Study Unit 5 Interest Rates and Bond Valuation Exam Questions

  1. The theory suggesting that for any given issuer, long-term interest rates tend to be higher than short-term rates is called …
  1. The expectation hypothesis.
  2. The liquidity preference theory.
  3. The market segmentation theory.
  4. None of the above.
  1. In the valuation process, the … is used to incorporate risk in the analysis.
  1. standard deviation (σ)
  2. coefficient of variation (CV)
  3. discount rate
  4. interest rate
  1. The ____ value of a bond is also called its face value____. Bonds which sell at less than the face value are priced at a ___ while bonds which sell at greater than face value sell at a
  1. Discount, par, premium
  2. Premium, discount, par
  3. Par, discount, premium
  4. Coupon, premium, discount
  1. A 12-year bond has an annual coupon rate of 9 percent. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7 percent. Which one of the following statements is correct?
  1. If the market interest rates decline, the price of the bond will also decline
  2. The bond is currently selling at a price below its par value
  3. If market interest rates remain unchanged, the bond’s price one year from now will be lower than it is today
  4. If market interest rates remain unchanged, the bond’s price one year from now will be higher than it is today
  1. If a bond is issued with a coupon rate that vanes directly with the required return, the price of the bond will be
  1. less than the face value
  2. greater than the face value
  3. equal to the face value
  4. greater or less than the face value depending on how interests vary
  1. The Mopani Company has two debentures outstanding which differ in their maturity date Debenture A matures in four years while Debenture B matures in seven years. If the required return changes to 15%, then (Nov 2005) (Nov 2006) (May 2009)
  1. Debenture A will have a greater change in price
  2. Debenture B will have a greater change in price
  3. The price of the debentures will be constant
  4. The price change for the debentures will be equal
  1. The yield to maturity on a bond with a price equal to its value will… (Nov 2005)
  1. Be less than the coupon rate
  2. Be more than the coupon rate
  3. Always be equal to the coupon rate
  4. Be more or less than the coupon rate, depending on the required return
  1. A Telkom bond is issued at a par value of R1000 each. Interest is paid annually and the required rate is the bond’s coupon interest rate of 12 percent. If the maturity of the bond is 10 years, what is its present value? (Nov 2005)
  1. R1000,00
  2. R708,40
  3. R678,00
  4. R322,00
  1. Renaissance Investments has a required rate of return of 15%. It is considering investing in Orange Cell debentures, which will be issued at a par value of R1 000 with a coupon interest rate of 12% (paid annually) and a maturity period of ten years. The value of the debentures is approximately …
  1. R247,00.
  2. R602,28.
  3. R849,28.
  4. R1 000,00.
  1. You have just purchased a 10-year, R1 000 par value 8% debentures with interest paid every 6 months. If you expect to earn a 10% return on this debenture, how much did you pay for it?
  1. R 812 15
  2. R 875 38
  3. R1 003 42
  4. R1 122 87
  1. Muntu Zondo acquired an asset that is expected to generate cash flows of R2 200, R0, R4 400 and R11 00 at the end of years one, two, three and four respectively. Muntu’s required rate of return is 18%. The value of the asset equals …
  1. R10 219,00.
  2. R14 432,00.
  3. R17 600,00.
  4. R31 154,20.
  1. An enterprise has an issue of R1 000 par value bonds with a nine per cent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 per cent, the enterprise’s bond will sell for … today.
  1. R1 000
  2. R716,67
  3. R840,67
  4. R1 123,33
  1. Calculate the approximate value of a R1000 bond, which has 10 years until maturity and pays quarterly interest at an annual coupon rate of 12 percent. The required return on similar-risk bonds is 20 percent.
  1. R 656,82
  2. R 835,45
  3. R 845,66
  4. R2200,08
  1. What is the yield-to-maturity, to the nearest per cent, for a bond whose current price is R908, has a coupon rate of 11%, has R1 000 par value, on which interest is paid annually and which has eight years to maturity?
  1. 11 per cent
  2. 12 per cent
  3. 13 per cent
  4. 14 per cent
  1. What is the approximate yield to maturity, to the nearest percent, for the following bond, current price is R908, coupon rate is 11 percent, R1000 par value, interest paid annually, eight years to maturity?
  1. 11%
  2. 12%
  3. 13%
  4. 14%
  1. ABC Corp issued bonds bearing a coupon rate of 12 per cent, pay coupons semi-annually, have three years remaining to maturity and are currently priced at R940 per bond. What is the yield-to-maturity (YTM)?

(1)12,00%

(2)13,99%

(3)14,54%

(4)15,25%

  1. Bond Corporation issued R1000 par value bonds bearing a coupon rate of 12 percent and paying coupons semi-annually. The bonds have three years remaining to maturity and are currently priced at R940. What is the annual yield to maturity (YTM)?
  1. 12,00%
  2. 13,99%
  3. 14,54%
  4. 15,25%
  1. The current price of a 10-year, R1 000 par value debenture is R1158, 91 Interest on this debenture is paid every 6 months and the simple annual yield is 14% Given these facts, what is the bond's annual coupon rate?

110%

212%

314%

417%

  1. Pan African Limited has determined that it can issue R1 000 par value, with an 8% coupon paid semi-annually and a five-year maturity at R900 per bond. What would be the yield-to-maturity (YTM) of the bond closest to?

1. 5,3%

2. 5,6%

3. 10,6%

4. 11,2%

  1. A 20-year, 10% annual bond has a par value of R1 000. What would this bond be trading for if it were being priced to yield 15% as an annual rate?
  1. R685,14
  2. R687,03
  3. R828,39
  4. R834,74
  1. Consider a zero-coupon bond with a R1 000 par value and 10 years left until maturity. What is the yield-to-maturity of the bond if it is currently trading for R459?

1. 7,5%

2. 8,1%

3. 9,7%

4. 10,1%

  1. What is the coupon rate of a two-year, R10 000 bond with semi-annual coupons and a priceof R9 543,45 if it has a yield-to-maturity of 6,8%?

1. 4,32%

2. 5,60%

3. 6,25%

4. 8,44%

  1. What is the yield to maturity (YTM) of a five-year, R5 000 bond with a 4,5% coupon rate and semi-annual coupons if the bond is currently trading for a price of R4876?

1. 4,30%

2. 5,07%

3. 6,30%

4. 8,60%

  1. Which of the following bonds is trading at a premium?
  1. A five-year bond with a R2 000 face value whose yield-to-maturity is 7,0% and coupon rate is 7,2%, paid semi-annually.
  2. A ten-year bond with a R4 000 face value whose yield-to-maturity is 6,0% and coupon rate is 5,9%, paid semi-annually.
  3. A fifteen-year bond with a R10 000 face value whose yield-to-maturity is 8% and coupon rate is 7,8%, paid semi-annually.
  1. A two-year bond with a R50 000 face value whose yield-to-maturity is 5,2% and coupon rate is 5,2%, paid monthly.
  1. Suppose the term structure of interest rate is as shown below:

Term / 1 year / 2 years / 3 years / 5 years / 10 years / 20 years
Rate
(EAR%) / 5,00% / 4,80% / 4,60% / 4,50% / 4,25% / 4,15%
  1. What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?

1. inverted ; higher

2. normal ; higher

3. inverted ; lower

4. normal; lower

  1. What is the real rate of interest on your investment if the current inflation rate is 4% and you have an investment opportunity that pays 10%?
  1. 5,8%
  2. 6,0%
  3. 10,0%
  4. 14,0%

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