Exam 2 Sample Questions with Answers
1. All else constant, a coupon bond that is selling at a premium, must have:
a. a coupon rate that is equal to the yield to maturity.
b. a market price that is less than par value.
c. semi-annual interest payments.
D. a yield to maturity that is less than the coupon rate.
e. a coupon rate that is less than the yield to maturity.
2. American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in
10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this,
which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding
periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8 percent.
a. I and II only
b. II and III only
c. II, III, and IV only
d. I, II, and III only
E. I, III, and IV only
3. Which one of the following statements is correct concerning interest rate risk as it relates to bonds, all else
equal?
a. The shorter the time to maturity, the greater the interest rate risk.
b. The higher the coupon rate, the greater the interest rate risk.
c. For a bond selling at par value, there is no interest rate risk.
D. The greater the number of semiannual interest payments, the greater the interest rate risk.
e. The lower the amount of each interest payment, the lower the interest rate risk.
4. You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value
when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent,
then you would expect:
a. the bond issuer to increase the amount of each interest payment on these bonds.
b. the yield to maturity to remain constant due to the fixed coupon rate.
C. to realize a capital loss if you sold the bond at the market price today.
d. today's market price to exceed the face value of the bond.
e. the current yield today to be less than 7 percent.
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, 5. Which of the following statements concerning bond features is (are) correct?
I. Bondholders generally have voting power in a corporation.
II. Bond interest is tax-deductible as a business expense.
III. The repayment of the bond principle is tax-deductible.
IV. Failure to pay either the interest payments or the bond principle as agreed can cause a fi to go into
bankruptcy.
a. II only
b. I and II only
c. III and IV only
D. II and IV only
e. II, III, and IV only
6. Which of the following items are generally included in a bond indenture?
I. call provisions
II. security description
III. current yield
IV. . protective covenants
a. I and II only
b. II and IV only
c. II, III, and IV only
D. I, II, and IV only
e. I, II, III, and IV
7. Protective covenants:
a. are primarily designed to protect the issuing corporation from unreasonable demands of bondholders.
b. are consistent for all bonds issued by a corporation within the United States.
c. are limited to stating actions which a firm must take.
d. only apply to bonds that have a deferred call provision.
E. are primarily designed to protect bondholders from future actions of the bond issuer.
8. One basis point is equal to:
A. .01 percent.
b. .10 percent.
c. 1.0 percent.
d. 10 percent.
e. 100 percent.
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1. All else constant, a coupon bond that is selling at a premium, must have:
a. a coupon rate that is equal to the yield to maturity.
b. a market price that is less than par value.
c. semi-annual interest payments.
D. a yield to maturity that is less than the coupon rate.
e. a coupon rate that is less than the yield to maturity.
2. American Fortunes is preparing a bond offering with an 8 percent coupon rate. The bonds will be repaid in
10 years. The company plans to issue the bonds at par value and pay interest semiannually. Given this,
which of the following statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding
periods when calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8 percent.
a. I and II only
b. II and III only
c. II, III, and IV only
d. I, II, and III only
E. I, III, and IV only
3. Which one of the following statements is correct concerning interest rate risk as it relates to bonds, all else
equal?
a. The shorter the time to maturity, the greater the interest rate risk.
b. The higher the coupon rate, the greater the interest rate risk.
c. For a bond selling at par value, there is no interest rate risk.
D. The greater the number of semiannual interest payments, the greater the interest rate risk.
e. The lower the amount of each interest payment, the lower the interest rate risk.
4. You own a bond that has a 7 percent coupon and matures in 12 years. You purchased this bond at par value
when it was originally issued. If the current market rate for this type and quality of bond is 7.5 percent,
then you would expect:
a. the bond issuer to increase the amount of each interest payment on these bonds.
b. the yield to maturity to remain constant due to the fixed coupon rate.
C. to realize a capital loss if you sold the bond at the market price today.
d. today's market price to exceed the face value of the bond.
e. the current yield today to be less than 7 percent.
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, 5. Which of the following statements concerning bond features is (are) correct?
I. Bondholders generally have voting power in a corporation.
II. Bond interest is tax-deductible as a business expense.
III. The repayment of the bond principle is tax-deductible.
IV. Failure to pay either the interest payments or the bond principle as agreed can cause a fi to go into
bankruptcy.
a. II only
b. I and II only
c. III and IV only
D. II and IV only
e. II, III, and IV only
6. Which of the following items are generally included in a bond indenture?
I. call provisions
II. security description
III. current yield
IV. . protective covenants
a. I and II only
b. II and IV only
c. II, III, and IV only
D. I, II, and IV only
e. I, II, III, and IV
7. Protective covenants:
a. are primarily designed to protect the issuing corporation from unreasonable demands of bondholders.
b. are consistent for all bonds issued by a corporation within the United States.
c. are limited to stating actions which a firm must take.
d. only apply to bonds that have a deferred call provision.
E. are primarily designed to protect bondholders from future actions of the bond issuer.
8. One basis point is equal to:
A. .01 percent.
b. .10 percent.
c. 1.0 percent.
d. 10 percent.
e. 100 percent.
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