1215

A coupon bond:

A) does not pay interest on a regular basis, but pays a lump sum at maturity.

B) always sells at par.

C) pays interest on a regular basis (typically semi-annually).

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This choice accurately describes a coupon bond.

With an accrual bond, payments are deferred to maturity and then disbursed along with the par value at maturity. Unlike a normal zero-coupon bond, these issues are sold at (or near) their par values and then the interest accrues at a compound rate on top of that. So, they start at $1,000 and then appreciate from there.

1215

Which of the following statements regarding zero-coupon bonds is CORRECT?

A) Zero-coupon bonds have substantial amount of coupon reinvestment risk.

B) An investor who holds a zero-coupon bond until maturity will receive a return equal to the bond's effective annual yield.

C) An investor who holds a zero-coupon bond until maturity will receive an annuity of coupon payments plus recovery of principal at maturity.

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Zero-coupon bonds are quite special. Because zero-coupon bonds have no coupons (all of the bond’s return comes from price appreciation), investors have no uncertainty about the rate at which coupons will be invested. An investor who holds a zero-coupon bond until maturity will receive a return equal to the bond’s effective annual yield.

1215

A bond issued by the government of Italy is likely to be denominated in which one of the following currencies?

A) Euros.

B) U.S. dollars.

C) Swiss francs.

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Bonds issued by governments are likely to be denominated in the currency of the country where the bond is issued. In this case, the Euro is the Italian currency and bonds issued by the Italian government would normally be issued in Euros.

1215

Interest rates have fallen over the seven years since a $1,000 par, 10-year bond was issued with a coupon of 7%. What is the present value of this bond if the required rate of return is currently four and one-half percent? (For simplicity, assume annual payments.)

A) $1,052.17.

B) $1,044.33.

C) $1,068.72

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Each of the remaining cash flows on the bond is discounted at the annual rate of 4.5%.

Period	Payment	Discount	PV
1	$1,000 × 7% = $70	(1.045)1	$ 66.99
2	$1,000 × 7% = $70	(1.045)2	$ 64.10
3	$1,000 × 7% = $70	(1.045)3	$ 61.34
3	$1,000 principal	(1.045)3	$ 876.30
Total Present Value of Cash Flows			$1,068.73

The present value can also be determined with a financial calculator. N = 3, I = 4.5%, PMT = $1,000 × 7%, FV = $1,000. Solve for PV = $1,068.724.

1215

Which one of the following combinations represents an accurate classification of security owner options and security issuer options?

Security Owner Options

Security Issuer Options

A) A call provision A prepayment option

B) A cap An accelerated sinking fund

C) A floor A prepayment option

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A floor sets a minimum coupon rate for a floating-rate bond and protects the security owner from decreases in rates. A prepayment option is included in many amortizing securities and allows the holder of the option to make additional payments against outstanding principal.

1215

A bond has a par value of $5,000 and a coupon rate of 8.5% payable semi-annually. The bond is currently trading at 112.16. What is the dollar amount of the semi-annual coupon payment?

A) $238.33.

B) $425.00.

C) $212.50.

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The dollar amount of the coupon payment is computed as follows:

Coupon in $ = $5,000 × 0.085 / 2 = $212.50