​ ​ => FV = 1000, PMT = 70, n = 5, i = 10, PV = 886.28.

39. A coupon bond that pays interest annually has a par value of $1,000, matures in 7 years, and has a yield
to maturity of 9.3%. The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.
B. $960.14 ​ ​ ​ = FV = 1000, PMT = 85, n = 7, i = 9.3, PV = 960.138.

40. 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 10%. The intrinsic value of the bond today will be _________ if the coupon rate is 12%.
C. $1,075.82

41. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a
yield to maturity of 10%. The intrinsic value of the bond today will be __________ if the coupon rate is 8%.
A. $922.78

42. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 7 years, and has a
yield to maturity of 9.3%. The intrinsic value of the bond today will be ________ if the coupon rate is 9.5%.
B. $1,010.12

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43. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a
yield to maturity of 10%. The intrinsic value of the bond today will be ________ if the coupon rate is 12%.
D. $1,077.22

44. A coupon bond that pays interest of $100 annually has a par value of $1,000, matures in 5 years, and is
selling today at a $72 discount from par value. The yield to maturity on this bond is __________.
C. 12.00%

45. You purchased an annual interest coupon bond one year ago that now has 6 years remaining until
maturity. The coupon rate of interest was 10% and par value was $1,000. At the time you purchased the bond,
the yield to maturity was 8%. The amount you paid for this bond one year ago was
E. $1,104.13.

46. You purchased an annual interest coupon bond one year ago that had 6 years remaining to maturity at that
time. The coupon interest rate was 10% and par value was $1,000. At the time you purchased the bond, the
yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield to maturity
continued to be 8%, annual total rate of return on holding bond that year would have been _________.
C. 8.00%​ ​ FV = 1000, PMT = 100, n = 6, i = 8, PV = 1092.46;
FV = 1000, PMT = 100, n = 5, i = 8, PV = 1079.85;
HPR = (1079.85 − 1092.46 + 100)/1092.46 = 8%

47. 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 10%, ____________.
B. both bonds will increase in value, but bond B will increase more than bond A

48. A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in 8
years, the bond should sell for a price of _______ today.
B. $501.87 = $1,000/(1.09)8 = $501.87

49. You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of
$1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to
maturity on the bond is 11% at the time you sell.
D. 1.4% ​ $1,000/(1.10)10 = $385.54; $1,000/(1.11)9 = $390.92; ($390.92 − $385.54)/$385.54 = 1.4%.

50. A Treasury bill with a par value of $100,000 due one month from now is selling today for $99,010. The
effective annual yield is __________.
D. 12.68% = $990/$99,010 = 0.01; (1.01)12 − 1.0 = 12.68%.

51. A Treasury bill with a par value of $100,000 due two months from now is selling today for $98,039, with an
effective annual yield of _________.
C. 12.62% = $1,961/$98,039 = 0.02; (1.02)6 − 1 = 12.62%.

52. A Treasury bill with a par value of $100,000 due three months from now is selling today for $97,087, with
an effective annual yield of _________.
B. 12.55%

53. A coupon bond pays interest semi-annually, matures in 5 years, has par value of $1,000 and a coupon rate
of 12%, and an effective annual yield to maturity of 10.25%. The price bond should sell today is ________.
D. $1,077.20 = (1.1025)1/2 − 1 = 5%, N = 10, I = 5%, PMT = 60, FV = 1000, PV = 1,077.22.

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54. A convertible bond has a par value of $1,000 and a current market price of $850. The current price of the
issuing firm's stock is $29 and the conversion ratio is 30 shares. Bond's market conversion value is ______.
C. $870 = 30 shares × $29/share = $870.

55. A convertible bond has a par value of $1,000 and a current market value of $850. Current price of the
issuing firm's stock is $27 and the conversion ratio is 30 shares. Bond's conversion premium is _________.
A. $40 = 850 - 810

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

56. The yield to maturity on bond A is ____________. A. 10% = ($1,000 − $909.09)/$909.09 = 10%.

57. The yield to maturity on bond B is _________.

B. 11% = ($1,000 − $811.62)/$811.62 = 0.2321; (1.2321)1/2 − 1.0 = 11%.

58. The yield to maturity on bond C is ____________.

C. 12% = ($1,000 − $711.78)/$711.78 = 0.404928; (1.404928)1/3 − 1.0 = 12%.

59. The yield to maturity on bond D is _______. ​ C. 12%

60. A 10% coupon bond, annual payments, 10 years to maturity is callable in 3 years at a call price of $1,100.
If the bond is selling today for $975, the yield to call is _________. D. 13.98%

61. A 12% coupon bond, semiannual payments, is callable in 5 years. The call price is $1,120; if the bond is
selling today for $1,110, what is the yield to call? C. 10.95%.

62. A 10% coupon, annual payments, bond maturing in 10 years, is expected to make all coupon payments,
but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased
for $975? ​ ​ B. 6.68%.

63. You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time
of purchase. The coupon interest rate is 10% and par value is $1,000. At the time you purchased the bond, the
yield to maturity was 8%. If you sold bond after receiving first interest payment and the bond's yield to maturity
had changed to 7%, annual total rate of return on holding the bond for that year would have been _________.
D. 11.95% ​ ​ FV = 1000, PMT = 100, n = 6, i = 8, PV = 1092.46;
FV = 1000, PMT = 100, n = 5, i = 7, PV = 1123.01;
HPR = (1123.01 − 1092.46 + 100)/1092.46 = 11.95%.

64. The ________ is used to calculate the present value of a bond. ​ C. yield to maturity

65. The yield to maturity on a bond is ________.

B. the discount rate that will set the present value of the payments equal to the bond price

66. A bond will sell at a discount when __________.

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

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67. Consider a 5-year bond with a 10% coupon that has a present yield to maturity of 8%. If interest rates
remain constant, one year from now the price of this bond will be _______. ​ B. lower

68. A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid
annually, a current price of $850 and a yield to maturity of 12%. Intuitively and without the use calculations, if
interest payments are reinvested at 10%, the realized compound yield on this bond must be ________.
B. 10.9%

69. A bond with a 12% coupon, 10 years to maturity and selling at 88:00 has a yield to maturity of _______.
A. over 14%

70. Using semiannual compounding, a 15-year zero coupon bond that has a par value of $1,000 and a
required return of 8% would be priced at approximately ______. A. $308

71. The yield to maturity of a 20-year zero coupon bond that is selling for $372.50 with a value at maturity of
$1,000 is ________. A. 5.1% = [$1,000/($372.50]1/20 − 1 = 5.1%.

72. Which one of the following statements about convertibles is true?

B. The more volatile the underlying stock, the greater the value of the conversion feature.

73. Which one of the following statements about convertibles is false?

E. The longer the call protection on a convertible, the less the security is worth, the smaller the spread
between the dividend yield on the stock and the yield-to-maturity on the bond, the more the
convertible is worth and the collateral that is used to secure a convertible bond is one reason
convertibles are more attractive than the underlying stock.

74. Consider a $1,000 par value 20-year zero coupon bond issued at a yield to maturity of 10%. If you buy that
bond when it is issued and continue to hold the bond as yields decline to 9%, the imputed interest income for
the first year of that bond is
B. $14.87. = $1,000/(1.10)20 = $148.64; $1,000/(1.10)19 = $163.51; $163.51− $148.64 = $14.87.

75. The bond indenture includes

A. the coupon rate of the bond. C. the maturity date of the bond. E. None of these is correct.
B. the par value of the bond. D. All of these are correct.

76. A Treasury bond quoted at 107:16 107:18 has a bid price of _______ and an asked price of _____.
D. $1,071.80; $1,071.60

77. Most corporate bonds are traded

C. over the counter by bond dealers linked by a computer quotation system.

78. The process of retiring high-coupon debt and issuing new bonds at a lower coupon to reduce interest
payments is called ​ D. refunding.

79. Convertible bonds​​ D. give their holders the ability to share in price appreciation of the
underlying stock and offer lower coupon rates than similar nonconvertible bonds.

80. TIPS are ​ C. government bonds with par value linked to the general level of prices.

81. Altman's Z scores are assigned based on a firm's financial characteristics and are used to predict
B. bankruptcy risk.

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82. When a bond indenture includes a sinking fund provision
C. bondholders may lose because their bonds can be repurchased by the corporation at below market
prices.

83. Subordination clauses in bond indentures

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

84. Collateralized bonds

E. are backed by specific assets of the issuing firm and are considered the safest variety of bonds.

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

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

86. A zero-coupon bond is one that ​ A. effectively has a zero percent coupon rate.

87. Swingin' Soiree, Inc. is a firm that has its main office on the Right Bank in Paris. The firm just issued bonds
with a final payment amount that depends on whether the Seine River floods. This type of bond is known as
B. a catastrophe bond.

88. One year ago, you purchased a newly issued TIPS bond that has a 6% coupon rate, five years to maturity,
and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the
coupon payment you will receive and what is the current face value of the bond?
D. $62.52, $1,042 ​ The bond price, which is indexed to the inflation rate, becomes $1,000*1.042 = $1,042.
The interest payment is based on the coupon rate and the new face value.
The interest amount equals $1,042*.06 = $62.52.

89. Bond analysts might be more interested in a bond's yield to call if

E. interest rates are expected to fall.

90. What is the relationship between the price of a straight bond and the price of a callable bond?
A. The straight bond's price will be higher than the callable bond's price for low interest rates.

91. Three years ago you purchased a bond for $974.69. The bond had three years to maturity, a coupon rate
of 8%, paid annually, and a face value of $1,000. Each year you reinvested all coupon interest at the prevailing
reinvestment rate shown in the table below. Today is the bond's maturity date. What is your realized compound
yield on the bond? ​ D. 8.97%
The investment grows to a total future value of $80*(1.072)*(1.094) + $80*(1.094) + $1,080 = $1,261.34 over
the three year period. The realized compound yield is the yield that will compound the original investment to
yield the same future value: $974.69*(1+rcy)3 = $1,261.34, (1 + rcy)3 = 1.29409, 1 + rcy = 1.0897, rcy = 8.97%.

92. Which of the following is not a type of international bond? ​ D. Elton bonds

93. A coupon bond that pays interest annually has a par value of $1,000, matures in 6 years, and has a yield
to maturity of 11%. The intrinsic value of the bond today will be ______ if the coupon rate is 7.5%.
B. $851.93

94. A coupon bond that pays interest annually has a par value of $1,000, matures in 8 years, and has a yield
to maturity of 9%. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.
A. $833.96
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95. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 6 years, and has a
yield to maturity of 9%. The intrinsic value of the bond today will be __________ if the coupon rate is 9%.
D. $1,000.00

96. A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 7 years, and has a
yield to maturity of 11%. The intrinsic value of the bond today will be __________ if the coupon rate is 8.8%.
B. $894.51

97. A coupon bond that pays interest of $90 annually has a par value of $1,000, matures in 9 years, and is
selling today at a $66 discount from par value. The yield to maturity on this bond is __________.
B. 10.15%

98. A coupon bond that pays interest of $40 semi annually has a par value of $1,000, matures in 4 years, and
is selling today at a $36 discount from par value. The yield to maturity on this bond is __________.
B. 9.09%

99. You purchased an annual interest coupon bond one year ago that now has 18 years remaining until
maturity. The coupon rate of interest was 11% and par value was $1,000. At the time you purchased the bond,
the yield to maturity was 10%. The amount you paid for this bond one year ago was __________.
C. $1,083.65

100. You purchased an annual interest coupon bond one year ago that had 9 years remaining to maturity at
that time. The coupon interest rate was 10% and the par value was $1,000. At the time you purchased the
bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the yield
to maturity continued to be 8%, your annual total rate of return on holding the bond for that year would have
been _________.
A. 8.00%
FV = 1000, PMT = 100, n = 9, i = 8, PV = 1124.94; FV = 1000, PMT = 100, n = 8, i = 8, PV = 1114.93;
HPR = (1114.93 − 1124.94 + 100)/1124.94 = 8%

101. Consider two bonds, F and G. Both bonds presently are selling at their par value of $1,000. Each pays
interest of $90 annually. Bond F will mature in 15 years while bond G will mature in 26 years. If the yields to
maturity on the two bonds change from 9% to 10%, ____________.
D. both bonds will decrease in value, but bond G will decrease more than bond F

102. A zero-coupon bond has a yield to maturity of 12% and a par value of $1,000. If the bond matures in 18
years, the bond should sell for a price of _______ today.
D. $130.04 = $1,000/(1.12)18 = $130.04

103. A zero-coupon bond has a yield to maturity of 11% and a par value of $1,000. If the bond matures in 27
years, the bond should sell for a price of _______ today.
A. $59.74

104. You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of
$1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to
maturity on the bond is 10% at the time you sell.
C. −1.4% = $1,000/(1.09)12 = $355.53; $1,000/(1.10)11 = $350.49; ($350.49 − $355.53)/$355.53 = −1.4%.

105. You have just purchased a 7-year zero-coupon bond with a yield to maturity of 11% and a par value of
$1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to
maturity on the bond is 9% at the time you sell.
B. 23.8%
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106. A convertible bond has a par value of $1,000 and a current market price of $975. The current price of the
issuing firm's stock is $42 and the conversion ratio is 22 shares. Bond's market conversion value is ______.
B. $924 = 22 shares × $42/share = $924.

107. A convertible bond has a par value of $1,000 and a current market price of $1105. Current price of the
issuing firm's stock is $20 and the conversion ratio is 35 shares. Bond's market conversion value is ______.
A. $700

108. A convertible bond has a par value of $1,000 and a current market value of $950. The current price of the
issuing firm's stock is $22 and the conversion ratio is 40 shares. Bond's conversion premium is _________.
B. $70 = 950 - 880

109. A convertible bond has a par value of $1,000 and a current market value of $1150. The current price of
the issuing firm's stock is $65 and the conversion ratio is 15 shares. bond's conversion premium is _________.
C. $175 = $1150 − $975 = $175.

110. If a 7% coupon bond that pays interest every 182 days paid interest 32 days ago, the accrued interest
would be _______. ​ D. 6.15 = $35*(32/182) = $6.15

111. If a 7.5% coupon bond that pays interest every 182 days paid interest 62 days ago, the accrued interest
would be ________. ​ C. 12.77

112. If a 9% coupon bond that pays interest every 182 days paid interest 112 days ago, the accrued interest
would be ________. ​ A. 27.69

113. A 7% coupon bond with an ask price of 100:00 pays interest every 182 days. If the bond paid interest 32
days ago, the invoice price of the bond would be __________.
D. 1,006.15 = $1000 + [35*(32/182)] = $1006.15

114. A 7.5% coupon bond with an ask price of 100:00 pays interest every 182 days. If the bond paid interest
62 days ago, the invoice price of the bond would be __________. ​C. 1,012.77

115. A 9% coupon bond with an ask price of 100:00 pays interest every 182 days. If the bond paid interest 112
days ago, the invoice price of the bond would be __________. A. 1,027.69

116. One year ago, you purchased a newly issued TIPS bond that has a 5% coupon rate, five years to
maturity, and a par value of $1,000. The average inflation rate over the year was 3.2%. What is the amount of
the coupon payment you will receive and what is the current face value of the bond?
E. $51.60, $1,032 = The bond price, which is indexed to the inflation rate, becomes $1,000*1.032 = $1,032.
The interest payment is based on the coupon rate and the new face value. The interest amount equals
$1,032*.05 = $51.60.

117. One year ago, you purchased a newly issued TIPS bond that has a 4% coupon rate, five years to
maturity, and a par value of $1,000. The average inflation rate over the year was 3.6%. What is the amount of
the coupon payment you will receive and what is the current face value of the bond? B. $41.44, $1,036

118. A CDO is a B. collateralized debt obligation.

119. A CDS is a E. credit default swap.

120. A credit default swap is ​C. an insurance policy on the default risk of a corporate bond or loan.

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121. The compensation form a CDS can come from
D. the CDS holder delivering the defaulted bond to the CDS issuer in return for the bond's par value
and the CDS issuer paying the swap holder the difference between the par value of the bond and the
bond's market price.

122. SIVs are A. structured investment vehicles.

123. SIVs raise funds by ______ and then use the proceeds to ______.
B. issuing short-term commercial paper; buy other forms of debt such as mortgages

124. CDOs are divided in tranches

E. that provide investors with securities with varying degrees of credit risk and each tranch is given a
different level of seniority in terms of its claims on the underlying pool B.

125. Mortgage-backed CDOs were a disaster in 2007 because

E. they were formed by pooling sub-prime mortgages, home prices stalled, and the mortgages were
variable rate loans and interest rates increased.

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