cf1.5.1

Consider three 30-year bonds with annual coupon payments. One bond has a 10% coupon rate,

one has a 5% coupon rate, and one has a 3% coupon rate. If the yield to maturity of each bond is

5%, what is the price of each bond per $100 face value? Which bond trades at a premium, which

trades at a discount, and which trades at par?

• 10% trade at premium

  3% trade at a discount, 5% trade at par

• 3% trade at premium

  10% trade at a discount, 5% trade at par

• Cannot make conclusion

• 3% trade at discount, the other 2 trade at premium

Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:

A.         the bond issuer to increase the amount of all future interest payments.

B.         the yield to maturity to remain constant due to the fixed coupon rate.

C.        to realize a capital loss if she sold the bond at today’s market price.

D.        today's market price to exceed the face value of the bond.

E.         the current yield today to be less than 7 percent.

• A

• B

• C

• D

• E

A zero coupon bond:

A.         is sold at a large premium.

B.         has a price equal to the future value of the face amount given a positive rate of return.

C.        can only be issued by the U.S. Treasury.

D.        has less interest rate risk than a comparable coupon bond.

E.         has a market price that is computed using semiannual compounding of interest.

• A

• B

• C

• D

• E

            Which one of these bonds is the most interest-rate sensitive?

A.         5-year zero coupon bond

B.         10-year zero coupon bond

C.        5-year, 6 percent, annual coupon bond

D.        10-year, 6 percent, semiannual coupon bond

E.         10-year, 6 percent, annual coupon bond

• A

• B

• C

• D

• E

If its yield to maturity is less than its coupon rate, a bond will sell at a _____, and increases in market interest rates will:

A.         discount; decrease this discount.

B.         discount; increase this discount.

C.        premium; decrease this premium.

D.        premium; increase this premium.

E.         premium; not affect this premium.

• A

• B

• C

• D

• E