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Chapter 07 - Valuing Bonds
Chapter 07
Valuing Bonds
Multiple Choice Questions
1. Which of these statements is false?

A. Bonds are more important capital sources than stocks for companies and governments.
B. Some bonds offer high potential for rewards and, consequently, higher risk.
C. The bond market is larger than the stock market.
D. Bonds are always less risky than stocks.
2. Bonds are issued by which of the following?

A. corporations
B. federal government or its agencies
C. state and local governments
D. all of these
3. Which of these statements answers why bonds are known as fixed income securities?
A. Many investors on fixed incomes buy them.
B. Investors know how much they will receive in interest payments.
C. Investors will not receive their principal when the bond's term is up.
D. All of these
4. Which of the following is a legal contract that outlines the precise terms between the issuer
and the bondholder?
A. debenture
B. enforcement codes
C. indenture
D. prospectus
7-1
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
5. Regarding a bond's characteristics, which of the following is the principal loan amount that
the borrower must repay?
A. call premium
B. maturity date
C. par or face value
D. time to maturity value
6. To compensate the bondholders for getting the bond called, the issuer pays which of the
following?
A. call feature
B. call premium
C. coupon rate
D. original issue premium
7. This determines the dollar amount of interest paid to bondholders.

A. original issue discount
B. call premium
C. coupon rate
D. market rate
8. Bond prices are quoted in terms of which of the following?

B. percent of par value
C. coupon rate in dollars
D. market rate in dollars
9. Which of the following are main issuers of bonds?

A. U.S. Treasury bonds
B. Corporate bonds
C. Municipal bonds
D. All of these
7-2
10. Which of the following statements is true?

A. Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level.
B. Interest payments paid to corporate bond holders are not taxed at the federal level.
C. Interest payments paid to corporate bond holders are not taxed at the state level.
D. Interest payments paid to municipal bond holders are not taxed at the federal level, or by
the state for which the bond is issued.
11. Which of the following issues Treasury Inflation Protected Securities (TIPS)?
A. U.S. Treasury
B. Corporations
C. Municipalities
D. Nonprofits
12. Which of the following is true regarding U.S. Government Agency Securities?
A. They carry the federal government's full faith and credit guarantee.
B. They do not carry the federal government's full faith and credit guarantee.
C. They are insured by the FDIC.
D. They are treated the same as U.S. Treasury bonds with regard to the federal government's
full faith and credit guarantee.
13. Which of the following is a debt security whose payments originate from other loans, such
as credit card debt, auto loans, and home equity loans?
A. asset-backed securities
B. credit quality securities
C. debentures
D. junk bonds
14. Which of the following is NOT a factor that determines the coupon rate of a company's
bonds?
A. The amount of uncertainty about whether the company will be able to make all the
payments.
B. The term of the loan.
C. The level of interest rates in the overall economy at the time.
D. All of these are factors that determine the coupon rate of a company's bonds.
7-3
15. Which of the following bonds makes no interest payments?

A. a bond whose coupon rate is equal to the market interest rates
B. a bond whose coupon rates are greater than market interest rates
C. a bond whose coupon rates are less than the market interest rates
D. zero coupon bond
16. Which of the following is a true statement?

A. If interest rates fall, U.S. Treasury bonds will have decreasing values.
B. If interest rates fall, corporate bonds will have decreasing values.
C. If interest rates fall, no bonds will enjoy rising values.
D. If interest rates fall, all bonds will enjoy rising values.
17. Which of the following terms means that during periods when interest rates change
substantially, bondholders experience distinct gains and losses in their bond investments?
A. credit quality risk
B. interest rate risk
C. liquidity rate risk
D. reinvestment rate risk
18. Which of the following terms means the chance that future interest payments will have to
be reinvested at a lower interest rate?
19. Which of the following terms is a comparison of market yields on securities, assuming all
characteristics except maturity are the same?
C. liquidity of interest rate risk
D. term structure of interest rates
7-4
20. A bond's current yield is defined as

A. the bond's annual coupon rate divided by the bond's par value.
B. the bond's annual coupon rate divided by the market interest rate.
C. the bond's annual coupon rate divided by the bond's current market price.
D. the bond's annual coupon rate divided by the bond's original issue price.
21. Which of the following is an important advantage to the issuer of a bond with a call
provision?
A. They are able to avoid interest rate risk.
B. They are able to avoid reinvestment rate risk.
C. They are able to reduce their credit risk.
D. They allow for refinancing opportunities.
22. Which of the following is a reason municipal bonds offer lower rates of interest income
for their investors?
C. They are able to offer reduced credit risk as they are backed by the federal government.
D. They are tax exempt—at least at the federal level.
23. Which of the following terms is the chance that the bond issuer will not be able to make
timely payments?
24. Which of the following bonds carry significant risk that the issuer will not make current or
future payments?
A. credit quality risk bonds
B. interest rate risk bonds
C. liquidity rate risk bonds
D. junk bonds
7-5
25. Interest Payments Determine the interest payment for the following three bonds: 5½
percent coupon corporate bond (paid semi-annually), 6.45 percent coupon Treasury note, and
a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)
A. $5.50, $6.45, $0, respectively
B. $27.50, $32.25, $0, respectively
C. $27.50, $32.25, $100, respectively
D. $55.00, $64.50, $0, respectively
A. $2.50, $3.15, $0, respectively
B. $12.50, $15.75, $0, respectively
C. $12.50, $15.75, $100, respectively
D. $25.00, $31.50, $0, respectively
27. Interest Payments Determine the interest payment for the following three bonds: 4
A. $4.00, $4.75, $0, respectively
B. $20.00, $23.75, $0, respectively
C. $20.00, $23.75, $150, respectively
D. $40.00, $47.50, $0, respectively
28. Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to
mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity?
(Assume annual interest payments.)
A. 1 year, 6 months
B. 8 years
C. 8 years, 6 months
D. 10 years
7-6
29. Time to Maturity A bond issued by a corporation on May 1, 1999, is scheduled to mature
on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume
annual interest payments.)
A. 9 years
B. 10 years
C. 19 years
D. 20 years
30. Time to Maturity A bond issued by a corporation on October 1, 2007, is scheduled to

mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity?
A. 2 years
B. 50 years
C. 998 years
D. 100 years
31. Call Premium A 5.5 percent corporate coupon bond is callable in four years for a call
premium of one year of coupon payments. Assuming a par value of $1,000, what is the price
paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)
A. $55
B. $220
C. $1000
D. $1055
32. Call Premium A 6 percent corporate coupon bond is callable in ten years for a call
paid to the bondholder if the issuer calls the bond?
A. $60
B. $600
C. $1000
D. $1060
7-7
33. Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call
A. $45
B. $225
C. $1000
D. $1045
34. TIPS Interest and Par Value A 2½ percent TIPS has an original reference CPI of 170.4.
If the current CPI is 205.7, what is the current interest payment and par value of the TIPS?
(Assume semi-annual interest payments and $1,000 par value.)
A. $1000, $7.16, respectively
B. $1000, $15.09, respectively
C. $1207.16, $7.16, respectively
D. $1207.16, $15.09, respectively
35. TIPS Interest and Par Value A 3 3/4 percent TIPS has an original reference CPI of
175.8. If the current CPI is 207.7, what is the current interest payment and par value of the
TIPS? (Assume semi-annual interest payments and $1,000 par value.)
C. $1181.46, $22.15, respectively
D. $1181.46, $37.50, respectively
36. Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 87:25,
and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the
Treasury and corporate bonds have a par value of $1,000 and the municipal bond has a par
value of $5,000, what is the price of these three bonds in dollars?
A. $872.50, $1000, $1000, respectively
B. $1000, $1000, $1000, respectively
C. $877.81, $1024.20, $5072.50, respectively
D. $1000, $1024.20, $1001.45, respectively
7-8
37. Bond Quotes Consider the following three bond quotes; a Treasury note quoted at
102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the
A. $1002.30, $1000, $1000, respectively
B. $1000, $1000, $5000, respectively
C. $1002.30, $994.50, $5012.25 respectively
D. $1029.38, $994.50, $5122.50, respectively
38. Zero Coupon Bond Price Calculate the price of a zero coupon bond that matures in 10
years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000
par value.)
A. $553.68
B. $558.66
C. $940.00
D. $1000.00
years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and
$1,000 par value.)
A. $692.02
B. $696.57
C. $962.50
D. $1000.00
40. Current Yield What's the current yield of a 6 percent coupon corporate bond quoted at a
price of 101.70?
A. 5.9%
B. 6.0%
C. 6.1%
D. 10.2%
7-9
41. Current Yield What's the current yield of a 5.75 percent coupon corporate bond quoted at
a price of 103.05?
A. 5.58%
B. 5.75%
C. 5.93%
D. 17.54%
42. Current Yield What's the current yield of an 8.15 percent coupon corporate bond quoted
at a price of 94.30?
A. 4.30%
B. 8.01%
C. 8.15%
D. 8.64%
43. Taxable Equivalent Yield What's the taxable equivalent yield on a municipal bond with
a yield to maturity of 3.9 percent for an investor in the 35 percent marginal tax bracket?
A. 1.09%
B. 3.90%
C. 6.00%
D. 11.14%
A. 1.76%
B. 4.50%
C. 7.38%
D. 11.54%
7-10
45. Credit Risk and Yield Rank the following bonds in order from lowest credit risk to
highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond
with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond
with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.
A. JM bond, TC bond, B&O bond, IB bond
B. IB bond, B&O bond, TC bond, JM bond
C. TC bond, B&O bond, IB bond, JM bond
D. JM bond, IB bond, B&O bond, TC bond
46. TIPS Capital Return Consider a 2.75% TIPS with an issue CPI reference of 184.2. At
the beginning of this year, the CPI was 195.4 and was at 200.5 at the end of the year. What
was the capital gain of the TIPS in dollars?
A. $5.10
B. $11.20
C. $16.30
D. $27.69
was the capital gain of the TIPS in dollars? (Assume semi-annual interest payments and
$1,000 par value.)
A. $4.90
B. $10.80
C. $15.70
D. $26.25
was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments
and $1,000 par value.)
A. 3.75%
B. 4.62%
C. 7.10%
D. 8.80%
7-11
49. Compute Bond Price Compute the price of a 4.75 percent coupon bond with 15 years left
to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-
annual and par value is $1,000.) Is this a discount or premium bond?
A. discount
B. premium
50. Compute Bond Price Compute the price of a 6 percent coupon bond with 10 years left to
maturity and a market interest rate of 8.75 percent. (Assume interest payments are semi-
A. discount
B. premium
51. Bond Prices and Interest Rate Changes A 6 percent coupon bond with 12 years left to
maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the
yield to maturity will be 6.25 percent. What is the change in price the bond will experience in
dollars? (Assume semi-annual interest payments and $1,000 par value.)
A. $19.67
B. $21.55
C. $25.00
D. $41.22
52. Bond Prices and Interest Rate Changes A 5.5 percent coupon bond with 18 years left to
A. $25.00
B. $26.89
C. $53.48
D. $80.37
7-12
53. Yield to Maturity A 5.75 percent coupon bond with 12 years left to maturity is offered
for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments
are paid semi-annually and par value is $1,000.)
A. 3.00%
B. 3.09%
C. 5.75%
D. 6.00%
54. Yield to Maturity A 4.25 percent coupon bond with 8 years left to maturity is offered for
sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are
paid semi-annually and par value is $1,000.)
A. 2.25%
B. 2.36%
C. 4.25%
D. 4.50%
55. Yield to Call A 7.25 percent coupon bond with 25 years left to maturity can be called in 5
years. The call premium is one year of coupon payments. It is offered for sale at $1066.24.
What is the yield to call of the bond? (Assume that interest payments are paid semi-annually
and par value is $1,000.)
A. 3.41%
B. 3.45%
C. 3.51%
D. 6.90%
A. 4.60%
B. 4.68%
C. 4.75%
D. 5.05%
7-13
57. Comparing Bond Yields A client in the 33 percent marginal tax bracket is comparing a
municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that
offers a 6.25 percent yield. Which bond will give the client more profit after taxes?
A. the municipal bond
B. the corporate bond
C. Both give the client equal profits after taxes.
D. There is not enough information given to determine.
municipal bond that offers a 3.25 percent yield to maturity and a similar-risk corporate bond
that offers a 4.10 percent yield. Which bond will give the client more profit after taxes?
D. There is not enough information given to determine answer.
60. TIPS Total Return Reconsider a 3.25% TIPS that was issued with CPI reference of
186.7. The bond is purchased at the beginning of the year (after the interest payment), when
the CPI was 197.5. For the interest in the middle of the year, the CPI was 201.1. Now, at the
end of the year, the CPI is 202.4 and the interest payment has been made. What is the total
return of the TIPS in percentage terms for the year? (Assume semi-annual interest payments
A. 1.6%
B. 2.4%
C. 5.8%
D. 9.1%
7-14
61. Bond Prices and Interest Rate Changes A 6.75 percent coupon bond with 10 years left
to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the
yield to maturity will be 6.65 percent. If this occurs, what would be the total return of the
bond in percent? (Assume semi-annual interest payments and $1,000 par value.)
A. 5.5%
B. 5.6%
C. 6.6%
D. 6.7%
to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the
A. 3.5%
B. 5.3%
C. 7.0%
D. 7.15%
63. Yields of a Bond A 3.25 percent coupon municipal bond has 12 years left to maturity and
has a price quote of 98.75. The bond can be called in 5 years. The call premium is one year of
coupon payments. What is the bond's taxable equivalent yield for an investor in the 35 percent
marginal tax bracket? (Assume interest payments are paid semi-annually and a par value of
$5,000.)
A. 3.38%
B. 5.00%
C. 5.20%
D. 10.12%
7-15
$5,000.)
A. 4.5%
B. 4.78%
C. 7.13%
D. 14.48%
65. Bond Ratings and Prices A corporate bond with a 5.75 percent coupon has 15 years left
to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm
has recently gotten more financially stable and the rating agency is upgrading the bonds to
BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the
bond's price in dollars? (Assume interest payments are paid semi-annually and a par value of
$1,000.)
A. decrease $22.25
B. increase $22.25
C. decrease $23.72
D. increase $23.72
66. Which of the following was the catalyst for the recent financial crisis?
A. Corruption in the investment banking industry.
B. Widespread layoffs due to illegal alien hiring.
C. Defaults on subprime mortgages.
D. All of these.
67. Which of the following is not true about EE savings bonds?

A. Interest payments are received annually but are tax deductible.
B. About 1 in 6 Americans own a savings bond
C. These are tax deferred investments
D. Patriot bonds sell for one-half of their face value.
7-16
68. If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following
statements is true?
A. The current bond price will increase.
B. Interest rates required on new bond issues will increase.
C. The current bond price will decrease.
D. The current bond price will increase and interest rates on new bonds issues will decrease.
69. A 6.5% coupon bond with 12 years left to maturity can be called in 4 years. The call
premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield
to call of the bond? (Assume interest payments are paid semi-annually and par value is
$1,000.)
A. 1.48%
B. 2.96%
C. 6.5%
D. 7.23%
70. A 7.5% coupon bond with 16 years left to maturity is offered for sale at $834.92. What
yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and
par value is $1,000.)
A. 4.77%
B. 7.5%
C. 9.54%
D. 10.34%
71. An 8% coupon bond with 15 years to maturity is priced to offer a 9% yield to maturity.
You believe that in one year, the yield to maturity will be 6.5%. What is the change in price
the bond will experience in dollars? (Assume annual interest payments and par value is
$1,000.)
A. $163.92
B. $176.15
C. $198.45
D. $215.82
7-17
72. Calculate the price of a 6.5% coupon bond with 27 years left to maturity and a market
interest rate of 5%. (Assume interest payments are semiannual and par value is $1,000.) Is this
a discount or premium bond?
A. $982.03; discount
B. $1,010.59; discount
C. $1,220.93; premium
D. $1,315.62; premium
interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a
discount or premium bond?
B. $791.03; discount
C. $1,051.83; premium
D. $1,176.31; premium
74. Calculate the price of a zero coupon bond that matures in 20 years if the market interest
rate is 8.5%. (Assume annual compounding and a par value of $1,000.)
A. $90.29
B. $195.62
C. $1,195.62
D. $995.62
75. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4%
for an investor in the 28% tax bracket?
A. 2.88%
B. 3.87%
C. 4.51%
D. 5.56%
7-18
76. Rank from lowest credit risk to highest credit risk the following bonds, with the same time
to maturity, by their yield to maturity: Treasury bond with yield of 5.55%, IBM bond with
yield of 7.95%, Trump Casino bond with a yield of 9.15%, and Banc Ono bond with a yield
of 6.12%.
A. Treasury, Trump Casino, Banc Ono, IBM
B. Trump Casino, IBM, Banc Ono, Treasury
C. Treasury, Banc Ono, IBM, Trump Casino
D. Trump Casino, Banc Ono, IBM, Treasury
77. Consider a 4.5% TIPS with an issue CPI reference of 187.2. At the beginning of this year,
the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS
in dollars?
A. $32.73
B. $46.92
C. $62.49
D. $75.85
78. Rank from highest credit risk to lowest credit risk the following bonds, with the same time
of 9.46%.
B. Banc Ono, Trump Casino, IBM, Treasury
C. Trump Casino, Treasury, Banc Ono, IBM
D. IBM, Banc Ono, Trump Casino, Treasury
79. Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal
bond has a par value of $5,000, what is the price of the bond in dollars?
A. $5,089.06
B. $5,050.19
C. $5,062.50
D. $5,109.75
7-19
80. A 3.75% TIPS has an original reference CPI of 183.9. If the current CPI is 214.7, what is
the current interest payment? (Assume semi-annual interest payments and a par value of
$1,000.)
A. $43.78
B. $37.50
C. $21.89
D. $18.75
81. A 5 1/8% TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is
the par value of the TIPS?
A. $981.75
B. $1,018.60
C. $992.75
D. $1,042.95
82. A 7.5% coupon bond with 9 years left to maturity is priced to offer a 10.4% yield to
maturity. You believe that in one year, the yield to maturity will be 8%. What is the change in
price the bond will experience in dollars? (Assume interest payments are semiannual and par
value is $1,000.)
A. $97.75
B. $101.50
C. $129.25
D. $137.75
premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to
call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.
A. 12.14%
B. 7.27%
C. 14.54%
D. 8.29%
7-20
84. A 5.5% coupon municipal bond has 16 years left to maturity and has a price quote of
92.55. The bond can be called in 9 years. The call premium is one year of coupon payments.
Compute the bond's current yield. Assume interest payments are paid semi-annually and a par
value of $5,000.
A. 5.94%
B. 11.89%
C. 12.19%
D. 13.14%
Compute the bond's yield to maturity and yield to call. Assume interest payments are paid
semi-annually and a par value of $5,000.
A. YTM = 6.91%; YTC = 7.52%
B. YTM = 6.24%; YTC = 7.08%
C. YTM = 5.78%; YTC = 6.61%
D. YTM = 5.92%; YTC = 6.85%
86. An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 98.5.
The bond can be called in 6 years. The call premium is one year of coupon payments.
Compute the bond's yield to call and determine if the bond will be called. Assume interest
payments are paid semi-annually and a par value of $5,000.
A. 4.68%; yes, the bond will be called
B. 9.36%; yes, the bond will be called
C. 9.36%; no, the bond will not be called
D. 10.71%; no, the bond will not be called
87. An 8% coupon municipal bond has 15 years left to maturity and has a price quote of
D. 11.21%; no the bond will not be called
7-21
88. A corporate bond with a 5% coupon has 10 years left to maturity. It has had a credit rating
of BBB and a yield to maturity of 8.0%. The firm has recently gotten into some trouble and
the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be
9%. What will be the change in the bond's price in dollars? Assume interest payments are paid
semi-annually and par value is $1,000.
A. -$43.61
B. -$51.07
C. -$62.43
D. -$56.31
89. A corporate bond with an 8.5% coupon has 10 years left to maturity. It has had a credit
rating of A and a yield to maturity of 10%. The firm has recently gotten into some trouble and
the rating agency is downgrading the bonds to BBB. The new appropriate discount rate will
be 11.5%. What will be the change in the bond's price in dollars? Assume interest payments
are paid semi-annually and par value is $1,000.
A. -$82.13
B. -$95.19
C. -$101.37
D. -$69.85
90. Junk bonds are those bonds with a credit rating of _____________.
A. BB and lower
B. B and lower
C. BBB and lower
D. None of these.
91. Which of following are backed only by the reputation and financial stability of the
corporation?
A. Debentures
B. Unsecured bonds
C. Both a and b
D. None of these.
7-22
92. Investment grade bonds include those bonds with ratings _____________.
A. From AAA to BB
B. From AAA to BBB
C. From AAA to B
D. From AAA to A
93. Which of the following statements is correct?

A. Michael Milken pioneered an active high-yield bond market in the late 1970s that provided
much needed capital to entrepreneurs and financial innovators.
B. Prior to Milken, the only junk bonds were those issued by once financially stable firms that
had fallen on hard times.
C. Milken showed investors that, historically, junk bonds rarely defaulted and offered a very
high return to those willing to assume the risk of owning them.
D. All of these statements are correct.

A. Yield spreads between bonds of different quality remain static over time.
B. Yield spreads are set by the Securities Exchange Commission.
C. Yield spreads between bonds of different quality change over time.
D. None of these statements is correct.
95. Sally is choosing between two bonds both of which mature in 15 years and have the same
level of risk. Bond A is a municipal bond that yields 5.25%. Bond B is a corporate bond that
yields 7.75%. If Sally is in the 30% tax bracket, which bond should she select and why?
A. Sally should select Bond A because its interest income is not taxable.
B. Sally should select Bond B is better because it has lower risk.
C. Sally should select Bond A because its taxable equivalent yield is greater than the yield of
Bond B.
D. Sally should select Bond B because the taxable equivalent yield of Bond A is less than the
yield of Bond B.
7-23
B. Sally will be indifferent between Bond A and B since the taxable equivalent yield of Bond
A equals the yield of Bond B.
C. Sally should select Bond A because its TEY is greater than the yield of Bond B.
D. Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B.
Bond B.
yield of Bond B.
98. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of
10.06%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is
the bond's annual coupon rate?
A. 5.50%
B. 8.19%
C. 9.57%
D. 11.00%
99. A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%.
If this bond pays its coupon payments semi-annually and par value is $1,000, what is the
bond's annual coupon rate?
A. 7.45%
B. 8.03%
C. 9.39%
D. 10.82%
7-24
100. All of the following items would need to be included in the bond's indenture agreement
except _____.
A. The coupon rate
B. The call feature
C. The credit rating
D. Steps that the bondholder can take in the event that the issuer fails to pay the interest or
principal
101. Which of the following is not a correct statement?

A. Treasury inflation-protected securities have fixed coupon rates.
B. The federal government adjusts the par value of Treasury inflation-protected securities at
the rate of inflation.
C. At maturity, investor in Treasury inflation-protected securities receives an inflation-
adjusted principal amount.
102. Which of the following would NOT be an example of an agency bond?

A. Federal Home Loan Bank bond
B. Student Loan Marketing Association bond
C. Fannie Mae bond
D. Treasury bills

A. Bonds with short-term maturities will have very little interest rate risk.
B. Bonds with large coupon payments will have very little interest rate risk.
C. Bonds with higher credit ratings will have very little interest rate risk.

A. Long-term bonds have more reinvestment rate risk than short-term bonds.
B. Long-term bonds have more interest rate risk than short-term bonds.
C. Short-term bonds with high coupons have high interest rate risk.
D. Zero coupon bonds do not have interest rate risk.
7-25
105. Which of the following bonds will have the largest percentage increase in value if
interest rates decrease by 1%?
A. 2-year, 5% coupon bond
B. 30-year, 10% coupon bond
C. 10-year, zero coupon
D. 30-year, zero coupon
106. Rank the following bonds, from highest to lowest interest rate risk: 2-year zero coupon,
2-year 5% coupon bond, 30-year 5% coupon bond, 30-year, zero coupon bond.
A. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year 5% coupon bond, 2-year zero
coupon bond
B. 2-year 5% coupon bond, 2-year zero coupon bond, 30-year 5% coupon bond, 30-year zero
coupon bond
C. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond, 2-year 5%
coupon bond
D. 30-year, 5% coupon bond, 30-year zero coupon bond, 2-year 5% coupon bond, 2-year zero
coupon bond

A. All else the same, an investor will require less return to invest in a callable bond than one
that is not callable.
B. All else the same, an investor will require more return to invest in a callable bond than one
C. The call feature does not impact the return that investors demand.
D. We would need to know the current level of interest rates to answer this question.
108. Under which conditions will an investor demand a larger return (yield) on a bond?
A. The bond issue is upgraded from A to AA.
B. The bond issue is downgraded from A to BBB.
C. Interest rates decrease due to decline in inflation.
D. None of these conditions will cause an increase in the bond's yield.
7-26

A. There is an inverse relationship between bond prices and bond yields.
B. There is a positive relationship between bond prices and bond yields.
C. There is no relationship between bond prices and bond yields.
D. The relationship between bond prices and bond yields is dependent on the market interest
rate.
110. If a bond is selling at a premium, then ________________________________.

A. its coupon rate must be greater than its yield
B. its coupon rate must be less than its yield
C. its coupon rate must be equal to its yield
D. its coupon rate must be equal to one-half the yield to maturity for a 5-year bond
111. The bond's annual coupon rate divided by its market price is referred to as the
__________.
A. Yield to Call
B. Yield to Maturity
C. Current Yield
D. Term Structure of Interest Rates
112. Possible shapes for the yield include all of the following except ____________.
A. Humped
B. Downward sloping
C. Flat
D. All of these are possible shapes.
113. Possible shapes for the yield curve include all of the following except ___________.
A. Upward sloping
B. Humped
C. Horizontal line
D. Vertical line
7-27
114. If a bond is selling at a discount, which of the following statements is correct?

A. The current yield must be greater than the coupon rate.
B. The coupon rate must be greater than the yield to maturity.
C. The bond must have a low bond rating.
D. All of the statements are correct.
115. If a bond is selling at par value, which of the following statements is correct?
A. The current yield must equal the coupon rate.
B. The current yield must equal the yield to maturity.
C. Both of these statements are correct.
116. To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac
purchased home mortgages from banks and other lenders. They combined the mortgages into
diversified portfolios of loans and issued ______________.
A. Trust securities
B. Mortgage-backed securities
C. Current yield securities
D. Treasury Inflation Protected Securities
117. Under what conditions is a bond likely to be called?

A. The firm is in financial duress.
B. The firm is planning a massive expansion and needs to raise a lot of capital.
C. Interest rates have significantly declined.
D. The firm wants to increase its debt ratio.
118. A 30-year bond with an 8% coupon has a yield to maturity of 6%. The bond could be
called in 7 years and if called would generate a yield to call of 5.75%. What is this bond's call
premium? Assume the coupon payments are made annually and par value is $1,000.
A. $219.73
B. $152.64
C. $106.29
D. $301.76
7-28
119. A 15-year bond with a 10% coupon has a yield to maturity of 8%. The bond could be
called in 4 years and if called would generate a yield to call of 6%. What is this bond's call
premium? Assume the coupon payments are made semi-annually and par value is $1,000.
A. $19.73
B. $81.87
C. $41.20
D. $66.03
120. A 5% coupon bond has 10 years to maturity and could be called in 2 years. If the bond is
called, investors will earn 6.2%. The call premium is one year of coupon payments. If coupon
payments are made semi-annually and par value is $1,000, what is the bond's yield to
maturity?
A. 2.36%
B. 4.72%
C. 5.18%
D. 6.49%
maturity?
A. 2.84%
B. 3.17%
C. 5.38%
D. 5.69%
122. A 10% coupon bond has 15 years to maturity and could be called in 2 years. If the bond
is called, investors will earn 4%. The call premium is one year of coupon payments. If coupon
payments are made annually and par value is $1,000, what is the bond's yield to maturity?
A. 6.19%
B. 6.82%
C. 7.65%
D. 7.98%
Essay Questions
7-29
123. Describe the relationship between interest rate changes and bond prices.
124. Describe reasons that the U.S. Government and corporations would issue bonds.
125. Explain why high-income and wealthy people are more likely to buy a municipal bond
than a corporate bond.
126. Yields of a Bond A 4.75 percent coupon municipal bond has 20 years left to maturity
and has a price quote of 98.9. The bond can be called in 5 years. The call premium is one year
of coupon payments. Compute and discuss the bond's current yield, yield to maturity, taxable
equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call.
(Assume interest payments are paid semi-annually and a par value of $5,000.)
7-30
to maturity. It has had a credit rating of BBB and a yield to maturity of 6.25 percent. The firm
has recently gotten into some trouble and the rating agency is downgrading the bonds to BB.
The new appropriate discount rate will be 6.75 percent. What will be the change in the bond's
price in dollars and percentage terms? (Assume interest payments are paid semi-annually and
a par value of $1,000.)
128. What does a call provision allow the issuer to do, and why would they do it?
129. All else equal, which bond's price is more affected by a change in interest rates, a bond
with a large coupon or a small coupon? Why?
130. Explain how investors can assess bond market performance.
7-31
131. What actions taken by the Federal Reserve preceded and possibly helped precipitate the
recent financial crisis?
7-32
Chapter 07 Valuing Bonds Answer Key
Multiple Choice Questions
1. Which of these statements is false?

A. Bonds are more important capital sources than stocks for companies and governments.
B. Some bonds offer high potential for rewards and, consequently, higher risk.
C. The bond market is larger than the stock market.
D. Bonds are always less risky than stocks.
AACSB: Reflective Thinking

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-01 Describe bond characteristics.
Source: NEW
Topic: Bond characteristics
2. Bonds are issued by which of the following?

A. corporations
B. federal government or its agencies
C. state and local governments
D. all of these

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: General bond
7-33
3. Which of these statements answers why bonds are known as fixed income securities?
A. Many investors on fixed incomes buy them.
B. Investors know how much they will receive in interest payments.
C. Investors will not receive their principal when the bond's term is up.
D. All of these

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
4. Which of the following is a legal contract that outlines the precise terms between the issuer
and the bondholder?
A. debenture
B. enforcement codes
C. indenture
D. prospectus

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
5. Regarding a bond's characteristics, which of the following is the principal loan amount that
the borrower must repay?
A. call premium
B. maturity date
C. par or face value
D. time to maturity value

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
7-34
6. To compensate the bondholders for getting the bond called, the issuer pays which of the
following?
A. call feature
B. call premium
C. coupon rate
D. original issue premium

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
7. This determines the dollar amount of interest paid to bondholders.

B. call premium
C. coupon rate
D. market rate

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
8. Bond prices are quoted in terms of which of the following?

B. percent of par value
C. coupon rate in dollars
D. market rate in dollars

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
7-35
9. Which of the following are main issuers of bonds?

A. U.S. Treasury bonds
B. Corporate bonds
C. Municipal bonds
D. All of these

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-02 Identify various bond issuers and their motivation for issuing debt.
Source: NEW
Topic: Bonds
10. Which of the following statements is true?

A. Interest payments paid to U.S. Treasury bond holders are not taxed at the federal level.
B. Interest payments paid to corporate bond holders are not taxed at the federal level.
C. Interest payments paid to corporate bond holders are not taxed at the state level.
D. Interest payments paid to municipal bond holders are not taxed at the federal level, or by
the state for which the bond is issued.

Blooms: Remember
Difficulty: 2 Intermediate
Source: NEW
Topic: Bonds and tax exemptions
11. Which of the following issues Treasury Inflation Protected Securities (TIPS)?
A. U.S. Treasury
B. Corporations
C. Municipalities
D. Nonprofits

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Types of government securities
7-36
12. Which of the following is true regarding U.S. Government Agency Securities?
A. They carry the federal government's full faith and credit guarantee.
B. They do not carry the federal government's full faith and credit guarantee.
C. They are insured by the FDIC.
D. They are treated the same as U.S. Treasury bonds with regard to the federal government's
full faith and credit guarantee.

Blooms: Remember
Source: NEW
Topic: Types of government securities
13. Which of the following is a debt security whose payments originate from other loans, such
as credit card debt, auto loans, and home equity loans?
A. asset-backed securities
B. credit quality securities
C. debentures
D. junk bonds

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Types of debt securities
14. Which of the following is NOT a factor that determines the coupon rate of a company's
bonds?
A. The amount of uncertainty about whether the company will be able to make all the
payments.
B. The term of the loan.
C. The level of interest rates in the overall economy at the time.
D. All of these are factors that determine the coupon rate of a company's bonds.

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-03 Read and interpret bond quotes.
Source: NEW
7-37
15. Which of the following bonds makes no interest payments?

A. a bond whose coupon rate is equal to the market interest rates
B. a bond whose coupon rates are greater than market interest rates
C. a bond whose coupon rates are less than the market interest rates
D. zero coupon bond

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-04 Compute bond prices using present value concepts.
Source: NEW
Topic: Types of bonds
16. Which of the following is a true statement?

A. If interest rates fall, U.S. Treasury bonds will have decreasing values.
B. If interest rates fall, corporate bonds will have decreasing values.
C. If interest rates fall, no bonds will enjoy rising values.
D. If interest rates fall, all bonds will enjoy rising values.

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-05 Explain the relationship between bond prices and interest rates.
Source: NEW
Topic: Interest rates in relation to bonds
17. Which of the following terms means that during periods when interest rates change
substantially, bondholders experience distinct gains and losses in their bond investments?

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Risk premiums
7-38
18. Which of the following terms means the chance that future interest payments will have to
be reinvested at a lower interest rate?

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
19. Which of the following terms is a comparison of market yields on securities, assuming all
characteristics except maturity are the same?

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
20. A bond's current yield is defined as

A. the bond's annual coupon rate divided by the bond's par value.
B. the bond's annual coupon rate divided by the market interest rate.
C. the bond's annual coupon rate divided by the bond's current market price.
D. the bond's annual coupon rate divided by the bond's original issue price.

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-06 Compute bond yields.
Source: NEW
7-39
21. Which of the following is an important advantage to the issuer of a bond with a call
provision?
C. They are able to reduce their credit risk.
D. They allow for refinancing opportunities.

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
22. Which of the following is a reason municipal bonds offer lower rates of interest income
for their investors?
C. They are able to offer reduced credit risk as they are backed by the federal government.
D. They are tax exempt—at least at the federal level.

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Bonds and tax exemptions
23. Which of the following terms is the chance that the bond issuer will not be able to make
timely payments?

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-07 Find bond ratings and assess credit risk's effects on bond yields.
Source: NEW
7-40
24. Which of the following bonds carry significant risk that the issuer will not make current or
future payments?
A. credit quality risk bonds
B. interest rate risk bonds
C. liquidity rate risk bonds
D. junk bonds

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
A. $5.50, $6.45, $0, respectively
B. $27.50, $32.25, $0, respectively
C. $27.50, $32.25, $100, respectively
D. $55.00, $64.50, $0, respectively
5½ percent coupon corporate bond (paid semi-annually): ½ x 5.5% x $1,000 = $27.50

6.45 percent coupon Treasury note: ½ x 6.45% x $1,000 = $32.25
corporate zero coupon bond maturing in 10 years: 0% x $1,000 = $0
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 1
Topic: Interest payments
7-41
A. $2.50, $3.15, $0, respectively
B. $12.50, $15.75, $0, respectively
C. $12.50, $15.75, $100, respectively
D. $25.00, $31.50, $0, respectively
2½ percent coupon corporate bond (paid semi-annually): ½ x 2.5% x $1,000 = $12.50

3.15 percent coupon Treasury note: ½ x 3.15% x $1,000 = $15.75 corporate zero coupon bond
maturing in 10 years: 0% x $1,000 = $0
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 1
27. Interest Payments Determine the interest payment for the following three bonds: 4
A. $4.00, $4.75, $0, respectively
B. $20.00, $23.75, $0, respectively
C. $20.00, $23.75, $150, respectively
D. $40.00, $47.50, $0, respectively
4 percent coupon corporate bond (paid semi-annually): ½ x 4% x $1,000 = $20.00

4.75 percent coupon Treasury note: ½ x 4.75% x $1,000 = $23.75 corporate zero coupon bond
maturing in 10 years: 0% x $1,000 = $0
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 1
7-42
28. Time to Maturity A bond issued by a corporation on June 15, 2007, is scheduled to
mature on June 15, 2017. If today is December 16, 2008, what is this bond's time to maturity?
A. 1 year, 6 months
B. 8 years
C. 8 years, 6 months
D. 10 years
June 15, 2017 minus December 16, 2008 = 8 years and 6 months
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 3
Topic: Time to maturity
29. Time to Maturity A bond issued by a corporation on May 1, 1999, is scheduled to mature
on May 1, 2019. If today is May 2, 2009, what is this bond's time to maturity? (Assume
annual interest payments.)
A. 9 years
B. 10 years
C. 19 years
D. 20 years
May 1, 2019 minus May 2, 2009 = 10 years and 0 months
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 3
7-43
30. Time to Maturity A bond issued by a corporation on October 1, 2007, is scheduled to

mature on October 1, 3007. If today is October 2, 2009, what is this bond's time to maturity?
A. 2 years
B. 50 years
C. 998 years
D. 100 years
October 1, 3007 - October 2, 2009 = 998 years
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 3
31. Call Premium A 5.5 percent corporate coupon bond is callable in four years for a call
paid to the bondholder if the issuer calls the bond? (Assume annual interest payments.)
A. $55
B. $220
C. $1000
D. $1055
principal + call premium = $1,000 + 5.5% x $1,000 = $1,055
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 5
Topic: Call premium
7-44
32. Call Premium A 6 percent corporate coupon bond is callable in ten years for a call
A. $60
B. $600
C. $1000
D. $1060
principal + call premium = $1,000 + 6% x $1,000 = $1,060
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 5
Topic: Call premium
33. Call Premium A 4.5 percent corporate coupon bond is callable in five years for a call
A. $45
B. $225
C. $1000
D. $1045
principal + call premium = $1,000 + 4.5% x $1,000 = $1,045
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 5
Topic: Call premium
7-45
34. TIPS Interest and Par Value A 2½ percent TIPS has an original reference CPI of 170.4.
If the current CPI is 205.7, what is the current interest payment and par value of the TIPS?
(Assume semi-annual interest payments and $1,000 par value.)
C. $1207.16, $7.16, respectively
D. $1207.16, $15.09, respectively
par value = 205.7/170.4 x $1,000 = $1,207.16

interest payment = ½ x 2.5% x $1,207.16 = $15.09
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 7
Topic: TIPS interest and PAR value
35. TIPS Interest and Par Value A 3 3/4 percent TIPS has an original reference CPI of
175.8. If the current CPI is 207.7, what is the current interest payment and par value of the
TIPS? (Assume semi-annual interest payments and $1,000 par value.)
C. $1181.46, $22.15, respectively
D. $1181.46, $37.50, respectively
par value = 207.7/175.8 x $1,000 = $1,181.4562

interest payment = ½ x 3.75% x $1,181.46 = $22.15
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 7
Topic: TIPS interest and PAR value
7-46
36. Bond Quotes Consider the following three bond quotes; a Treasury note quoted at 87:25,
and a corporate bond quoted at 102.42, and a municipal bond quoted at 101.45. If the
A. $872.50, $1000, $1000, respectively
B. $1000, $1000, $1000, respectively
C. $877.81, $1024.20, $5072.50, respectively
D. $1000, $1024.20, $1001.45, respectively
Treasury note at 87:25: (87 + 25/32)% x $1,000 = $877.8125

Corporate bond at 102.42: 102.42% x $1,000 = $1,024.20
Municipal bond at 101.45: 101.45% x $5,000 = $5,072.50
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 9
Topic: Bond quotes
37. Bond Quotes Consider the following three bond quotes; a Treasury note quoted at
102:30, and a corporate bond quoted at 99.45, and a municipal bond quoted at 102.45. If the
A. $1002.30, $1000, $1000, respectively
B. $1000, $1000, $5000, respectively
C. $1002.30, $994.50, $5012.25 respectively
D. $1029.38, $994.50, $5122.50, respectively
Treasury note at 102:30: (102 + 30/32)% x $1,000 = $1029.375

Corporate bond at 99.45: 99.45% x $1,000 = $994.50
Municipal bond at 102.45: 102.45% x $5,000 = $5,122.50
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 9
Topic: Bond quotes
7-47
years if the market interest rate is 6 percent. (Assume semi-annual compounding and $1,000
par value.)
A. $553.68
B. $558.66
C. $940.00
D. $1000.00
use semi-annual compounding:
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 11
Topic: Zero coupon bond
years if the market interest rate is 7.50 percent. (Assume semi-annual compounding and
$1,000 par value.)
A. $692.02
B. $696.57
C. $962.50
D. $1000.00
use semi-annual compounding:
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 11
7-48
40. Current Yield What's the current yield of a 6 percent coupon corporate bond quoted at a
price of 101.70?
A. 5.9%
B. 6.0%
C. 6.1%
D. 10.2%
6%  101.7% = 0.058997 = 5.9%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 13
Topic: Current yield
41. Current Yield What's the current yield of a 5.75 percent coupon corporate bond quoted at
a price of 103.05?
A. 5.58%
B. 5.75%
C. 5.93%
D. 17.54%
5.75%  103.05% = 0.055798 = 5.58%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 13
7-49
42. Current Yield What's the current yield of an 8.15 percent coupon corporate bond quoted
at a price of 94.30?
A. 4.30%
B. 8.01%
C. 8.15%
D. 8.64%
8.15%  94.30% = 0.08643 = 8.6%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 13
A. 1.09%
B. 3.90%
C. 6.00%
D. 11.14%
Use equation 6.4:
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 15
Topic: Taxable equivalent yield
7-50
A. 1.76%
B. 4.50%
C. 7.38%
D. 11.54%
Use equation 6.4:
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 15
45. Credit Risk and Yield Rank the following bonds in order from lowest credit risk to
highest risk all with the same time to maturity, by their yield to maturity: JM Corporate bond
with yield of 12.25 percent, IB Corporate bond with yield of 4.49 percent, TC Corporate bond
with yield of 8.76 percent, and B&O Corporate bond with a yield of 5.99 percent.
A. JM bond, TC bond, B&O bond, IB bond
B. IB bond, B&O bond, TC bond, JM bond
C. TC bond, B&O bond, IB bond, JM bond
D. JM bond, IB bond, B&O bond, TC bond
IB bond with a yield of 4.49 percent

B&O bond with yield of 5.99 percent
TC bond with yield of 8.76 percent
JM bond with yield of 12.25 percent
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Source: 7 - 18
Topic: Credit risk and yield
7-51
was the capital gain of the TIPS in dollars?
A. $5.10
B. $11.20
C. $16.30
D. $27.69
gain = end of year value - beginning of year value

= 200.5/184.2 x $1,000 - 195.4/184.2 x $1,000 = $1,088.49 - $1,060.80 = $27.69
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 19
Topic: TIPS capital return
was the capital gain of the TIPS in dollars? (Assume semi-annual interest payments and
$1,000 par value.)
A. $4.90
B. $10.80
C. $15.70
D. $26.25

= 202.4/186.7 x $1,000 - 197.5/186.7 x $1,000 = $1,084.09 - $1,057.85 = $26.25
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 19
7-52
was the capital gain of the TIPS in percentage terms? (Assume semi-annual interest payments
A. 3.75%
B. 4.62%
C. 7.10%
D. 8.80%

= 199.4/183.5 x $1,000 - 190.6/183.5 x $1,000 = $1,086.65 - $1,038.69 = $47.96
As a percentage, the gain was = $47.96  $1,038.69 = 4.62%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 20
49. Compute Bond Price Compute the price of a 4.75 percent coupon bond with 15 years left
to maturity and a market interest rate of 6.25 percent. (Assume interest payments are semi-
A. discount
B. premium
N = 30, I = 3.125, PMT = 23.75, FV = 1000 CPT PV = -855.34

Since this is less than $1,000, it is a discount bond.
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 21
Topic: Compute bond price
7-53
50. Compute Bond Price Compute the price of a 6 percent coupon bond with 10 years left to
maturity and a market interest rate of 8.75 percent. (Assume interest payments are semi-
A. discount
B. premium
N = 20, I = 4.375, PMT = 30, FV = 1000 CPT PV = -819.19

Since this is less than $1,000, it is a discount bond.
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 21
51. Bond Prices and Interest Rate Changes A 6 percent coupon bond with 12 years left to
A. $19.67
B. $21.55
C. $25.00
D. $41.22
Compute the current bond price:

N = 24, I = 3.25, PMT = 30, FV = 1000 CPT PV = -958.78
Now compute the price in one year:
N = 22, I = 3.125, PMT = 30, FV = 1000 CPT PV = -980.33
So the dollar change in price is:
$980.33 - $958.78 = $21.55
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 25
Topic: Bond prices and interest rate changes
7-54
52. Bond Prices and Interest Rate Changes A 5.5 percent coupon bond with 18 years left to
A. $25.00
B. $26.89
C. $53.48
D. $80.37

N = 36, I = 3.125, PMT = 27.50, FV = 1000 CPT PV = -919.63
N = 34, I = 2.875, PMT = 27.50, FV = 1000 CPT PV = -973.11
$973.11 - $919.63 = $53.48
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 25
53. Yield to Maturity A 5.75 percent coupon bond with 12 years left to maturity is offered
for sale at $978.83. What yield to maturity is the bond offering? (Assume interest payments
are paid semi-annually and par value is $1,000.)
A. 3.00%
B. 3.09%
C. 5.75%
D. 6.00%
N = 24, PV = -978.83, PMT = 28.75, FV = 1000 CPT I = 3%, YTM = 3% x 2 = 6%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 27
Topic: Yield to maturity
7-55
54. Yield to Maturity A 4.25 percent coupon bond with 8 years left to maturity is offered for
sale at $983.36. What yield to maturity is the bond offering? (Assume interest payments are
paid semi-annually and par value is $1,000.)
A. 2.25%
B. 2.36%
C. 4.25%
D. 4.50%
N = 16, PV = -983.36, PMT = 21.25, FV = 1000 CPT I = 2.25%, YTM = 2.25% x 2 = 4.50%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 27
A. 3.41%
B. 3.45%
C. 3.51%
D. 6.90%
N = 10, PV = -1066.24, PMT = 36.25, FV = 1072.50 CPT I = 3.45%, YTC = 3.45% x 2 =

6.90%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 29
Topic: Yield to call
7-56
A. 4.60%
B. 4.68%
C. 4.75%
D. 5.05%
N = 4, PV = -1037.35, PMT = 23.75, FV = 1047.50 CPT I = 2.525%, YTC = 2.525% x 2 =

5.05%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 29
municipal bond that offers a 5 percent yield to maturity and a similar-risk corporate bond that
offers a 6.25 percent yield. Which bond will give the client more profit after taxes?
D. There is not enough information given to determine.
First determine the ETY:
Since 7.46% > 6.25%, the client should take the municipal bond.
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 31
Topic: Comparing bond yields
7-57
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 31
7-58
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 31
7-59
60. TIPS Total Return Reconsider a 3.25% TIPS that was issued with CPI reference of
186.7. The bond is purchased at the beginning of the year (after the interest payment), when
the CPI was 197.5. For the interest in the middle of the year, the CPI was 201.1. Now, at the
end of the year, the CPI is 202.4 and the interest payment has been made. What is the total
return of the TIPS in percentage terms for the year? (Assume semi-annual interest payments
A. 1.6%
B. 2.4%
C. 5.8%
D. 9.1%
capital gain = end of year value - beginning of year value

= 202.4/186.7 x $1,000 - 197.5/186.7 x $1,000 = $1,084.09 - $1,057.85 = $26.24
The mid-year interest payment was: ½ x 3.25% x 201.1/186.7 x $1,000 = $17.50
The end-of-year interest payment was: ½ x 3.25% x 202.4/186.7 x $1,000 = $17.62
Total dollar return = $26.24 + $17.50 + $17.62 = $61.36
As a percentage, the return was = $61.36  $1,057.85 = 5.8%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Difficulty: 3 Advanced
Source: 7 - 33
Topic: TIPS total return
7-60
to maturity is priced to offer a 6.5 percent yield to maturity. You believe that in one year, the
A. 5.5%
B. 5.6%
C. 6.6%
D. 6.7%

N = 20, I = 3.25, PMT = 33.75, FV = 1000 CPT PV = -1018.17
N = 18, I = 3.325, PMT = 33.75, FV = 1000 CPT PV = -1006.69
So the dollar change in price + interest payments are:
$1,006.69 - $1,018.17 + $67.50 = $56.02
The percentage return is: $56.02  $1,018.17 = 5.5%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 35
7-61
to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the
A. 3.5%
B. 5.3%
C. 7.0%
D. 7.15%

N = 50, I = 3.5, PMT = 36.25, FV = 1000 CPT PV = -1029.32
N = 48, I = 3.575, PMT = 36.25, FV = 1000 CPT PV = -1011.40
So the dollar change in price + interest payments are:
$1011.40 - $1029.32 + $72.50 = $54.58
The percentage return is: $54.58  $1,029.32 = 5.3%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 35
7-62
$5,000.)
A. 3.38%
B. 5.00%
C. 5.20%
D. 10.12%
YTM: N = 24, PV = -4937.50, PMT = 81.25, FV = 5000 CPT I = 1.69%, YTM = 1.69% x 2 =
3.38%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 37
Topic: Yields of a bond
7-63
$5,000.)
A. 4.5%
B. 4.78%
C. 7.13%
D. 14.48%
YTM: N = 20, PV = -4887.50, PMT = 112.50, FV = 5000 CPT I = 2.39%, YTM = 2.39% x 2
= 4.78%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 37
7-64
to maturity. It has had a credit rating of BB and a yield to maturity of 6.25 percent. The firm
has recently gotten more financially stable and the rating agency is upgrading the bonds to
BBB. The new appropriate discount rate will be 6.00 percent. What will be the change in the
bond's price in dollars? (Assume interest payments are paid semi-annually and a par value of
$1,000.)
A. decrease $22.25
B. increase $22.25
C. decrease $23.72
D. increase $23.72

N = 30, I = 3.125, PMT = 28.75, FV = 1000 CPT PV = -951.78
Now compute the price after the rating change:
N = 30, I = 3.00, PMT = 28.75, FV = 1000 CPT PV = -975.50
$975.50 - $951.78 = $23.72
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: 7 - 40
Topic: Bond ratings and prices
66. Which of the following was the catalyst for the recent financial crisis?
A. Corruption in the investment banking industry.
B. Widespread layoffs due to illegal alien hiring.
C. Defaults on subprime mortgages.
D. All of these.

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Financial crisis
7-65
67. Which of the following is not true about EE savings bonds?

A. Interest payments are received annually but are tax deductible.
B. About 1 in 6 Americans own a savings bond
C. These are tax deferred investments
D. Patriot bonds sell for one-half of their face value.

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: EE Savings Bonds
68. If Zeus Energy bonds are upgraded from BBB- to BBB+, which of the following
statements is true?
A. The current bond price will increase.
B. Interest rates required on new bond issues will increase.
C. The current bond price will decrease.
D. The current bond price will increase and interest rates on new bonds issues will decrease.

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Bond ratings
7-66
premium is one year of coupon payments. It is offered for sale at $1,190.25. What is the yield
to call of the bond? (Assume interest payments are paid semi-annually and par value is
$1,000.)
A. 1.48%
B. 2.96%
C. 6.5%
D. 7.23%
PV = 1190.25; PMT = 32.50; n = 8; FV = 1065; = > i = 1.48 YTC = 1.48 * 2 = 2.96
AACSB: Analytical
Blooms: Apply
Source: 6 - 29
70. A 7.5% coupon bond with 16 years left to maturity is offered for sale at $834.92. What
yield to maturity is the bond offering? (Assume interest payments are paid semi-annually and
par value is $1,000.)
A. 4.77%
B. 7.5%
C. 9.54%
D. 10.34%
PV = 834.92; PMT = 37.5; FV = 1000; n = 32; = > I = 4.77; 4.77 * 2 = 9.54
AACSB: Analytical
Blooms: Apply
Source: 6 - 28
7-67
71. An 8% coupon bond with 15 years to maturity is priced to offer a 9% yield to maturity.
You believe that in one year, the yield to maturity will be 6.5%. What is the change in price
the bond will experience in dollars? (Assume annual interest payments and par value is
$1,000.)
A. $163.92
B. $176.15
C. $198.45
D. $215.82
Step 1: PMT = 80; FV = 1000; n = 15; i = 9; = > PV = 919.39 Step 2: i = 6.5; PMT = 80; n =
14; FV = 1000; = > PV = 1135.21 Step 3: 1135.21 - 919.39 = 215.82
AACSB: Analytical
Blooms: Apply
Source: 6 - 25
interest rate of 5%. (Assume interest payments are semiannual and par value is $1,000.) Is this
a discount or premium bond?
B. $1,010.59; discount
C. $1,220.93; premium
D. $1,315.62; premium
PMT = 32.5; n = 54; FV = 1000; i = 2.5; = > PV = 1220.93; premium
AACSB: Analytical
Blooms: Apply
Source: 6 - 24
7-68
interest rate of 10.5%. (Assume interest rates are semiannual and par value is $1,000.) Is this a
discount or premium bond?
B. $791.03; discount
C. $1,051.83; premium
D. $1,176.31; premium
PMT = 32.5; FV = 1000; i = 5.25; n = 34; = > PV = 685.93; discount
AACSB: Analytical
Blooms: Apply
Source: 6 - 22
74. Calculate the price of a zero coupon bond that matures in 20 years if the market interest
rate is 8.5%. (Assume annual compounding and a par value of $1,000.)
A. $90.29
B. $195.62
C. $1,195.62
D. $995.62
PMT = 0; FV = 1000; n = 20; i = 8.5; = > PV = 195.62
AACSB: Analytical
Blooms: Apply
Difficulty: 1 Basic
Source: 6 - 12
7-69
75. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4%
for an investor in the 28% tax bracket?
A. 2.88%
B. 3.87%
C. 4.51%
D. 5.56%
4/(1 - .28) = 5.56
AACSB: Analytical
Blooms: Apply
Difficulty: 1 Basic
Source: 6 - 15
76. Rank from lowest credit risk to highest credit risk the following bonds, with the same time
of 6.12%.
B. Trump Casino, IBM, Banc Ono, Treasury
C. Treasury, Banc Ono, IBM, Trump Casino
D. Trump Casino, Banc Ono, IBM, Treasury
Rank from lowest YTM to highest YTM
AACSB: Analytical
Blooms: Evaluate
Difficulty: 1 Basic
Source: 6 - 17
7-70
77. Consider a 4.5% TIPS with an issue CPI reference of 187.2. At the beginning of this year,
the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS
in dollars?
A. $32.73
B. $46.92
C. $62.49
D. $75.85
(213.7/187.2) * 1000 - (199.5/187.2) * 1000 = 75.85
AACSB: Analytical
Blooms: Apply
Source: 6 - 19
78. Rank from highest credit risk to lowest credit risk the following bonds, with the same time
of 9.46%.
B. Banc Ono, Trump Casino, IBM, Treasury
C. Trump Casino, Treasury, Banc Ono, IBM
D. IBM, Banc Ono, Trump Casino, Treasury
Rank from highest YTM to lowest YTM
AACSB: Analytical
Blooms: Evaluate
Difficulty: 1 Basic
Source: 6 - 18
7-71
79. Consider the following bond quote: a municipal bond quoted at 101.25. If the municipal
bond has a par value of $5,000, what is the price of the bond in dollars?
A. $5,089.06
B. $5,050.19
C. $5,062.50
D. $5,109.75
101.25% * 5000 = 5062.50
AACSB: Analytical
Blooms: Apply
Difficulty: 1 Basic
Source: 6 - 10
Topic: Bond quotes
80. A 3.75% TIPS has an original reference CPI of 183.9. If the current CPI is 214.7, what is
the current interest payment? (Assume semi-annual interest payments and a par value of
$1,000.)
A. $43.78
B. $37.50
C. $21.89
D. $18.75
3.75% * (214.7/183.9) * 1000/2 = 21.89
AACSB: Analytical
Blooms: Apply
Difficulty: 1 Basic
Source: 6 - 7
Topic: TIPS Interest
7-72
81. A 5 1/8% TIPS has an original reference CPI of 191.8. If the current CPI is 188.3, what is
the par value of the TIPS?
A. $981.75
B. $1,018.60
C. $992.75
D. $1,042.95
1000 * (188.3/191.8) = 981.75
AACSB: Analytical
Blooms: Apply
Difficulty: 1 Basic
Source: 6 - 7
Topic: TIPS Par Value
82. A 7.5% coupon bond with 9 years left to maturity is priced to offer a 10.4% yield to
maturity. You believe that in one year, the yield to maturity will be 8%. What is the change in
price the bond will experience in dollars? (Assume interest payments are semiannual and par
value is $1,000.)
A. $97.75
B. $101.50
C. $129.25
D. $137.75
Step 1: PMT = 37.50; FV = 1000; n = 18; i = 5.2; = > PV = 833.12 Step 2: i = 4; PMT =
37.50; n = 16; FV = 1000; = > PV = 970.87 Step 3: 970.87 - 833.12 = 137.75
AACSB: Analytical
Blooms: Apply
Source: 6 - 26
7-73
premium is one year of coupon payments. It is offered for sale at $919.75. What is the yield to
call of the bond? Assume interest payments are paid semi-annually and par value is $1,000.
A. 12.14%
B. 7.27%
C. 14.54%
D. 8.29%
n = 4; PMT = 33.75; PV = 919.75; FV = 1067.50; = > i = 7.27 YTC = 7.27 * 2 = 14.54
AACSB: Analytical
Blooms: Apply
Source: 6 - 30
Compute the bond's current yield. Assume interest payments are paid semi-annually and a par
value of $5,000.
A. 5.94%
B. 11.89%
C. 12.19%
D. 13.14%
5.5/92.55 = .0594
AACSB: Analytical
Blooms: Apply
Source: 6 - 38
7-74
Compute the bond's yield to maturity and yield to call. Assume interest payments are paid
semi-annually and a par value of $5,000.
A. YTM = 6.91%; YTC = 7.52%
B. YTM = 6.24%; YTC = 7.08%
C. YTM = 5.78%; YTC = 6.61%
D. YTM = 5.92%; YTC = 6.85%
Step 1: n = 32; PV = .9255 * 5000; FV = 5000; PMT = 137.5; = > i = 3.12; 2 * 3.12 = 6.24 =
YTM; Step 2: PMT = 137.5; n = 18; PV = .9255 * 5000; FV = 5275; = > i = 3.54; YTC = 2 *
3.54 = 7.08
AACSB: Analytical
Blooms: Apply
Source: 6 - 37
86. An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 98.5.
The bond can be called in 6 years. The call premium is one year of coupon payments.
D. 10.71%; no, the bond will not be called
Step 1: n = 12; pmt = 200; pv = 4925; fv = 5400; = > i = 4.68; ytc = 2 * 4.68 = 9.36 Step 2:
Bond sells at discount; unlikely it will be called.
AACSB: Analytical
Blooms: Apply
Source: NEW
7-75
87. An 8% coupon municipal bond has 15 years left to maturity and has a price quote of
D. 11.21%; no the bond will not be called
Step 1: n = 12; pmt = 200; pv = 5100; fv = 5400; = > i = 4.31; ytc = 2 * 4.31 = 8.62 Step 2:
Bond sells at premium; likely it will be called.
AACSB: Analytical
Blooms: Apply
Source: NEW
88. A corporate bond with a 5% coupon has 10 years left to maturity. It has had a credit rating
of BBB and a yield to maturity of 8.0%. The firm has recently gotten into some trouble and
the rating agency is downgrading the bonds to BB. The new appropriate discount rate will be
9%. What will be the change in the bond's price in dollars? Assume interest payments are paid
semi-annually and par value is $1,000.
A. -$43.61
B. -$51.07
C. -$62.43
D. -$56.31
Step 1: pmt = 25; n = 20; i = 4; fv = 1000; = >pv = 796.15 Step 2: pmt = 25; n = 20; i = 4.5; fv
= 1000; = >pv = 739.84 diff = -56.31
AACSB: Analytical
Blooms: Apply
Source: 6 - 40
7-76
89. A corporate bond with an 8.5% coupon has 10 years left to maturity. It has had a credit
rating of A and a yield to maturity of 10%. The firm has recently gotten into some trouble and
the rating agency is downgrading the bonds to BBB. The new appropriate discount rate will
be 11.5%. What will be the change in the bond's price in dollars? Assume interest payments
are paid semi-annually and par value is $1,000.
A. -$82.13
B. -$95.19
C. -$101.37
D. -$69.85
Step 1: PMT = 42.50; n = 20; i = 5; FV = 1000; = > PV = 906.53; Step 2: PMT = 42.50; n =
20; i = 5.75; FV = 1000; = > PV = 824.40; diff = -82.13
AACSB: Analytical
Blooms: Apply
Source: 6 - 40
90. Junk bonds are those bonds with a credit rating of _____________.
A. BB and lower
B. B and lower
C. BBB and lower
D. None of these.
AACSB: Analytical
Blooms: Remember
Source: NEW
Topic: Bond ratings
7-77
91. Which of following are backed only by the reputation and financial stability of the
corporation?
A. Debentures
B. Unsecured bonds
C. Both a and b
D. None of these.
AACSB: Analytical
Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Credit Risk
92. Investment grade bonds include those bonds with ratings _____________.
A. From AAA to BB
B. From AAA to BBB
C. From AAA to B
D. From AAA to A
AACSB: Analytical
Blooms: Remember
Source: NEW
Topic: Bond ratings

A. Michael Milken pioneered an active high-yield bond market in the late 1970s that provided
much needed capital to entrepreneurs and financial innovators.
B. Prior to Milken, the only junk bonds were those issued by once financially stable firms that
had fallen on hard times.
C. Milken showed investors that, historically, junk bonds rarely defaulted and offered a very
high return to those willing to assume the risk of owning them.
AACSB: Analytical
Blooms: Remember
Source: NEW
Topic: Michael Milken
7-78

A. Yield spreads between bonds of different quality remain static over time.
B. Yield spreads are set by the Securities Exchange Commission.
C. Yield spreads between bonds of different quality change over time.
AACSB: Analytical
Blooms: Remember
Source: NEW
Topic: Credit Risk
Topic: Yield
B. Sally should select Bond B is better because it has lower risk.
Bond B.
yield of Bond B.
TEY = 5.25%(1 - .3) = 7.5% vs. 7.75%; select the corporate bond
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: NEW
7-79
C. Sally should select Bond A because its TEY is greater than the yield of Bond B.
D. Sally should select Bond B because the TEY of Bond A is less than the yield of Bond B.
TEY = 5.75% (1 - .28) = 7.99% vs. 7.75%; select the municipal bond
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: NEW
Bond B.
yield of Bond B.
TEY = 5.15% (1 - .28) = 7.15% vs. 7.15%; indifferent between the two
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
Source: NEW
7-80
98. A bond with 14 years to maturity is selling for $1070 and has a yield to maturity of
10.06%. If this bond pays its coupon payments semi-annually and par value is $1,000, what is
the bond's annual coupon rate?
A. 5.50%
B. 8.19%
C. 9.57%
D. 11.00%
PV = -1070; FV = 1000; n = 28; i = 5.03; = > PMT = 55.01; annual coupon payment = 55.01
* 2 = 110.02; annual coupon rate = 110.02/1000 * 100 = 11.00%
AACSB: Analytical
Blooms: Apply
Source: NEW
Topic: Coupon Rate
99. A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12%.
If this bond pays its coupon payments semi-annually and par value is $1,000, what is the
bond's annual coupon rate?
A. 7.45%
B. 8.03%
C. 9.39%
D. 10.82%
PV = -991; FV = 1000; n = 46; i = 4.06; = > PMT = 40.16; annual coupon payment = 40.16 *
2 = 80.32; annual coupon rate = 80.32/1000 * 100 = 8.03%
AACSB: Analytical
Blooms: Apply
Source: NEW
Topic: Coupon Rate
7-81
100. All of the following items would need to be included in the bond's indenture agreement
except _____.
A. The coupon rate
B. The call feature
C. The credit rating
D. Steps that the bondholder can take in the event that the issuer fails to pay the interest or
principal
AACSB: Analytical
Blooms: Remember
Difficulty: 1 Basic
Source: NEW
101. Which of the following is not a correct statement?

A. Treasury inflation-protected securities have fixed coupon rates.
B. The federal government adjusts the par value of Treasury inflation-protected securities at
the rate of inflation.
C. At maturity, investor in Treasury inflation-protected securities receives an inflation-
adjusted principal amount.
AACSB: Analytical
Blooms: Remember
Source: NEW
Topic: TIPS
102. Which of the following would NOT be an example of an agency bond?

A. Federal Home Loan Bank bond
B. Student Loan Marketing Association bond
C. Fannie Mae bond
D. Treasury bills
AACSB: Analytical
Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Bond Issuers
7-82

A. Bonds with short-term maturities will have very little interest rate risk.
B. Bonds with large coupon payments will have very little interest rate risk.
C. Bonds with higher credit ratings will have very little interest rate risk.
AACSB: Analytical
Blooms: Remember
Blooms: Understand
Source: NEW
Topic: Interest Rate Risk

A. Long-term bonds have more reinvestment rate risk than short-term bonds.
B. Long-term bonds have more interest rate risk than short-term bonds.
C. Short-term bonds with high coupons have high interest rate risk.
D. Zero coupon bonds do not have interest rate risk.
AACSB: Analytical
Blooms: Remember
Blooms: Understand
Source: NEW
105. Which of the following bonds will have the largest percentage increase in value if
interest rates decrease by 1%?
A. 2-year, 5% coupon bond
B. 30-year, 10% coupon bond
C. 10-year, zero coupon
D. 30-year, zero coupon

Blooms: Evaluate
Source: NEW
7-83
106. Rank the following bonds, from highest to lowest interest rate risk: 2-year zero coupon,
2-year 5% coupon bond, 30-year 5% coupon bond, 30-year, zero coupon bond.
A. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year 5% coupon bond, 2-year zero
coupon bond
B. 2-year 5% coupon bond, 2-year zero coupon bond, 30-year 5% coupon bond, 30-year zero
coupon bond
C. 30-year, zero coupon bond, 30-year 5% coupon bond, 2-year zero coupon bond, 2-year 5%
coupon bond
D. 30-year, 5% coupon bond, 30-year zero coupon bond, 2-year 5% coupon bond, 2-year zero
coupon bond

Blooms: Evaluate
Source: NEW

A. All else the same, an investor will require less return to invest in a callable bond than one
B. All else the same, an investor will require more return to invest in a callable bond than one
C. The call feature does not impact the return that investors demand.
D. We would need to know the current level of interest rates to answer this question.
AACSB: Analytical
Blooms: Remember
Blooms: Understand
Source: NEW
Topic: Call Feature
7-84
108. Under which conditions will an investor demand a larger return (yield) on a bond?
A. The bond issue is upgraded from A to AA.
B. The bond issue is downgraded from A to BBB.
C. Interest rates decrease due to decline in inflation.
D. None of these conditions will cause an increase in the bond's yield.
AACSB: Analytical
Blooms: Remember
Blooms: Understand
Difficulty: 1 Basic
Source: NEW
Topic: Bond ratings

A. There is an inverse relationship between bond prices and bond yields.
B. There is a positive relationship between bond prices and bond yields.
C. There is no relationship between bond prices and bond yields.
D. The relationship between bond prices and bond yields is dependent on the market interest
rate.
AACSB: Analytical
Blooms: Remember
Blooms: Understand
Source: NEW
Topic: Bond Prices
110. If a bond is selling at a premium, then ________________________________.

A. its coupon rate must be greater than its yield
B. its coupon rate must be less than its yield
C. its coupon rate must be equal to its yield
D. its coupon rate must be equal to one-half the yield to maturity for a 5-year bond
AACSB: Analytical
Blooms: Create
Source: NEW
Topic: Premium Bond
7-85
111. The bond's annual coupon rate divided by its market price is referred to as the
__________.
A. Yield to Call
B. Yield to Maturity
C. Current Yield
D. Term Structure of Interest Rates
AACSB: Analytical
Blooms: Remember
Difficulty: 1 Basic
Source: NEW
112. Possible shapes for the yield include all of the following except ____________.
A. Humped
B. Downward sloping
C. Flat
D. All of these are possible shapes.
AACSB: Analytical
Blooms: Remember
Source: NEW
Topic: Term Structure of Interest Rates
113. Possible shapes for the yield curve include all of the following except ___________.
A. Upward sloping
B. Humped
C. Horizontal line
D. Vertical line
AACSB: Analytical
Blooms: Remember
Source: NEW
Topic: Term Structure of Interest Rates
7-86
114. If a bond is selling at a discount, which of the following statements is correct?

A. The current yield must be greater than the coupon rate.
B. The coupon rate must be greater than the yield to maturity.
C. The bond must have a low bond rating.
D. All of the statements are correct.

Blooms: Create
Source: NEW
115. If a bond is selling at par value, which of the following statements is correct?
A. The current yield must equal the coupon rate.
B. The current yield must equal the yield to maturity.
C. Both of these statements are correct.

Blooms: Create
Source: NEW
116. To increase the liquidity for the home mortgage market, Fannie Mae and Freddie Mac
purchased home mortgages from banks and other lenders. They combined the mortgages into
diversified portfolios of loans and issued ______________.
A. Trust securities
B. Mortgage-backed securities
C. Current yield securities
D. Treasury Inflation Protected Securities
AACSB: Analytical
Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Mortgage-backed Securities
7-87
117. Under what conditions is a bond likely to be called?

A. The firm is in financial duress.
B. The firm is planning a massive expansion and needs to raise a lot of capital.
C. Interest rates have significantly declined.
D. The firm wants to increase its debt ratio.

Blooms: Evaluate
Source: NEW
Topic: Call Feature
118. A 30-year bond with an 8% coupon has a yield to maturity of 6%. The bond could be
called in 7 years and if called would generate a yield to call of 5.75%. What is this bond's call
premium? Assume the coupon payments are made annually and par value is $1,000.
A. $219.73
B. $152.64
C. $106.29
D. $301.76
Step 1: Find the selling price of the bond: FV = 1000; i = 6; n = 30; PMT = 80; = > PV =
1275.30; Step 2: Find the Call Price: PV = -1275.30; n = 7; i = 5.75; PMT = 80; = > FV =
1219.73; Step 3: Call premium = 1000 - 1219.73 = 219.73
AACSB: Analytical
Blooms: Apply
Source: NEW
Topic: Call premium
7-88
119. A 15-year bond with a 10% coupon has a yield to maturity of 8%. The bond could be
called in 4 years and if called would generate a yield to call of 6%. What is this bond's call
premium? Assume the coupon payments are made semi-annually and par value is $1,000.
A. $19.73
B. $81.87
C. $41.20
D. $66.03
Step 1: Find the selling price of the bond: FV = 1000; i = 4; n = 30; PMT = 50; = > PV =
1172.92; Step 2: Find the Call Price: PV = -1172.92; n = 8; i = 3; PMT = 50; = > FV =
1041.20; Step 3: Call premium = 1000 - 1041.20 = 41.20
AACSB: Analytical
Blooms: Apply
Source: NEW
Topic: Call premium
maturity?
A. 2.36%
B. 4.72%
C. 5.18%
D. 6.49%
Step 1: Find the bond's price: FV = 1050; PMT = 25; i = 3.1; n = 4; = > PV = 1022.00; Step 2:
Find YTM: PV = -1022.00; FV = 1000; PMT = 25; n = 20; = > i = 2.36; YTM = 2.36 * 2 =
4.72%
AACSB: Analytical
Blooms: Apply
Source: NEW
7-89
maturity?
A. 2.84%
B. 3.17%
C. 5.38%
D. 5.69%
Step 1: Find the bond's price: FV = 1070; PMT = 35; i = 2.75; n = 6; = > PV = 1100.45; Step
2: Find YTM: PV = -1100.45; FV = 1000; PMT = 35; n = 20; = > i = 2.84; YTM = 2.84 * 2 =
5.67%
AACSB: Analytical
Blooms: Apply
Source: NEW
122. A 10% coupon bond has 15 years to maturity and could be called in 2 years. If the bond
is called, investors will earn 4%. The call premium is one year of coupon payments. If coupon
payments are made annually and par value is $1,000, what is the bond's yield to maturity?
A. 6.19%
B. 6.82%
C. 7.65%
D. 7.98%
Step 1: Find the bond's price: FV = 1100; PMT = 100; i = 4; n = 2; = > PV = 1205.62; Step 2:
Find YTM: PV = -1205.62; FV = 1000; PMT = 100; n = 15; = > i = 7.65% = YTM
AACSB: Analytical
Blooms: Apply
Source: NEW
Essay Questions
7-90
123. Describe the relationship between interest rate changes and bond prices.
The relationship is one of opposite directions or inverse. Increases in market interest rates will
cause bond prices to fall and vice versa.
AACSB: Analytical
Blooms: Remember
Blooms: Understand
Source: NEW
Topic: Bond Prices
124. Describe reasons that the U.S. Government and corporations would issue bonds.
The federal government issues bonds to fund its annual spending deficit and to refund old
bonds that are maturing. Corporations issue bonds to raise the capital required to fund
projects.
AACSB: Analytical
Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Bond Issuers
125. Explain why high-income and wealthy people are more likely to buy a municipal bond
than a corporate bond.
Municipal bonds are not taxed and since these people tend to be in a higher marginal tax rate,
the tax-free nature of the earnings has great value.
AACSB: Analytical
Blooms: Remember
Blooms: Understand
Difficulty: 1 Basic
Source: NEW
Topic: Municipal Bonds
7-91
126. Yields of a Bond A 4.75 percent coupon municipal bond has 20 years left to maturity
and has a price quote of 98.9. The bond can be called in 5 years. The call premium is one year
of coupon payments. Compute and discuss the bond's current yield, yield to maturity, taxable
equivalent yield (for an investor in the 35 percent marginal tax bracket), and yield to call.
(Assume interest payments are paid semi-annually and a par value of $5,000.)
Current yield = 4.75  98.9 = 4.80%

YTM: N = 40, PV = -4945, PMT = 118.75, FV = 5000 CPT I = 2.42%, YTM = 2.42% x 2 =
4.84%
YTC: N = 10, PV = -4945, PMT = 118.75, FV = 5237.50 CPT I = 2.92%, YTM = 2.92% x 2
= 5.84%
The current yield is higher than the coupon rate because this is currently a discount bond. This
is also shown in a YTM that is greater than the coupon rate. The YTC is comparatively high,
but it is currently not likely that the bond will be called early since interest rates are high.
AACSB: Analytical
Blooms: Create
Blooms: Evaluate
Source: NEW
7-92
to maturity. It has had a credit rating of BBB and a yield to maturity of 6.25 percent. The firm
has recently gotten into some trouble and the rating agency is downgrading the bonds to BB.
The new appropriate discount rate will be 6.75 percent. What will be the change in the bond's
price in dollars and percentage terms? (Assume interest payments are paid semi-annually and
a par value of $1,000.)

N = 20, I = 3.125, PMT = 28.75, FV = 1000 CPT PV = -963.23
Now compute the price after the rating change:

N = 20, I = 3.375, PMT = 28.75, FV = 1000 CPT PV = -928.13
So the dollar change in dollars is:

$928.13 - $963.23 = $-35.10
The percentage return is: -35.10  963.23 = -3.64%
AACSB: Analytical
Blooms: Analyze
Blooms: Apply
128. What does a call provision allow the issuer to do, and why would they do it?
A call provision on a bond issue allows the issuer to pay off the bond debt early at a cost of
the principal plus any call premium. Most of the time when a bond issue is called, it is
because interest rates have substantially declined in the economy. The issuer calls the existing
bonds and issues new bonds at the lower interest rate. This reduces the interest payments the
issuer must pay each year.

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Mortgage securities and the financial crisis
7-93
129. All else equal, which bond's price is more affected by a change in interest rates, a bond
with a large coupon or a small coupon? Why?
The price of the bond with the small coupon will be impacted more by a change in interest
rates than the price of the large coupon bond. For a small coupon bond, the cash flows are
weighted much more toward the maturity date because of the small interest payments. The
large coupon bond has high interest payments. These higher cash flows made earlier dampen
the impact of interest rate changes because those changes in the discount rate impact the
earlier cash flows to a lesser degree than the later cash flows.

Blooms: Remember
Source: NEW
Topic: Interest effects on bond price with small and large coupons
130. Explain how investors can assess bond market performance.
Investors can follow the bond market through prevailing market interest rates because interest
rates and bond prices move in opposite directions. Bond indexes track specific segments of
the bond market.

Blooms: Remember
Difficulty: 1 Basic
Learning Objective: 07-08 Assess bond market performance.
Source: NEW
Topic: Bond market performance
7-94
131. What actions taken by the Federal Reserve preceded and possibly helped precipitate the
recent financial crisis?
From 2000 to early 2004, the Federal Reserve lowered interest rates and kept them low. This
fostered an increase in subprime lending. From 2004 to 2006 the Federal Reserve increased
interest rates, which caused homes to be less affordable and also the adjustable rate mortgages
that many subprime borrowers had adjusted upward, which made their mortgage payments
too high. These borrowers defaulted leading to widespread foreclosures.

Blooms: Remember
Difficulty: 1 Basic
Source: NEW
Topic: Call provision characteristics
7-95
Another random document with
no related content on Scribd:
He conversed for a long time with the old men of the tribe and
besought them to tell him some of their experiences from their own
recalling. Their memory, however, did not extend beyond the limits of
the living generation and he was obliged to help them in recalling the
course of events so that they could keep them in regular order. Once
they have secured the thread of a story, so this close observer
informs us, they experience extraordinary pleasure and seem to
regain, in all their original freshness, feelings which have been long
concealed under later impressions. The less frequently this occurs,
however, the greater is the delight with which they again sound the
strains of the old time and with growing enthusiasm, often with a
bizarre kind of poetry, and with imagery tinted with a constantly
increasing oriental glow, they describe the scenes which they have
drawn from their recollections.
The description itself was only the expression of momentary and
accidental passion, not of a well considered purpose or regularly
developed plan, hence these impetuous, unrestrained, unsubdued
impulses make dissimulation unnecessary. The originality of the
occurrence consists chiefly in the more or less energetic or fanciful
passion of the hero who accompanies it with impromptu accessories.
The remarkable simplicity of these natural relations prevents that
sequence of events, that change of circumstances, that development
of the emotions like germinating seeds, which in their maturity are
turning points in our destiny. Too quick, prompt and self-willed for
patience or perseverance, they as quickly seize what they desire;
they take swift revenge for any assault; sometimes, like a wounded
animal, they bear away the shaft that has pierced them and to
conceal their wounds forsake their tribe. Our narrator further
mentions that they observe a haughty and timid silence, a feeling of
manly shame, as it were, about their own feelings, and speaking of
their companions they only allude to the dead or the faithless, and a
word, a nod of the head or a gesture suffices for all they have to say.
Thus Liszt could obtain only individual adventures in love-intrigues,
strife and crafty tricks, and in these the most important thing, namely,
the part played by the principal himself and the controlling passion at
work, were persistently and regularly concealed, and yet in spite of
all the craftiness which the necessity of procuring alms has taught
them they manifest a very poetical sense in picturing the scenes of
which they were witnesses, so much so indeed, that the little
narratives “can be strung upon the same thread, like pearls of the
same color.”
The picture becomes gayer and more animated when he returns to
his friends the second time. It was on those same plains of the
Oedenburg county where he was born. He had not forgotten his old
hosts and they still thought well of him also, for when he left the plain
old church, after the mass, where he had prayed so fervently as a
child, in which all his neighbors had loudly sung in honor of this
same boy, who, the good dames of the village prophesied, would
come back in “a carriage of glass,” that is, in a glistening equipage, a
great crowd of gypsies swarmed about him and received him with
every manifestation of joy and delight, prepared to do him honor.
Their orchestra was soon ready in a neighboring oak-grove. Barrels
placed on end and covered with boards formed a table and around it
“Roman couches” were made of stacks of hay, one of them a
genuine throne of thyme, butterfly-shaped flowers, flax blooms in
elegant half-mourning, anemones in white tunics, wild mallows,
cornflowers, irises, and golden bells, a “flowery mound fit to offer to
Titania.” Nightshades, with their broad, shield-shaped leaves spread
a colossal fan about the rural festival. And then follows a description
of nature, the counterpart of which may be found in music: “Bees,
attracted by the fragrance of the fresh hay, forsook their hives in the
neighboring tree-trunks by swarms. Crickets chirped in the rye and
wheat fields. Hornets and wasps buzzed their contralto. The dragon-
flies came in flights with a whirr like the rustling of taffeta robes. The
quails and larks sang. The frightened sparrows called out. The little
emerald frogs croaked among the rushes of the brook and a whole
swarm of shelterless insects flew about us with the most confused
sounds. What polyphony! What ethereal music! What smorzandos
on organ points! All this must have floated before Berlioz when he
composed the ‘Dance of the Sylphs.’” But, say we, such a picture of
the surprisingly varied activity of creative nature must have filled the
daring and at all times active fancy of the same artist who quickly
makes the living human heart, with all its foolish pride and restless
longings, realize “the pain and pangs of almighty nature,” as he
terms it, with an effect as wonderfully vivid as only a Salvator Rosa
or a Ruysdael could paint it. Farther on we have a genuine Inferno in
mere word-pictures.
“Night came before they were weary. To light up the darkness a
dozen pitch torches blazed in a circle. The flames arose like
cylinders of glowing iron, for not a breath stirred the atmosphere
laden with heat and the fragrance of invisible aromatic herbs that
had been mowed down in the morning. To our half-closed dreamy
eyes the torches appeared like columns supporting the dark canopy
of the heavens. The smoke wavered in the air, now concealing and
anon revealing the golden stars. The darkness was like a solid wall
around a fantastic wood palace, while the gnarled tree-trunks with
their curiously twisted branches stood out like statuary. The children
leaped about like gnomes and stripped the bushes. The scene
constantly grew more strange and fantastic. The women appeared
like specters when they suddenly emerged from some dark corner
with eyes gleaming like coals and with magical beckoning hands to
tell us our ‘good fortune.’ That evening the phrase was not a
meaningless one.” As a happy close, one of those humorous scenes
occurred which are never wanting among the children of simple
nature.
“On the next morning, the men would not hear of an immediate
separation, and gave us their company as protectors, some on
horseback, some running on foot, to the nearest village. The
closeness of the day before was followed by a rain storm but they
refreshed themselves with parting drinks and glowed with delight,
rejoicing in the fitful rushes of the rain. In their turned lamb’s skins
they looked like bears on raging steeds, for they spurred their horses
so furiously that they leaped about like carps. The abandon of these
people, could scarcely be kept within bounds any longer. They
reached a tavern not far off, and here this extraordinary carnival
came to an end with a morning serenade under a huge shed, and
pretending that it did not rain, the symphony began with an animated
flourish, con estro poetico, but the circulating morning’s wine and the
liquor of the day before infused them with fresh vigor and soon led to
a rinforzado con rabbia. The thunder growled in the distance like a
continuous bass. The high beams and the half-fallen walls of the
shed gave back such an echo that every sound struck upon the ear
with redoubled power. Passionate passages and feats of virtuosity
followed each other and were confusedly mixed. This musical
morning roar was rent into tatters of tones, and in the stormy finale it
seemed as if all the sounds were piled upon each other like a
mountain ridge. One could hardly tell whether the old building had
not tumbled in, so deafening was the instrumentation of this concert,
which certainly would not have received a favorable verdict from any
conservatory, and which I myself must declare was somewhat
daring.” With this spirited description, this vigorous picture of life
closes.
But what is all this in comparison with the effect when the artist takes
his own pencil and depicts these scenes in music, the spirit of which
re-echoes them all. When Salvator Rosa dashes off his passionately
excited scenes from nature, his bold conceptions of bandit
characteristics, and other weird pictures of outdoor life and its
accessories, as if they were living figures passing before us, we can
not help realizing that he must have actually lived among the
robbers. The artist has given us his own account of this unpolluted
nature and her children. Our musical picture-gallery has been
remarkably enriched with his “Hungarian Rhapsodies,” in which he
has successfully painted in tones all that life which he has sketched
in words and thus has preserved it to the world of art. The
“Hungarian Fantasy,” for piano and orchestra, and the stately
symphonic poem, “Hungaria,” give us a memorial picture of this
animated Hungarian life, so full of strange power and extreme
contrasts, with which also, in this regard, the nature-world of the
gypsies was fully identified. It was important to give a definite
description of it, for it seems in this connection above all else
necessary to furnish the details and essentials of a music, which, in
contrast with our European musical creations in their accepted
forms, is a world in itself, in harmony, rhythm, melody and
instrumentation, and one which we recognize as wonderfully fanciful
and rich in color and yet full of the germs of life. Did we not possess
the inimitable magic of that web of nature in Shakespeare’s
“Midsummer Night’s Dream,” we should declare that in the artistic
presentation of the wonderful poetry of absolute nature, these works
of Liszt, based upon the gypsy music, were the most poetical of all.
At all events, by the side of these picturesque, genre pictures, they
suffer but little in power, delicacy and reality, and we may call them
studies made directly from nature.
CHAPTER III.
CAPRICCIOSO.
Untamable Animals and Men—An Interesting Test—Attempt

to Refine a Gypsy—The Boy Josy—Bought from the
Gypsies—His Advent in Liszt’s Salon—Thalberg’s
Astonishment—Adopted by the Master—Attempts to
Educate him—A Hopeless Task—Josy becomes a Fop—
His Insolence and Conceit—Liszt Despondent—Josy goes
to the Conservatory—Worse and Worse—Sent to the
Black Forest—No better—Liszt’s Encounter with a
Traveling Band—Josy’s Brother Intercedes for his Return
—Liszt Consents—Great Joy—Josy Settles at Debrezin—
Violinist in a Gypsy Band—Letter to Liszt—His Love and
Devotion.
It is well known that there are animals who are never tamable for
any length of time and it is none the less interesting to know that an
untamableness of nature just as absolute is a human characteristic,
and belongs to beings of our own kind, who inconsistently throw
away all the benefactions and blessings of a fixed existence and
culture, content to secure the inexhaustible bounty of nature and
enjoy the simplest form of human existence. It is that people “which
draws water from every stream of earth and eats bread from all its
furrows.” Liszt, who had found the way to them by his earnest desire
to witness their actual life, has given us an illustration of this feature
of their untamableness and contempt for all our blessings of culture,
which, when closely considered, leads us to reflect upon the real
nature of our culture. In parts it is very amusing and again it is almost
pathetically humorous, revealing to us the nature of human existence
in all its varying moods. We may observe this from a psychological
standpoint and thus save ourselves the necessity of character-
description.
Would not continual kindness of treatment at last overcome this
innate wantonness of the gypsy nature? Might not one by carefully
fostering their music, that exotic plant, that special gift of theirs, so
brilliant in its first radiance, develop it to a fuller growth in the
atmosphere of civilization and improve its beauty? These were the
questions which for a long time had impressed themselves upon the
manly feelings and the kindly spirit of the great artist, as well as upon
his deep concern for and earnest sympathy with all true and genuine
things and with the immortal nature of all the spontaneous
outgrowths of his art.
It was in Paris, about the beginning of 1840, and at a time also when
Liszt’s attention was not much given to the gypsies, that one morning
his dear friend, Count Sandor Teleky, came in, accompanied by a
twelve-year-old lad, in a hussar jacket and broad laced trowsers,
with dark brown complexion, wildly waving hair, a bold look, and a
demeanor as haughty as if he were about to challenge all the kings
of the world. He had a violin in his hands. “See,” said the Count, as
he pushed the lad toward him by the shoulders, “I bring you a
present.” Great was the astonishment of all the guests at a scene so
strange for Frenchmen to witness. Among these guests was that
great artist, who was at that time, notwithstanding Liszt’s abilities,
called in Paris, “the greatest,” until one who had closely watched the
rivalry between them settled it in a word: “Thalberg is the first but
Liszt is the only one.” It was Thalberg who could not refrain from
asking what he intended to do with this gift.
Liszt himself was surprised. He had not thought for a long time of the
wish he had expressed, when in Hungary, of finding a young gypsy
with a talent for the violin which he might further develop, but he
guessed as soon as he looked upon this slim, nervous and evidently
quarrelsome little being that his desire for a young “Cygan” and
countryman had been gratified. In fact, the Count on leaving
Hungary had left instructions on his estates, since they had sought in
vain while he was there, that in the event of finding such a young
man he should be sent direct to Paris. The impetuous youngster,
whom he now introduced to Liszt, had been discovered a short time
before on his possessions, and had been purchased and forwarded
to him as a token of friendly affection.
Liszt kept the boy continually near him and naturally took keen
pleasure in watching the development of his emotions and humors
amid his new surroundings. Insolence was the strongest
characteristic of his nature, and it displayed itself in the most diverse
ways, by a thousand naive and childish frivolities. To steal out of
greediness, to continually hug the women, to break every object
whose mechanism he did not understand, were very inconvenient
but natural faults which might have corrected themselves. It was not
easy, however, to deal with them as they continually broke out in
new directions. In these circles which included acute psychological
observers, like Balzac and George Sand, “Josy” soon became a little
lion and his private concerts kept his purse well filled. The money
which came in so abundantly he flung away recklessly and with all
the prodigality of a magnate. The first object of his attention was the
adorning of his own little person. His coquetry was beyond belief and
even went so far as affected vanity. He must always have plenty of
beautiful little canes, breast-pins and watch-chains by him, and of
various kinds. His cravats and vests could not be too showy in colors
and no hair-dresser was too good to curl his locks. To become an
Adonis was the great problem of his existence, but in his attempt to
solve it, one pang gnawed at his heart and poisoned his peace. In
contrast with those about him, his complexion was so brown and
yellow! He thought that by the active application of soap and oil,
such as he had seen employed with great success in acquiring that
enviable possession, a beautiful color, he could overcome his
misfortunes, and he continually provided himself with them. He
visited the best shops and bought everything he thought would
answer for that purpose, always throwing down five franc pieces, for
he was much too fine a gentleman to take any change.
It soon became impossible to do anything with him. In all the friendly
circles of his adopted father, he swelled about, a full flown dandy. On
the eve of taking his journey to Spain, Liszt gave him over to the
violin professor of the Paris Conservatory. He promised to give the
utmost attention to his astonishing musical talent, while the
superintendent of a school, in which meanwhile the boy was placed,
undertook to cultivate him mentally and morally. All accounts from
him, however, more and more confirmed Liszt’s doubts of the
success of these educational schemes. In music it was specially
useless to try and keep him within any practical bounds. He had the
utmost contempt for everything that he did not know, and without
directly asserting it, in his own estimation he was convinced of his
superiority to everything about him. Like a genuine “savage” he was
interested only in his own pleasures, his own violin and his own
music, and had no desire for anything else.
When Count Teleky brought him in, in his Hungarian gypsy costume,
he had still his own violin. Upon this little wooden shell, poorly glued
together, covered with strings which seemed better adapted for
hanging oneself than for playing, he played even then the liveliest
dances with remarkable aplomb and unsurpassed vigor. His
perceptions never failed him and he played very willingly. He could
perform for hours partly by ear and partly improvising and was very
reluctant to make use of the melodies which he had heard among his
associates. For the most part they were dull and insipid to him, but
he was very partial to the melodies which he had heard Liszt play
many times, and he would often regale his own audience with them,
ornamenting them, however, in such a droll fashion that they never
failed to set every one in a cheerful mood. As soon, however, as he
was obliged to undertake actual study, he became refractory and
would have nothing to do with it. No one could convince him that his
own methods were not finer than any they could teach him and he
lived in the fullest conviction that he was the victim of barbarous
coercion whenever his teacher in the least complained that he was
unwilling to be instructed by him.
As might have been expected, Liszt soon heard that Josy grew
larger but did not change otherwise; that he made no progress, and
that nothing could be done with him. With his personal weakness for
these singular people, he looked upon the zig-zag letters of the boy
which showed the type of oriental exaggeration, as a proof of his
industry. He sent word to him to meet him in Strasburg. When he first
arrived he did not think of the boy, but when he stepped from his
carriage he suddenly felt a violent hand-shake and was almost
suffocated in the embraces of a strange young man. It took some
time before he could recognize in this elegant young gentleman, clad
in Parisian fashion, his little untamed, harum-scarum gypsy of the
moors. Only the curved nose, the Asiatic eyes and the dark skin, in
spite of all the French cosmetics and soaps, were the same. The
self-conceit also was left, for when Liszt suddenly exclaimed: “Why,
Josy, you look like a young gentleman,” not in the least disconcerted
and with the mien of an hidalgo, he replied, “Yes, because I am one.”
In his new costume he also preserved his lofty style and grandeur of
demeanor, and after that it was difficult for the “father” to believe that
the inflexible gypsy nature could be restrained within the limits of
civilization and keep a designated course. Still he would not allow his
convictions to defeat his hopes so soon. He thought that perhaps
woods and fields would have a better influence upon the boy than
the great city and he consigned him to an excellent musician in
Germany, on the edge of the Black Forest. This retreat, which
withdrew him from the atmosphere of the great city and the danger
of continual fresh corruption, interfering with the growth of what little
virtuous aptitude he had by nature, Liszt hoped would lead yet to the
amelioration of the wild creature.
Not long after he was in Vienna and heard of a new gypsy band. He
went one evening to the “Zeiferl,” where they played, to see whether
it was worth the trouble to make their acquaintance. Not one of the
company expected to find a face they knew in the band and for that
reason they were surprised at the commotion which Liszt’s entrance
occasioned. A slim young fellow rushed out of the troupe, fell at his
feet and embraced his knees with the most passionate gestures. At
the same instant he was surrounded by the whole troupe, who
without further ado, overwhelmed him by kissing his hand and
expressions of gratitude, of which he did not understand a syllable.
After much trouble he discovered that the one who had thrown
himself at his feet with such an enthusiastic “Elyen Liszt,” was an
older brother of Josy’s. He had been inquiring among Liszt’s friends
and related, boasting and sobbing at the same time, all that had
been done for the benefit of the poor sold boy, which did not prevent
him, however, from timidly intimating how glad they would be to see
him and have him again.
The news from his teacher was not satisfactory, so all hope must be
given up of making a rational artist out of this gypsy musician. Liszt
could no longer force an organization which was at utter variance
with the temperament of our society and culture. Will any one
contend that the European world has anything better to offer to such
a branch dissevered from its stem, than the joys of nature, to which
our culture had perhaps gradually made him wholly insensible? So
he allowed this “son of the wilderness” to come to Vienna in order
that he might again join his companions, if he so wished. His rapture
at seeing them was boundless. They feared he would go mad, but
the elasticity of such nerves knows no limits. Although in his foolish
moments he had wished for another complexion he now was
conscious that he could no longer disown his race. No sooner were
they reunited than the band disappeared from the city with the
purpose of showing the lost child to his father again. From the very
first moment, Josy had shown himself more intolerable than ever,
and with many passionate expressions of gratitude begged to be
allowed to return at once and forever to his people. So they parted,
after his friends had filled his purse with a little contribution which the
haughty little fellow squandered upon a colossal banquet given to his
brethren in spite of all protestations and the farewell supper besides,
which had been provided for him.
Did he ever see him again, this most perverse of all his countless
scholars, on the edge of the wood, with his violin, smoking, playing
or only dreaming, as Lenau has pictured “the three gypsies?”
Some years later, in 1857, Liszt’s volume made its appearance. A
German translation of it by P. Cornelius appeared in Pesth, in 1861.
It contained a letter from Debrezin, in Hungary, signed: “Sarai Josef,
or the Gypsy Josy in the principal orchestra of Boka Karoly.” A notice
of the volume had appeared in the Debrezin Sonntagsblatt, and so
Josy writes the following which shows that culture had had some
influence upon him: “Since I have become the father of a family and
acquired a restful spirit and clear understanding, I reflect with
sadness that in my youth I might have had the good fortune, under
Your Highness’ protection and patronage, of an introduction to the
great world and of artistic cultivation, but for my incorrigible
perversity and aversion to all that was noble, elevated and artistic.
But it was impossible, and you are richly rewarded by my own and
my brother’s request, since a worthless gypsy fellow, whom it was
impossible to develop into an artist, is sent home again. In a word, I
realize that I have buried my future, but it could not have been
otherwise. But as you openly desire, at the close of your narrative, to
hear something of me, I take this opportunity to humbly inform you
that here in Debrezin, my home, I am serving as an ordinary gypsy in
the orchestra, among my companions, and am a favorite with the
public since I still play the violin tolerably well.”
He had also married a gypsy of the same place, and the year before
had a son, who was christened with Liszt’s most precious name of
Franz. He says: “I am so bold as to select Your Highness as
godfather. We prolonged the christening with a lively entertainment,
pledging the godfather in a far away foreign land with high swinging
cups.” He added that the most precious recollections of him were
impressed upon his heart and that a portrait of “His Highness,” which
he once took away from Paris with him, should be preserved in his
humble abode as long as he lived and should be consigned to his
posterity as a sacred relic.
“Poverty often hangs the soul with rags and leaves it bare of
everything that graces and warms,” says Goethe, but in this case we
see that where nature has no other needs than those which can be
satisfied without trouble, the saying is not true and the appreciation
of a benefit conferred is, so to speak, a higher moral attribute, a
culture in itself. If a want of gratitude be the first sign of liberty and
self-dependence, then this “ordinary gypsy,” Sarai Josy, might quietly
say: “We barbarians are still better men.” Gratitude was the
distinction of his person as that haughtiness which has clung to them
through centuries of misery and privation in all countries of the world
is the distinction of his race. Could culture have given such a
distinction to this Josy? We doubt it and offer as an illustration the
beautiful saying of our great Fichte, in the address to the German
people, that delight in the good is rooted in man. In fact we have
observed it in this Josy. The loss of all the beautiful gifts of culture
did not give him a moment’s concern. That he had “buried his future”
was to him simply a thing that could not have been avoided, but the
spirit of goodness and love which alone can add happiness and
blessing to culture, once experienced by him, was never forgotten.
As long as he lived and even after he was gone, the picture of his
benefactor would be preserved as a “holy relic.” This one incident
reveals to us the real character of our master, who in this respect
inherited the traits of Mozart.
CHAPTER IV.
IMPROMPTU.
General Characteristics of Liszt—Earnestness of his Art—Its

Genial Character—His Interest in Life—His Loving Nature
—Affection for his Parents—Remorse of a Capellmeister
—Richard Wagner’s Testimony—A Helping Hand in time
of Need—His Generosity to Wagner—Secures him a
Hearing—The Letter to Herr B.—Plans to Bring out
Wagner’s Works in London—Wagner in Despair—
Misunderstanding of Liszt—A Personal Appeal and
Prompt Reply—A Success made in Weimar—Urges
Wagner to create a New Work—“The Nibelungen”—
Wagner’s Tribute at Baireuth.
Better known personally than most of his contemporaries, not so
much by the principles of his artistic movement as by his own
personality, for fifty years all over Europe, admired and courted on
account of the wonderful miracle of his genius, a hundred-fold more
on account of his manners and individuality studied partly for the
laudable purpose of discovering the secret of his overwhelming
mastery, partly to detect the failings of human weakness, the shadow
in so much light, “the dark ray”—what can be said of such a man as
Liszt in a general characterization?
And yet, however well known he may be, in reality, we, his
contemporaries, can know little of such a man, for the reason that we
are now in a position to define the limits of his artistic power. How
long is it since we shrugged our shoulders at the so-called earnest
manner of Mozart when we spoke of him as a man? That he was a
genius no one doubted, but with it was immediately associated the
idea of a light-minded person who was only too glad to drink
champagne, or of a child who did not know how to deal with life, still
less with money, and consequently differed from ordinary people.
And yet how his letters, already in their second edition, have
revealed him to us! That this divinely inspired artist, even in his
youthful years, was so imbued with the seriousness of his art, will
surprise that person who only recognizes the grace of his melodies
apart from any idea of human toil and does not know that they are
results achieved by the hardest labor. That life was so thoroughly
beautiful to him, especially in the pure and manly features of piety
and friendship, was due to a lovely union of the beauty and purity of
feeling which alone can disclose to us the soulfulness of his music.
This could only be predicated of one, who, like Mozart, had actually
taken into his soul the very essence of art. It is manifest in the great
variety of his creations as well as in his correspondence, and
particularly in the latter, as in his various biographies it is only
disclosed piecemeal.
And yet that quality of his music which is showered down upon our
spirits like heavenly peace and blessing is a something which far
transcends the beautiful earnestness of a life measured by duty and
brings us to a close perception of the infinite, of those conditions of
life with which marvelous natural endowments and the highest
perfection of intellectual and artistic skill have little to do, and in
which we are forced to recognize the peculiar essence out of which
genius springs and creates. This deep heavenly joy of the spirit
which only seeks the good, and in such wise only as to maintain and
cherish it, how and when it can, not merely to conform his habit and
life to it—this genuine spirit of love which is the essence of industry,
of power, and of the highest and most productive qualities, this
strongest characteristic of Mozart’s nature is due to that spirit of
human love which was characteristic of his South-German home. It
is as good a product of his own peculiarly moral labor as his
boundless knowledge is the result of his industry as an artist. The
loving earnestness of a spirit which embraces all human things alone
produces such creations as Pamina and Sarastro. Every tone of his
tells us this, be it in his joyous songs, in the serene purpose of his
life, or in the gracious promptings of his heart.
Is not Franz Liszt also a child of this Austria, and particularly so as
he still possessed this natural good-heartedness in all its inner
abundance, and had not yet eaten of the tree of knowledge that
would drive him from the Paradise of unconscious, beautiful
harmony without securing in return for it the peace of the conscious
and wished-for reconciliation? His strong attachment to his parents
in his youth is known to us. It is a marked characteristic of his life.
The loss of his father threatened his mental condition. Friendships!
How many letters have been made public which disclose his
personal relations in every stage of development from pleasant
acquaintanceship to the most self-sacrificing friendship of the heart,
mostly with artists, that is, colleagues, even with rivals, to whom he
was almost without exception superior and whom he made happy
with his love. Yes, most happy! We once heard a Hofcapellmeister,
who had been induced by a prominent director of an art institute,
now deceased, to practice an imposition on our master, which drove
him away from Weimar, the scene of his activity, declare with tears in
his eyes: “How could I have acted so toward such a man? I feel it
was a crime against myself rather than against him.” There was no
delay between the expectation and the reception of Liszt’s
benefactions. Who, especially among artists, can say that when they
appealed to him he did not speedily help them? And who has not
appealed to him? It has been truthfully said that no sovereign lives
who has lavished his generosity upon his dominions as widely and
continuously as Liszt. Vienna experienced it as well as the city where
he lived. The Beethoven memorial will bear witness to it for posterity,
as well as the one erected in Bonn, in 1845, and the Schiller-Goethe
memorial of 1849, at Weimar, which would not have been completed
but for Liszt’s generosity.
One manifestation shows us the greatness and genuineness of the
artist, and its parallel can only be found in the relations of Goethe
and Schiller. What does Richard Wagner, the incomparable, who
stands equal in rank with Liszt in the world of art, say of the days
when he had to leave his fatherland as a fugitive, the victim of
infamous persecution?
It was in May, 1849. “On the day when every indication convinced
me, beyond all question, that my personal situation was endangered,
I saw Liszt directing a performance of my ‘Tannhauser,’ and was
astonished at recognizing my second self in his rendering. What I felt
when I invented this music, he felt when he conducted it. What I
wanted to say when I wrote it down, he said when he clothed it in
tones,” writes Wagner, speaking of his short stay in Weimar. One
realizes in this event the climax of his artistic sympathy. Wagner
assures us that with Liszt it sprang from that deepest fountain of life,
his true manly habit and goodness; from his sympathy with actual life
and its influences. He tells us how strange it was that he had in truth
found his “wonderful friend.”
He had made Liszt’s acquaintance in Paris, about the year 1840, at
the very time when, after repeated disappointments, “disheartened
and disgusted,” he had renounced all hope of success and was in a
constant state of internal revolt against the artistic conditions which
he found there and which led him to a completely new career. “When
we met, he struck me as an utter contrast to my own being and
circumstances,” says he. “In this world, in which I had longed to
appear and shine, wherein the midst of my insignificant surroundings
I had yearned for the great, Liszt had grown up from his younger
years to become the general delight and wonder, at a time when I
had become so disgusted with it and with the coldness and lack of
sympathy with which it regarded me, that I could only realize its
hollowness and emptiness with all the bitterness of one repeatedly
deceived.” Thus Liszt was to him at that time “scarcely more than a
suspicious phenomenon,” and he had as yet no opportunity of
acquainting the inspired virtuoso with his own being and working.
Thus the first contact of the two artists was superficial, as might have
been expected of a man like Liszt, to whom every day brought its
changeable impressions, while on his own part, in his half desperate
circumstances and condition, Wagner had not sufficient calmness
and fairness to seek for the natural and simple causes of Liszt’s
behavior toward him. He did not go to see him again, and manifested
his aversion by declining to make any closer acquaintance with him.
Liszt was to him as he says, “one of those beings who are strange
and hostile to one’s nature.” Unprecedented and particularly
impossible in a man like Liszt, it was only possible in the case of a
nature like Wagner’s, which had become hard and almost repulsive
through the force of circumstances. But we discover that the
situation cleared itself, and it reveals to us the actual nature of Liszt
himself, in all its greatness.
Wagner, in his openly vehement style, made no concealment of his
feelings toward Liszt, and so it could not fail to happen that one day
he heard what Wagner thought about him. It was at the time when
“Rienzi” was attracting general attention at Dresden and Liszt had
already settled down at Weimar as Hofcapellmeister. Liszt was
astonished to find that he was so violently misunderstood by a man
with whom he was scarcely acquainted, and in 1851, Wagner writes
in his “Communications to my Friends” that when he looks back he is
still greatly moved at the solicitude and actual persistence which
Liszt displayed, and the trouble which he took to change the opinions
which he entertained toward him. He had not even known anything
of his works. He was urged on by the simple wish to remove this
accidental want of harmony between himself and another person,
and perhaps also he felt a delicate misgiving whether he himself
might not have unconsciously injured him. “He who knows,”
continues Wagner, “all the disputatious hardness of human life and
the boundless selfishness in all our social relations, and particularly
in the relations of artists to each other, must be more than
astonished when he realizes how I was treated by that extraordinary
man.”
But, he continues, notwithstanding all that had been done, he was
yet to experience the peculiar beauty of Liszt’s gracious and loving
nature in a stronger manifestation. He at last observed these
approaches with actual wonder, and had been inclined to give them
still less credit, now that Liszt’s circumstances had changed and he
had come to be a famous man and the Royal Saxon
Hofcapellmeister. Now the actual basis, the essence, so to speak, of
Liszt’s manner of action and demeanor shows itself for the first time.
He had seen “Rienzi,” “and,” says Wagner, “from every corner of the
world, where, in the course of his artistic career he had
communicated with others, I received, now through this person and
now through that, evidences of the restless ardor of Liszt and of the
satisfaction he had experienced in hearing my music.” This
happened at the time when Wagner himself was more and more
losing ground with his dramatic creations. As Liszt had now settled
down quite permanently in Weimar, he made it a matter of prime
importance to establish a new and fixed abode for the creations of
this mistaken and proscribed artist. “Everywhere and always caring
for me, always quickly and decisively helping, when help was
necessary, with an open heart for my every wish, with a self-
sacrificing love for my very self, Liszt was something to me which I
had never found before and in a measure the fullness of which we
only comprehend when it actually embraces us to its full extent.”
With this most beautiful tribute, Wagner describes the circumstance
which was so decisive for him—and who can recall one more
beautiful?
In the following year, 1841, in contrast with his own and Wagner’s
self-sacrificing natures, Liszt had publicly accused Paganini, his
greatest rival, of being a “narrow egotist,” and referred to the “artistic
royalty” and even to “the divine service of devotion,” which elevates
genius to a priestly power—that reveals the very souls of men to
their God. He closes with the significant words: “May the artist of the
future with joyful heart renounce a frivolous, egotistical role, which
we hope has found its last brilliant representative in Paganini! May
he fix his goal in and not outside of himself and virtuosity be to him a
means, not an end! May he never forget that, although it is a
customary saying, ‘Noblesse oblige,’ it is a far more honorable
saying, ‘Genie oblige.’”
“It must be frankly conceded that Liszt has devoted himself with the
greatest enthusiasm to the laudable task of securing the appreciation
of new works which are unknown or misunderstood and old works
which have been forgotten, as well as of the latest works belonging
to the opposition school,” says a notice of him, written in 1876. “Thus
we owe to Liszt our nearer acquaintance with Berlioz, the
introduction of many unknown works of Franz Schubert, Richard
Wagner, Robert Schumann, Raff, Baerwald, Frank in Paris, and
other masters, which secured their first public performance through
him.”
There is still further evidence of this in the following letter which has
only recently come to light. It was written in the year 1849, when
Wagner had been compelled to be a fugitive, and was bargaining for
“Lohengrin,” and is addressed to one Herr B., in Paris, but not
Berlioz. “Dear B.,” it says, “Richard Wagner, Capellmeister of
Dresden, has been here since yesterday. He is a man of astonishing
genius, of a genie si trepantique, as befits this country, a new and
brilliant appearance in art. Recent events in Dresden have forced
him to a plan in the execution of which I am determined to help him
with all my power. Meanwhile I have had a long interview with him.
Listen to what we have planned and what must be realized from it.
First, we will create a success for some grand, heroic and fascinating
music, the score of which was finished a year ago. Perhaps it will be
in London. Chorley, for instance, can be of great service to him in
this undertaking. Then if Wagner comes, with his success in his
pocket, to Paris in the winter, the doors of the opera, at which he has
always been knocking, will open to him. It is unnecessary to trouble
you with any further explanations. You understand and must learn
whether there is at this moment an English theatre in London—for
the Italian opera would be of no service to our friend, and whether
there is any prospect that a great and beautiful work by a master-
hand could make a success. Reply as soon as possible. Later, that
is, toward the end of the month, Wagner will pass through Paris. You
will see him, and he will speak with you personally about the
direction and extent of his plan, and will be royally thankful for every
favor. Write soon and help me as ever. It is a noble purpose for the
accomplishment of which all this must be done.”
Richard Wagner himself, in confirmation of what we have said,
relates the most beautiful thing of all. At the close of his brief Paris
visit, in 1849, when, sick, miserable and despairing, he sat brooding
over his situation, he happened to espy the score of his almost
forgotten “Lohengrin.” It suddenly struck him with a sense of pity, that
the music on this death-pale paper would never be heard: “I wrote
two words to Liszt and he replied that extensive preparations were
being made for the performance of the work. Whatever men and
circumstances could accomplish there (in Weimar,) should be done.
Success rewarded him and after this success he approached me
and said: ‘See, thus far have we come. Now create us a new work,
that we may go still further.’”

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Multiple Choice Questions

1. Which of these statements is false?

2. Bonds are issued by which of the following?

7. This determines the dollar amount of interest paid to bondholders.

8. Bond prices are quoted in terms of which of the following?

9. Which of the following are main issuers of bonds?

10. Which of the following statements is true?

15. Which of the following bonds makes no interest payments?

16. Which of the following is a true statement?

20. A bond's current yield is defined as

30. Time to Maturity A bond issued by a corporation on October 1, 2007, is scheduled to

67. Which of the following is not true about EE savings bonds?

93. Which of the following statements is correct?

94. Which of the following statements is correct?

101. Which of the following is not a correct statement?

102. Which of the following would NOT be an example of an agency bond?

103. Which of the following statements is correct?

104. Which of the following statements is correct?

107. Which of the following statements is correct?

109. Which of the following statements is correct?

110. If a bond is selling at a premium, then ________________________________.

114. If a bond is selling at a discount, which of the following statements is correct?

117. Under what conditions is a bond likely to be called?

130. Explain how investors can assess bond market performance.

Chapter 07 Valuing Bonds Answer Key

Multiple Choice Questions

1. Which of these statements is false?

AACSB: Reflective Thinking

2. Bonds are issued by which of the following?

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

7. This determines the dollar amount of interest paid to bondholders.

AACSB: Reflective Thinking

8. Bond prices are quoted in terms of which of the following?

AACSB: Reflective Thinking

9. Which of the following are main issuers of bonds?

AACSB: Reflective Thinking

10. Which of the following statements is true?

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

15. Which of the following bonds makes no interest payments?

AACSB: Reflective Thinking

16. Which of the following is a true statement?

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking