1. Assume that a 20-year semi-annual, 9% bond is callable after 10 years at 101% of par value and the discount rate in todays market is 7%. Using the price-to-worst method, what is the value of this bond?

A) $1,214

B) $1,000

C) $1,100

D) $1,147

E) $1,010

2. You own a 10-year bond and a 20-year bond, both of which are non-callable bond and pay a coupon of 8%. What is true about the change in value of your bonds if interest rate fall from 12% to 9%?

A) The value of the 20-yr bond will increase by $72 more than the 10-yr bond

B) The value of the 20-yr bond will decrease by $27 more than the 10-yr bond

C) The value of the 20-yr bond will decrease by $46 more than the 10-yr bond

D) The value of the 20-yr bond will increase by $27 more than the 10-yr bond

E) The value of the 20-yr bond will increase by $46 more than the 10-yr bond

3. Value a 15-yr semi-annual, non-callable bond that pays coupons of 9% assuming market interest rates are 6%.

A) $1,294

B) $1,000

C) $943

D) $1,274

E) $1,033

4. Which of the following is true about bonds?

A) Spread to treasuries measures the difference between the coupon rate paid by a bond and the coupon rate paid by risk free security with the comparable maturity

B) The bond rating being changed from BBB+ to B would result in a lower required yield

C) Only bonds issued in the primary market are subject to prepayment risk

D) The primary advantage to municipal bonds is that interest income received is not taxed by the federal government

E) Interest from mortgage bonds are not taxed by the Federal Government.

5. Which of the following is definitely true when interest rates are higher than a bonds coupon rate?

A) Bond will sell at a premium

B) Bond will sell at a discount

C) Bond will sell at par

D) Coupon rate will be increased to current interest rate

E) Principal to be repaid will increase

6. An upward sloping yield curve means that:

A) The yield curve is not related to required return on Treasuries.

B) Investors require the same return for both short and long-term Treasuries.

C) Investors require higher returns for longer maturity Treasuries.

D) Investors require higher returns for shorter maturity Treasuries.

E) Investors require lower returns for longer maturity Treasuries.

7. Which of the following is NOT a risk associated with bonds?

A) Default Risk

B) Ratings Upgrade Risk

C) Interest Rate Risk

D) Reinvestment Risk

E) Prepayment Risk

8. Calculate value of a perpetuity with even annual cash flows of $17,200 with 5% discount rate.

A) $344,000

B) $18,060

C) $16,381

D) $172,000

E) $361,200

9. What is true about the excess return period?

A) The excess return period is used to value a stock with technical analysis but not fundamental analysis

B) The excess return period is does not have a major impact on the value of a stock

C) The higher the competition in the industry the lower the excess return period

D) It refers to the period in which a firm is able to earn returns on new investments that are lower than its cost of capital due to competitive advantage of the firm over others

E) A company that sells commodities will likely have an excess return period of over 7 years