Question

25. A coupon bond is a bond that _________.

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

B) does not pay interest on a regular basis but pays a lump sum at maturity

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

D) always sells at par

26. Callable bonds

A) are called when interest rates decline appreciably.

B) have a call price that declines as time passes.

C) are called when interest rates increase appreciably.

D) A and B.

E) B and C.

27. 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%. The default risk premiums on the bonds issued by Shell and Ford, respectively, are

A) 1.0% and 1.2%

B) 0.7% and 1.5%

C) 1.2% and 1.0%

D) 0.8% and 1.3%

E) none of the above

28. 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:

A) 8.0%

B) 8.3%

C) 9.0%

D) 10.0%

Answer 1

Question 25:

A coupon bond is a bond that :

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

Question 26:

Callable bonds :

D) A and B.

(Answer = Option D = "A and B both" = "are called when interest rates decline appreciably" + "have a call price that declines as time passes.")

Question 27:

D) 0.8% and 1.3%

Calculations:

~ Default risk premium on bond by Shell (has one year maturity, therefore will take one year treasury bond for premium calculation) = 6.5% - 5.7% = 0.8%

~ Default risk premium on bond by Ford (has 5 year maturity, therefore will take 5 year treasury bond for premium calculation) = 7.5% - 6.2% = 1.3%

Question 28:

The yield to maturity on this bond is:

C) 9.0%

Reason : A bond "sells at par" when its coupon rate is equal to its yield to maturity. Therefore, here the bond is selling at par, which means its yield to maturity = its coupon = 9%.