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LOS b, (Part 1): Describe the basic features of a bond.
Q1. Which one of the following alternatives represents the correct series of payments made by a typical 6% U.S. Treasury note with a par value of $100,000 issued today with five years to maturity?
Number and size of each intermediate payment Payment made at maturity
A) 4 annual payments of $6,000 $106,000
B) 9 semiannual payments of $3,000 $103,000
C) 9 semiannual payments of $3,000 $100,000
Q2. 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) $212.50.
B) $238.33.
C) $425.00.
Q3. 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
Q4. A bond issued by the government of Italy is likely to be denominated in which one of the following currencies?
A) U.S. dollars.
B) Euros.
C) Swiss francs.
Q5. 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) $1,068.72
B) $1,052.17.
C) $1,044.33.
LOS b, (Part 1): Describe the basic features of a bond.fficeffice" />
Q1. Which one of the following alternatives represents the correct series of payments made by a typical 6% U.S. Treasury note with a par value of $100,000 issued today with five years to maturity?
Number and size of each intermediate payment Payment made at maturity
A) 4 annual payments of $6,000 $106,000
B) 9 semiannual payments of $3,000 $103,000
C) 9 semiannual payments of $3,000 $100,000
Correct answer is B)
Payments for U.S. Treasury bonds and notes are semiannual and are fixed for the life of each bond or note. The coupon rate is quoted on an annual basis but each payment is made on the basis of one half the annual rate multiplied by the maturity or par value.
Q2. 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) $212.50.
B) $238.33.
C) $425.00.
Correct answer is A)
The dollar amount of the coupon payment is computed as follows:
Coupon in $ = $5,000 × 0.085 / 2 = $212.50
Q3. 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
Correct answer is C)
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.
Q4. A bond issued by the government of ffice:smarttags" />
A) U.S. dollars.
B) Euros.
C) Swiss francs.
Correct answer is B)
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.
Q5. 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) $1,068.72
B) $1,052.17.
C) $1,044.33.
Correct answer is A)
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 principle |
(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.
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