Question

21. 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 ____________.

A) $1,100

B) $1,110

C) $1,150

D) $1,160

22. The bonds of Ford Motor Company have received a rating of "D" by Moody's. The "D" rating indicates

A) the bonds are insured

B) the bonds are junk bonds

C) the bonds are referred to as "high yield" bonds

D) B and C

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

A) positively related.

B) negatively related.

C) sometimes positively and sometimes negatively related.

E) not related.

E) indefinitely related.

24. 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.

A) current yield

B) dividend yield

C) P/E ratio

D) yield to maturity

Answer 1

Question-21:-

Invoice price = Current ask price + Accrued Interest

Interest will be accrued for 2 months

Accrued interest = $1000*12% *2/12 =$20

Current ask price = $1000*113% = $1130

hence Invoice price = $1130+$20 = $1150

Correct Answer-C) $1,150

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Question-22

Correct Option- (D) B and C

Reason-''D'' Rating indicates Junj bonds and the bonds with high yields or Low priced. Insured Bonds are rated under ''A''

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Question-23

Correct Option-(C) sometimes positively and sometimes negatively related.

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Question-24

Correct Answer-(D) yield to maturity

Reason-

yield to maturity is the average yield or return  that the investor will get if he hold the bond till maturity.

Option A is not the answer because Current Yield= [annual interest / Current price]

It shows the rate of return the investor will obtain if he holds the bond till next year.

Option B is not the answer because, Dividend yield = Annual dividend / Current share price.

And as you know bond pays interest and not Dividend.

Option C is not the Answer, because P/ E Ratio = Current price / Earning on bond.

It does not show the avg return rate.

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