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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

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Basic
Learning Goal: 07-01 Describe bond characteristics.
Topic: Bond features
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 choices are correct.

Blooms: Remember
Difficulty: 1 Basic
Topic: Bond types
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.

Blooms: Remember
Difficulty: 1 Basic
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
Topic: Indenture provisions
7-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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
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
7. Which of the following determines the dollar amount of interest paid to bondholders?
A. original issue discount

B. call premium
C. coupon rate
D. market rate
Blooms: Remember
Difficulty: 1 Basic
Topic: Bond coupons
8. Bond prices are quoted in terms of which of the following?
A. original issue discount

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

Blooms: Remember
Difficulty: 1 Basic
Topic: Bond quotes and trading
7-2
9. Which of the following are main issuers of bonds?
A. U.S. Treasury bonds

B. corporate bonds
C. municipal bonds

Blooms: Remember
Difficulty: 1 Basic
Learning Goal: 07-02 Identify various bond issuers and their motivation for issuing debt.
Topic: Bond types
10. Which of the following statements is true?
A. Interest payments paid to U.S. Treasury bondholders are not taxed at the federal level.
B. Interest payments paid to corporate bondholders are not taxed at the federal level.
C. Interest payments paid to corporate bondholders are not taxed at the state level.
D. Interest payments paid to municipal bondholders are not taxed at the federal level, or by the state for which the bond
is issued.

Blooms: Remember
Difficulty: 2 Intermediate
Topic: Bond types
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
Topic: Bond types
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
Topic: Bond types
7-3
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
Topic: Bond types
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.

Blooms: Remember
Difficulty: 1 Basic
Learning Goal: 07-03 Read and interpret bond quotes.
Topic: Bond coupons
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 Goal: 07-04 Compute bond prices using present value concepts.
Topic: Bond types
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 Goal: 07-05 Explain the relationship between bond prices and interest rates.
Topic: Interest rate risk
7-4
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

Blooms: Remember
Difficulty: 1 Basic
18. Which of the following terms means the chance that future interest payments will have to be reinvested at a lower interest
rate?

C. liquidity rate risk
D. reinvestment rate risk

Blooms: Remember
Difficulty: 1 Basic
Topic: Bond yields and returns
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

Blooms: Remember
Difficulty: 1 Basic
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 Goal: 07-06 Compute bond yields.
7-5
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.

Blooms: Remember
Difficulty: 1 Basic
22. Which of the following is a reason municipal bonds offer lower rates of interest income for their investors?
A. They are able to avoid interest rate risk.

B. They are able to avoid reinvestment rate risk.
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
23. Which of the following terms is the chance that the bond issuer will not be able to make timely payments?

C. liquidity of interest rate risk
D. term structure of interest rates

Blooms: Remember
Difficulty: 1 Basic
Learning Goal: 07-07 Find bond ratings and assess credit risk's effects on bond yields.
Topic: Bond ratings and credit risk
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
7-6
25. Determine the interest payment for the following three bonds: 5.5 percent coupon corporate bond (paid semiannually),
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
5.5 percent coupon corporate bond (paid semiannually): 0.5 × 5.5% × $1,000 = $27.50.
6.45 percent coupon Treasury note: 0.5 × 6.45% × $1,000 = $32.25.
Corporate zero-coupon bond maturing in 10 years: 0% × $1,000 = $0.
AACSB: Analytical Thinking

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
26. Determine the interest payment for the following three bonds: 2.5 percent coupon corporate bond (paid semiannually),
3.15 percent coupon Treasury note, and a corporate zero-coupon bond maturing in 10 years. (Assume a $1,000 par
value.)
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
2.5 percent coupon corporate bond (paid semiannually): 0.5 × 2.5% × $1,000 = $12.50.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
27. Determine the interest payment for the following three bonds: 4 percent coupon corporate bond (paid semiannually), 4.75
percent coupon Treasury note, and a corporate zero-coupon bond maturing in 15 years. (Assume a $1,000 par value.)
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 semiannually): 0.5 × 4% × $1,000 = $20.00.


Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
7-7
28. 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
June 15, 2017 minus December 16, 2008 = 8 years and 6 months.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Time to maturity
29. 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.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
30. 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? (Assume annual interest payments.)
A. 2 years
B. 50 years
C. 998 years
D. 100 years
October 1, 3007 minus October 2, 2009 = 998 years.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
7-8
31. 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. $1,000
D. $1,055
Principal + Call premium = $1,000 + 5.5% × $1,000 = $1,055.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
32. A 6 percent corporate coupon bond is callable in 10 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?
A. $60
B. $600
C. $1,000
D. $1,060
Principal + Call premium = $1,000 + 6% × $1,000 = $1,060.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
33. A 4.5 percent corporate coupon bond is callable in five 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?
A. $45
B. $225
C. $1,000
D. $1,045
Principal + Call premium = $1,000 + 4.5% × $1,000 = $1,045.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
7-9
34. A 2.5 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 semiannual interest payments and $1,000 par value.)
A. $1,000, $7.16, respectively

B. $1,000, $15.09, respectively
C. $1,207.16, $7.16, respectively
D. $1,207.16, $15.09, respectively
Par value = 205.7/170.4 × $1,000 = $1,207.16.
Interest payment = 0.5 × 2.5% × $1,207.16 = $15.09.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
A. $1,000, $18.75, respectively

B. $1,000, $37.50, respectively
C. $1,181.46, $22.15, respectively
D. $1,181.46, $37.50, respectively
Par value = 207.7/175.8 × $1,000 = $1,181.4562.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
36. 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, $1,000, $1,000, respectively

B. $1,000, $1,000, $1,000, respectively
C. $872.50, $1,024.20, $5,072.50, respectively
D. $1,000, $1,024.20, $1,001.45, respectively
Treasury note at 87.25: 87.25% × $1,000 = $872.50.
Corporate bond at 102.42: 102.42% × $1,000 = $1,024.20.
Municipal bond at 101.45: 101.45% × $5,000 = $5,072.50.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
7-10
37. 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 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. $1,002.30, $1,000, $1,000, respectively

B. $1,000, $1,000, $5,000, respectively
C. $1,002.30, $994.50, $5,012.25 respectively
D. $1,023.00, $994.50, $5,122.50, respectively
Treasury note at 102.30: 102.30% × $1,000 = $1023.00.

Corporate bond at 99.45: 99.45% × $1,000 = $994.50.
Municipal bond at 102.45: 102.45% × $5,000 = $5,122.50.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
38. Calculate the price of a zero-coupon bond that matures in 10 years if the market interest rate is 6 percent. (Assume
semiannual compounding and $1,000 par value.)
A. $553.68
B. $558.66
C. $940.00
D. $1,000.00
Use semiannual compounding:

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Bond valuation
7-11
39. Calculate the price of a zero-coupon bond that matures in five years if the market interest rate is 7.50 percent. (Assume
semiannual compounding and $1,000 par value.)
A. $692.02
B. $696.57
C. $962.50
D. $1,000.00
Use semi-annual compounding:

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
40. What's the current yield of a 6 percent coupon corporate bond quoted at a price of 101.70?
A. 5.9 percent
B. 6.0 percent
C. 6.1 percent
D. 10.2 percent
6% ÷ 101.7% = 0.058997 = 5.9%.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
41. What's the current yield of a 5.75 percent coupon corporate bond quoted at a price of 103.05?
A. 5.58 percent
B. 5.75 percent
C. 5.93 percent
D. 17.54 percent
5.75% ÷ 103.05% = 0.055798 = 5.58%.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
7-12
42. What's the current yield of an 8.15 percent coupon corporate bond quoted at a price of 94.30?
A. 4.30 percent
B. 8.01 percent
C. 8.15 percent
D. 8.64 percent
8.15% ÷ 94.30% = 0.08643 = 8.6%.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
43. 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%
Use Equation 6.4:

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
44. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4.5 percent for an investor in the 39
percent marginal tax bracket?
A. 1.76 percent
B. 4.50 percent
C. 7.38 percent
D. 11.54 percent
Use Equation 6.4:

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
7-13
45. 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

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
46. Consider a 2.75 percent 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
Gain = End of year value − Beginning of year value
= 200.5/184.2 × $1,000 − 195.4/184.2 × $1,000 = $1,088.49 − $1,060.80 = $27.69.

Blooms: Analyze
Blooms: Apply
was at 202.4 at the end of the year. What 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 × $1,000 − 197.5/186.7 × $1,000 = $1,084.09 − $1,057.85 = $26.25.

Blooms: Analyze
Blooms: Apply
7-14
was at 199.4 at the end of the year. What was the capital gain of the TIPS in percentage terms? (Assume semiannual
interest payments and $1,000 par value.)
A. 3.75 percent
B. 4.62 percent
C. 7.10 percent
D. 8.80 percent
= 199.4/183.5 × $1,000 − 190.6/183.5 × $1,000 = $1,086.65 − $1,038.69 = $47.96
As a percentage, the gain was = $47.96 ÷ $1,038.69 = 4.62%.

Blooms: Analyze
Blooms: Apply
49. 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 semiannual and par value is $1,000.) Is this a discount or premium bond?
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.

Blooms: Analyze
Blooms: Apply
50. Compute the price of a 6 percent coupon bond with 10 years left to maturity and a market interest rate of 8.75 percent.
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.

Blooms: Analyze
Blooms: Apply
7-15
51. 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 semiannual interest payments and $1,000 par value.)
A. $25.00
B. $21.55
C. $53.48
D. $80.37
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.

Blooms: Analyze
Blooms: Apply
52. A 5.5 percent coupon bond with 18 years left to maturity is priced to offer a 6.25 percent yield to maturity. You believe
that in one year, the yield to maturity will be 5.75 percent. What is the change in price the bond will experience in
dollars? (Assume semiannual interest payments and $1,000 par value.)
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.

Blooms: Analyze
Blooms: Apply
53. 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 semiannually and par value is $1,000.)
A. 3.00 percent
B. 3.09 percent
C. 5.75 percent
D. 6.00 percent
N = 24, PV = −978.83, PMT = 28.75, FV = 1000, CPT I = 3%, YTM = 3% × 2 = 6%

Blooms: Analyze
Blooms: Apply
7-16
54. A 4.25 percent coupon bond with eight years left to maturity is offered for sale at $983.36. What yield to maturity is the
bond offering? (Assume interest payments are paid semiannually and par value is $1,000.)
A. 2.25 percent
B. 2.36 percent
C. 4.25 percent
D. 4.50 percent
N = 16, PV = −983.36, PMT = 21.25, FV = 1000, CPT I = 2.25%, YTM = 2.25% × 2 = 4.50%

Blooms: Analyze
Blooms: Apply
55. A 7.25 percent coupon bond with 25 years left to maturity can be called in five years. The call premium is one year of
coupon payments. It is offered for sale at $1,066.24. What is the yield to call of the bond? (Assume that interest payments
are paid semiannually and par value is $1,000.)
A. 3.41 percent
B. 3.45 percent
C. 3.51 percent
D. 6.90 percent
N = 10, PV = −1066.24, PMT = 36.25, FV = 1072.50, CPT I = 3.45%, YTC = 3.45% × 2 = 6.90%

Blooms: Analyze
Blooms: Apply
56. A 4.75 percent coupon bond with 12 years left to maturity can be called in two years. The call premium is one year of
coupon payments. It is offered for sale at $1037.35. What is the yield to call of the bond? (Assume that interest payments
are paid semiannually and par value is $1,000.)
A. 4.60 percent
B. 4.68 percent
C. 4.75 percent
D. 5.05 percent
N = 4, PV = −1037.35, PMT = 23.75, FV = 1047.50, CPT I = 2.525%, YTC = 2.525% × 2 = 5.05%

Blooms: Analyze
Blooms: Apply
7-17
57. 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 the answer.
First determine the ETY:
Since 7.46% > 6.25%, the client should take the municipal bond.

Blooms: Analyze
Blooms: Apply
58. A client in the 28 percent marginal tax bracket is comparing a 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 the answer.

Blooms: Analyze
Blooms: Apply
7-18
59. A client in the 35 percent marginal tax bracket is comparing a municipal bond that offers a 4.25 percent yield to maturity
and a similar-risk corporate bond that offers a 5.10 percent yield. Which bond will give the client more profit after taxes?

D. There is not enough information given to determine answer.

Blooms: Analyze
Blooms: Apply
60. Reconsider a 3.25 percent 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 semiannual interest payments and $1,000 par value.)
A. 1.6 percent
B. 2.4 percent
C. 5.8 percent
D. 9.1 percent
Capital gain = End of year value − Beginning of year value
= 202.4/186.7 × $1,000 − 197.5/186.7 × $1,000 = $1,084.09 − $1,057.85 = $26.24.
The mid-year interest payment was: 0.5 × 3.25% × 201.1/186.7 × $1,000 = $17.50.
The end-of-year interest payment was: 0.5 × 3.25% × 202.4/186.7 × $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%.

Blooms: Analyze
Blooms: Apply
Difficulty: 3 Advanced
7-19
61. 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 semiannual interest payments and $1,000 par value.)
A. 5.5 percent
B. 5.6 percent
C. 6.6 percent
D. 6.7 percent
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%.

Blooms: Analyze
Blooms: Apply
62. A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that
in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in
percent? (Assume semiannual interest payments and $1,000 par value.)
A. 3.5 percent
B. 5.3 percent
C. 7.0 percent
D. 7.15 percent

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%

Blooms: Analyze
Blooms: Apply
7-20
63. 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 five 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 semiannually and a par value of
$5,000.)
A. 3.38 percent
B. 5.00 percent
C. 5.20 percent
D. 10.12 percent
YTM: N = 24, PV = −4937.50, PMT = 81.25, FV = 5000, CPT I = 1.69%, YTM = 1.69% × 2 = 3.38%.

Blooms: Analyze
Blooms: Apply
64. A 4.5 percent coupon municipal bond has 10 years left to maturity and has a price quote of 97.75. The bond can be called
in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an
$5,000.)
A. 4.5 percent
B. 4.78 percent
C. 7.13 percent
D. 14.48 percent

Blooms: Analyze
Blooms: Apply
7-21
65. 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 semiannually 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.

Blooms: Analyze
Blooms: Apply
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

Blooms: Remember
Difficulty: 1 Basic
Topic: Debt market performance and considerations
67. Which of the following is NOT true about EE savings bonds?
A. Interest payments are received annually but are tax deductible.

B. About one in six Americans owns a savings bond.
C. These are tax deferred investments.
D. Paper bonds sell for one-half of their face value.

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

Blooms: Remember
Difficulty: 1 Basic
7-22
69. A 6.5 percent coupon bond with 12 years left to maturity can be called in four 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 semiannually and par value is $1,000.)
A. 1.48 percent
B. 2.96 percent
C. 6.5 percent
D. 7.23 percent
PV = 1190.25; PMT = 32.50; N = 8; FV = 1065; => I = 1.48 YTC = 1.48 × 2 = 2.96

Blooms: Apply
70. A 7.5 percent 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 semiannually and par value is $1,000.)
A. 4.77 percent
B. 7.5 percent
C. 9.54 percent
D. 10.34 percent
PV = 834.92; PMT = 37.5; FV = 1000; N = 32; => I = 4.77; 4.77 × 2 = 9.54

Blooms: Apply
71. An 8 percent coupon bond with 15 years to maturity is priced to offer a 9 percent yield to maturity. You believe that in
one year, the yield to maturity will be 6.5 percent. 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.

Blooms: Apply
7-23
72. Calculate the price of a 6.5 percent coupon bond with 27 years left to maturity and a market interest rate of 5 percent.
A. $982.03; discount
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

Blooms: Apply
73. Calculate the price of a 6.5% coupon bond with 17 years left to maturity and a market interest rate of 10.5%. (Assume
interest rates are semiannual and par value is $1,000.) Is this a discount or premium bond?
A. $685.93; discount
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

Blooms: Apply
74. Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (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
Blooms: Apply
Difficulty: 1 Basic
75. What is the taxable equivalent yield on a municipal bond with a yield to maturity of 4 percent for an investor in the 28
percent tax bracket?
A. 2.88 percent
B. 3.87 percent
C. 4.51 percent
D. 5.56 percent
4/(1 − 0.28) = 5.56.

Blooms: Apply
Difficulty: 1 Basic
7-24
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 percent, IBM bond with yield of 7.95 percent, Trump Casino bond with a
yield of 9.15 percent and Banc Ono bond with a yield of 6.12 percent.
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
Rank from lowest YTM to highest YTM.

Blooms: Evaluate
Difficulty: 1 Basic
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) × 1,000 − (199.5/187.2) × 1,000 = 75.85.

Blooms: Apply
78. Rank from highest credit risk to lowest credit risk the following bonds, with the same time to maturity, by their yield to
maturity: Treasury bond with yield of 6.55 percent, IBM bond with yield of 10.95 percent, Trump Casino bond with a
yield of 9.15 percent, and Banc Ono bond with a yield of 9.46 percent.
A. Treasury, Trump Casino, Banc Ono, IBM

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.

Blooms: Evaluate
Difficulty: 1 Basic
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% × 5,000 = 5,062.50.

Blooms: Apply
Difficulty: 1 Basic
7-25
payment? (Assume semiannual 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) × 1,000/2 = 21.89.

Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
81. A 5.125 percent 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
1,000 × (188.3/191.8) = 981.75.

Blooms: Apply
Difficulty: 1 Basic
82. A 7.5 percent coupon bond with nine years left to maturity is priced to offer a 10.4 percent yield to maturity. You believe
that in one year, the yield to maturity will be 8 percent. 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.

Blooms: Apply
83. A 6.75 percent coupon bond with 13 years left to maturity can be called in two years. The call 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 semiannually and par value is $1,000.
A. 12.14 percent
B. 7.27 percent
C. 14.54 percent
D. 8.29 percent
N = 4; PMT = 33.75; PV = 919.75; FV = 1067.50; => I = 7.27 YTC = 7.27 × 2 = 14.54

Blooms: Apply
7-26
in nine years. The call premium is one year of coupon payments. Compute the bond's current yield. Assume interest
payments are paid semiannually and a par value of $5,000.
A. 5.94 percent
B. 11.89 percent
C. 12.19 percent
D. 13.14 percent
5.5/92.55 = 0.0594.

Blooms: Apply
in nine years. The call premium is one year of coupon payments. Compute the bond's yield to maturity and yield to call.
Assume interest payments are paid semiannually and a par value of $5,000.
A. YTM = 6.91 percent; YTC = 7.52 percent

B. YTM = 6.24 percent; YTC = 7.08 percent
C. YTM = 5.78 percent; YTC = 6.61 percent
D. YTM = 5.92 percent; YTC = 6.85 percent
Step 1: N = 32; PV = 0.9255 × 5000; FV = 5000; PMT = 137.5; => I = 3.12; 2 × 3.12 = 6.24 = YTM.
Step 2: PMT = 137.5; N = 18; PV = 0.9255 × 5000; FV = 5275; => I = 3.54; YTC = 2 × 3.54 = 7.08.

Blooms: Apply
Topic: Yield to call
86. An 8 percent coupon municipal bond has 15 years left to maturity and has a price quote of 98.5. The bond can be called in
six 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 semiannually and a par value of $5,000.
A. 4.68 percent; Yes, the bond will be called.

B. 9.36 percent; Yes, the bond will be called.
C. 9.36 percent; No, the bond will not be called.
D. 10.71 percent; 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.

Blooms: Apply
7-27
87. An 8% coupon municipal bond has 15 years left to maturity and has a price quote of 102.0. 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 semiannually and a par value of $5,000.
A. 4.31%; Yes, the bond will be called.

B. 8.62%; Yes, the bond will be called.
C. 8.62%; No, the bond will not be called.
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.

Blooms: Apply
88. A corporate bond with a 5 percent coupon has 10 years left to maturity. It has had a credit rating of BBB and a yield to
maturity of 8.0 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 9 percent. What will be the change in the bond's price in dollars? Assume
interest payments are paid semiannually 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.

Blooms: Apply
89. A corporate bond with an 8.5 percent coupon has 10 years left to maturity. It has had a credit rating of A and a yield to
maturity of 10 percent. 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 percent. What will be the change in the bond's price in dollars?
Assume interest payments are paid semiannually 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.

Blooms: Apply
7-28
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 choices are correct.

Blooms: Remember
91. Which of the following are backed only by the reputation and financial stability of the corporation?
A. debentures
B. unsecured bonds
C. Both debentures and unsecured bonds

Blooms: Remember
Difficulty: 1 Basic
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.
Blooms: Remember
93. Which of the following statements is 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.

Blooms: Remember
Topic: Credit risk
7-29
94. 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 percent. Bond B is a corporate bond that yields 7.75 percent. If Sally is in the 30 percent
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 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.
TEY = 5.25% (1 − 0.3) = 7.5% vs. 7.75%; select the corporate bond.

Blooms: Analyze
Blooms: Apply
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.
TEY = 5.75% (1 − 0.28) = 7.99% vs. 7.75%; select the municipal bond.

Blooms: Analyze
Blooms: Apply
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 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.
TEY = 10.00% (1 − 0.28) = 7.20% vs. 7.20%; indifferent between the two.

Blooms: Analyze
Blooms: Apply
7-30
97. A bond with 14 years to maturity is selling for $1,070 and has a yield to maturity of 10.06 percent. If this bond pays its
coupon payments semiannually and par value is $1,000, what is the bond's annual coupon rate?
A. 5.50 percent
B. 8.19 percent
C. 9.57 percent
D. 11.00 percent
PV = −1070; FV = 1000; N = 28; I = 5.03; => PMT = 55.01; annual coupon payment = 55.01 × 2 = 110.02; annual
coupon rate = 110.02/1,000 × 100 = 11.00%.

Blooms: Apply
Topic: Bond coupons
98. A bond with 23 years to maturity is selling for $991 and has a yield to maturity of 8.12 percent. If this bond pays its
coupon payments semiannually and par value is $1,000, what is the bond's annual coupon rate?
A. 7.45 percent
B. 8.03 percent
C. 9.39 percent
D. 10.82 percent
PV = −991; FV = 1000; N = 46; I = 4.06; => PMT = 40.16; annual coupon payment = 40.16 × 2 = 80.32; annual coupon
rate = 80.32/1,000 × 100 = 8.03%.

Blooms: Apply
Topic: Bond coupons
99. 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.

Blooms: Remember
Difficulty: 1 Basic
Topic: Indenture provisions
100. 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, an investor in Treasury inflation-protected securities receives an inflation-adjusted principal amount.

Blooms: Remember
7-31
101. 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

Blooms: Remember
Difficulty: 1 Basic
Topic: Types of bonds
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.

Blooms: Remember
Blooms: Understand
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.

Blooms: Remember
Blooms: Understand
104. Which of the following bonds will have the largest percentage increase in value if interest rates decrease by 1 percent?
A. 2-year, 5 percent coupon bond

B. 30-year, 10 percent coupon bond
C. 10-year, zero-coupon
D. 30-year, zero-coupon

Blooms: Evaluate
7-32
105. Rank the following bonds, from highest to lowest interest rate risk: 2-year zero-coupon, 2-year 5 percent coupon bond,
30-year 5 percent coupon bond, 30-year, zero-coupon bond.
A. 30-year, zero-coupon bond, 30-year 5 percent coupon bond, 2-year 5 percent coupon bond, 2-year zero-coupon bond
B. 2-year 5 percent coupon bond, 2-year zero-coupon bond, 30-year 5 percent coupon bond, 30-year zero-coupon bond
C. 30-year, zero-coupon bond, 30-year 5 percent coupon bond, 2-year zero-coupon bond, 2-year 5 percent coupon bond
D. 30-year, 5 percent coupon bond, 30-year zero-coupon bond, 2-year 5 percent coupon bond, 2-year zero-coupon bond

Blooms: Evaluate
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 that is not callable.
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.

Blooms: Remember
Blooms: Understand
107. 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 the conditions will cause an increase in the bond's yield.

Blooms: Remember
Blooms: Understand
Difficulty: 1 Basic
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.
Blooms: Remember
Blooms: Understand
7-33
109. 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.

Blooms: Create
110. 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.

Blooms: Remember
Difficulty: 1 Basic
111. Possible shapes for the yield include all of the following EXCEPT
A. humped.
B. downward-sloping.
C. flat.

Blooms: Remember
Topic: Term structure of interest rates
112. Possible shapes for the yield curve include all of the following EXCEPT
A. upward-sloping.
B. humped.
C. horizontal line.
D. vertical line.

Blooms: Remember
Topic: Term structure of interest rates
7-34
113. 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.

Blooms: Create
114. 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
115. 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.

Blooms: Remember
Difficulty: 1 Basic
Topic: Bond types
116. 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
7-35
117. A 30-year bond with an 8 percent coupon has a yield to maturity of 6 percent. The bond could be called in seven years
and if called would generate a yield to call of 5.75 percent. 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.

Blooms: Apply
118. A 15-year bond with a 10 percent coupon has a yield to maturity of 8 percent. The bond could be called in four years and
if called would generate a yield to call of 6 percent. What is this bond's call premium? Assume the coupon payments are
made semiannually 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.

Blooms: Apply
119. A 5 percent coupon bond has 10 years to maturity and could be called in two years. If the bond is called, investors will
earn 6.2 percent. The call premium is one year of coupon payments. If coupon payments are made semiannually and par
value is $1,000, what is the bond's yield to maturity?
A. 2.36 percent
B. 4.72 percent
C. 5.18 percent
D.
6.49 percent
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%.

Blooms: Apply
7-36
120. A 7 percent coupon bond has 10 years to maturity and could be called in three years. If the bond is called, investors will
earn 5.5 percent. The call premium is one year of coupon payments. If coupon payments are made semiannually and par
value is $1,000, what is the bond's yield to maturity?
A. 2.84 percent
B. 3.17 percent
C. 5.38 percent
D. 5.67 percent
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%.

Blooms: Apply
121. A 10 percent coupon bond has 15 years to maturity and could be called in two years. If the bond is called, investors will
earn 4 percent. 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 percent
B. 6.82 percent
C. 7.65 percent
D. 7.98 percent
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.

Blooms: Apply
122. Which of the following countries became the first to miss an International Monetary Fund loan repayment?
A. Argentina
B. Greece
C. Japan
D. Mexico

Blooms: Remember
Topic: Debt market performance and considerations
payment? (Assume semiannual interest payments and a par value of $1,000.)
A. $15.00
B. $16.25
C. $17.61
D. $31.54
3.25% × (210.3/194.1) × 1,000/2 = 17.61.

Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
7-37
A. $878.60, $16.79, respectively

B. $1,000.00, $29.50, respectively
C. $1,138.18, $16.79, respectively
D. $1,138.18, $29.50, respectively
Par value = 205.1/180.2 × $1,000 = $1,138.1798.

Blooms: Analyze
Blooms: Apply
Difficulty: 1 Basic
Topic: Bond coupons
125. A 4.15 percent TIPS has an original reference CPI of 182.1. If the current CPI is 188.3, what is the par value of the
TIPS?
A. $1,034.05
B. $1,004.75
C. $1,000.00
D. $967.07
1,000 × (188.3/182.1) = 1034.0472.

Blooms: Apply
Difficulty: 1 Basic
126. Reconsider a 2.75 percent TIPS that was issued with CPI reference of 191.7. 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
205.2. Now, at the end of the year, the CPI is 204.4 and the interest payment has been made. What is the total return of
the TIPS in percentage terms for the year? (Assume semiannual interest payments and $1,000 par value.)
A. 2.75 percent
B. 5.60 percent
C. 6.26 percent
D. 6.80 percent
Capital gain = end of year value − beginning of year value

= 204.4/191.7 × $1,000 − 197.5/191.7 × $1,000 = $1,066.25 − $1,030.26 = $35.99.
The mid-year interest payment was: 0.5 × 2.75% × 205.2/191.7 × $1,000 = $14.72.
The end-of-year interest payment was: 0.5 × 2.75% × 204.4/191.7 × $1,000 = $13.75.
Total dollar return = $35.99 + $14.72 + $13.75 = $64.46.
As a percentage, the return was = $64.46 ÷ $1,030.26 = 6.26%.

Blooms: Analyze
Blooms: Apply
7-38
127. Which of the following is another name for junk bonds?
A. high-risk bonds
B. high-price bonds
C. high-yield bonds

Blooms: Remember
Topic: Bond yields
Topic: Credit risk
128. A 4.25 percent coupon municipal bond has 10 years left to maturity and has a price quote of 108.75. The bond can be
called in five years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an
$1,000.)
A. 2.24 percent
B. 4.47 percent
C. 5.75 percent
D. 5.90 percent
Equivalent taxable yield = Muni yield/(1 − tax rate) = 3.22%/(1 − .28) = 4.4722%.

Blooms: Analyze
Blooms: Apply
in four years. The call premium is one year of coupon payments. What is the bond's taxable equivalent yield for an
$1,000.)
A. 2.35 percent
B. 3.50 percent
C. 4.64 percent
D. 9.75 percent
Equivalent taxable yield = Muni yield/(1 − tax rate) = 3.11%/(1 − .33) = 4.6418%.

Blooms: Analyze
Blooms: Apply
7-39
130. Which of the following is used to compute bond cash interest payments?
A. current yield
B. yield to maturity
C. coupon rate

Blooms: Remember
Difficulty: 1 Basic
Topic: Bond coupons
131. Many bonds are not callable, but for those that are, which of following is a common feature?
A. called any time after 2 years of issuance

B. called any time after 2 years from the time an investor buys the bond
C. called any time after 10 years of issuance
D. called any time after 10 years from the time an investor buys the bond

Blooms: Remember
Difficulty: 1 Basic
7-40
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Chapter IV.
The Crime at Heatherfield
“That's a fine old turkey-cock,” Dr. Ringwood commented, as he
and Sir Clinton groped their way down the drive towards the gate of
Ivy Lodge.
The Chief Constable smiled covertly at the aptness of the
description.
“He certainly did gobble a bit at the start,” he admitted. “But that
type generally stops gobbling if you treat it properly. I shouldn't care
to live with him long, though. A streak of the domestic tyrant in him
somewhere, I'm afraid.”
Dr. Ringwood laughed curtly.
“It must have been a pretty household,” he affirmed. “You didn't
get much valuable information out of him, in spite of all his self-
importance and fuss.”
“A character-sketch or two. Things like that are always useful
when one drops like a bolt from the blue into some little circle, as we
have to do in cases of this sort. I suppose it's the same in your own
line when you see a patient for the first time: he may be merely a
hypochondriac or he may be out of sorts. You've nothing to go on in
the way of past experience of him. We're in a worse state, if
anything, because you can't have a chat with a dead man and find
out what sort of person he was. It's simply a case of collecting other
people's impressions of him in a hurry and discarding about half that
you hear, on the ground of prejudice.”
“At least you'll get his own impressions this time, if it's true that he
kept a diary,” the doctor pointed out.
“It depends on the diary,” Sir Clinton amended. “But I confess to
some hopes.”
As they drew near the door of Heatherfield, Dr. Ringwood's
thoughts reverted to the state of things in the house. Glancing up at
the front, his eye was caught by a lighted window which had been
dark on his previous visit.
“That looks like a bedroom up there with the light on,” he pointed
out to his companion. “It wasn't lit up last time I was here. Perhaps
Silverdale or his wife has come home.”
A shapeless shadow swept momentarily across the curtains of
the lighted room as they watched.
“That's a relief to my mind,” the doctor confessed. “I didn't quite
like leaving that maid alone with my patient. One never can tell what
may happen in a fever case.”
As they were ascending the steps, a further thought struck him.
“Do you want to be advertised here—your name, I mean?”
“I think not, at present, so long as I can telephone without being
overheard.”
“Very well. I'll fix it,” Dr. Ringwood agreed, as he put his finger on
the bell-push.
Much to his surprise, his ring brought no one to the door.
“That woman must be deaf, surely,” he said, as he pressed the
button a second time. “She came quick enough the last time I was
here. I hope nothing's gone wrong.”
Sir Clinton waited until the prolonged peal of the bell ended when
the doctor took his finger away, then he bent down to the slit of the
letter-box and listened intently.
“I could swear I heard someone moving about, just then,” he said,
as he rose to his full height again. “There must be someone on the
premises to account for the shadow we saw at the window. This
looks a bit rum, doctor. Ring again, will you?”
Dr. Ringwood obeyed. They could hear the trilling of a heavy
gong somewhere in the back of the house.
“That ought to wake anyone up, surely,” he said with a nervous
tinge in his voice. “This is my second experience of the sort this
evening. I don't much care about it.”
They waited for a minute, but no one came to the door.
“It's not strictly legal,” Sir Clinton said at last, “but we've got to get
inside somehow. I think we'll make your patient an excuse, if the
worst comes to the worst. Just wait here a moment and I'll see what
can be done.”
He went down the steps and disappeared in the fog. Dr.
Ringwood waited for a minute or two, and then steps sounded in the
hall behind the door. Sir Clinton opened it and motioned him to come
in.
“The place seems to be empty,” he said hurriedly. “Stay here and
see that no one passes you. I want to go round the ground floor first
of all.”
He moved from door to door in the hall, switching on the lights
and swiftly inspecting each room as he came to it.
“Nothing here,” he reported, and then made his way into the
kitchen premises.
Dr. Ringwood heard his steps retreating; then, after a short
interval, there came the sound of a door closing and the shooting of
a bolt. It was not long before Sir Clinton reappeared.
“Somebody's been on the premises,” he said curtly. “That must
have been the sound I heard. The back door was open.”
Dr. Ringwood felt himself at a loss amid the complexities of his
adventures.
“I hope that confounded maid hasn't got the wind up and cleared
out,” he exclaimed, his responsibility for his patient coming foremost
in the confusion of the situation.
“No use thinking of chasing anyone through this fog,” Sir Clinton
confessed, betraying in his turn his own professional bias. “Whoever
it was has got clean away. Let's go upstairs and have a look round,
doctor.”
Leading the way, he snapped down the switch at the foot of the
stair-case; but to Dr. Ringwood's surprise, no light appeared above.
Sir Clinton pulled a flash-lamp from his pocket and hurried towards
the next flat; as he rounded the turn of the stair, he gave a muffled
exclamation. At the same moment, a high-pitched voice higher up in
the house broke into a torrent of aimless talk.
“That girl's a bit delirious,” Dr. Ringwood diagnosed, as he heard
the sound; and he quickened his ascent. But as he reached a little
landing and could see ahead of him, he was brought up sharply by
the sight which met his eyes. Sir Clinton was bending with his flash-
lamp over a huddled mass which lay on the floor at the head of the
flight, and a glance showed the doctor that it was the body of the
maid who had admitted him to the house on his earlier visit.
“Come here, doctor, and see if anything can be done for her,” Sir
Clinton's voice broke in on his surprise.
He leaped up the intervening steps and stooped in his turn over
the body, while Sir Clinton made way for him and kept the flash-lamp
playing on the face. Down the well of the stairs came the voice of the
delirious patient, sunk now to a querulous drone.
The briefest examination showed that the victim was beyond
help.
“We might try artificial respiration, but it would really be simply
time lost. She's been strangled pretty efficiently.”
Sir Clinton's face had grown dark as he bent over the body, but
his voice betrayed nothing of his feelings.
“Then you'd better go up and look after that girl upstairs, doctor.
She's evidently in a bad way. I'll attend to things here.”
Dr. Ringwood mechanically switched on the light of the next flight
in the stairs and then experienced a sort of subconscious surprise to
find it in action.
“I thought the fuse had gone,” he explained involuntarily, as he
hurried up the stairs.
Left to himself, Sir Clinton turned his flash-lamp upwards on to
the functionless electric light bracket above the landing and saw, as
he had expected, that the bulb had been removed from the socket. A
very short search revealed the lamp itself lying on the carpet. The
Chief Constable picked it up gingerly and examined it minutely with
his pocket-light; but his scrutiny merely proved that the glass was
unmarked by any recent finger-prints. He put it carefully aside,
entered the lighted bedroom, and secured a fresh bulb from one of
the lamp-sockets there.
With this he returned to the landing and glanced round in search
of something on which to stand, so that he could put the new bulb in
the empty socket. The only available piece of furniture was a small
table untidily covered with a cloth, which stood in one corner of the
landing. Sir Clinton stepped across to it and inspected it minutely.
“Somebody's been standing on that,” he noted. “But the traces
are just about nil. The cloth's thick enough to have saved the table-
top from any marks of his boot-nails.”
Leaving the table untouched, he re-entered the room he had
already visited and secured another small table, by means of which
he was able to climb up and fix the new bulb in the empty socket
over the landing. It refused to light, however, and he had to go to the
foot of the stairs and reverse the switch before the current came on.
Shutting off his flash-lamp, Sir Clinton returned to the landing and
bent once more over the body. The cause of death was perfectly
apparent: a cord with a rough wooden handle at each end had been
slipped round the woman's throat and had been used as a tourniquet
on her neck. The deep biting of the cord into the flesh indicated with
sufficient plainness the brutality of the killer. Sir Clinton did not
prolong his examination, and when he had finished, he drew out his
pocket-handkerchief and covered the distorted face of the body. As
he did so, Dr. Ringwood descended the stairs behind him.
“I'll need to telephone for the hospital van,” he said. “It's out of the
question to leave that girl here in the state she's in.”
Sir Clinton nodded his agreement. Then a thought seemed to
strike him.
“Quite off her rocker, I suppose?” he demanded. “Or did she
understand you when you spoke to her?”
“Delirious. She didn't even seem to recognise me,” Dr. Ringwood
explained shortly.
Then the reason for the Chief Constable's questions seemed to
occur to him.
“You mean she might be able to give evidence? It's out of the
question. She's got a very bad attack. She won't remember anything,
even if she's seen something or heard sounds. You'd get nothing out
of her.”
Sir Clinton showed no particular disappointment.
“I hardly expected much.”
Dr. Ringwood continued his way down stairs and made his way to
the telephone. When he had sent his message, he walked up again
to the first floor. A light was on in one of the rooms, and he pushed
open the door and entered, to find Sir Clinton kneeling on the floor in
front of an antique chest of drawers.
A glance round the room showed the doctor that it belonged to
Mrs. Silverdale. Through the half-open door of a wardrobe he caught
sight of some dresses; the dressing-table was littered with feminine
knick-knacks, among which was a powder-puff which the owner had
not replaced in its box; a dressing-jacket hung on a chair close to the
single bed. The whole room betrayed its constant use by some
woman who was prepared to spend time on her toilette.
“Found anything further?” Dr. Ringwood inquired as Sir Clinton
glanced up from his task.
“Nothing except this.”
The Chief Constable indicated the lowest drawer in front of him.
“Somebody's broken the lock and gone inside in a hurry. The
drawer's been shoved home anyhow and left projecting a bit. It
caught my eye when I came in.”
He pulled the drawer open as he spoke, and Dr. Ringwood
moved across and looked down into it over the Chief Constable's
shoulder. A number of jewel-boxes lay in one corner, and Sir Clinton
turned his attention to these in the first place. He opened them, one
after another, and found the contents of most of them in place. One
or two rings, and a couple of small articles seemed to be missing.
“Quite likely these are things she's wearing to-night,” he
explained, replacing the leather cases in the drawer as he spoke.
“We'll try again.”
The next thing which came to his hand was a packet of
photographs of various people. Among them was one of young
Hassendean, but it seemed to have no special value for Mrs.
Silverdale, since it had been carelessly thrust in among the rest of
the packet.
“Nothing particularly helpful there, it seems,” was Sir Clinton's
opinion.
He turned next to several old dance-programmes which had been
preserved with some care. Lifting them in turn and holding them so
that the doctor could see them, the Chief Constable glanced at the
scribbled names of the various partners.
“One gentleman seems to have been modest, anyhow,” he
pointed out. “No initials, even—just an asterisk on the line.”
He flipped the programmes over rapidly.
“Mr. Asterisk seems to be a favourite, doctor. He occurs pretty
often at each dance.”
“Her dancing-partner, probably,” Dr. Ringwood surmised. “Young
Hassendean, most likely, I should think.”
Sir Clinton put down the programmes and searched again in the
drawer. His hand fell on a battered notebook.
“Part of a diary she seems to have kept while she was in a
convent. . . . H'm! Just a school-girl's production,” he turned over a
few pages, reading as he went, “and not altogether a nice school-
girl,” he concluded, after he had paused at one entry. “There's
nothing to be got out of that just now. I suppose it may be useful later
on, in certain circumstances.”
He laid the little book down again and turned once more to the
drawer.
“That seems to be the lot. One thing's pretty clear. The person
who broke that lock wasn't a common burglar, for he'd have pouched
the trinkets. The bother is that we ought to find out what this search
was for; and since the thing has probably been removed, it leaves
one with a fairly wide field for guessing. Let's have another look
round.”
Suddenly he bent forward and picked up a tiny object from the
bottom of the drawer. As he lifted it, Dr. Ringwood could see that it
was a scrap of paper; and when it was turned over he recognised it
as a fragment torn from the corner of an envelope with part of the
stamp still adhering to it.
“H'm! Suggestive rather than conclusive,” was Sir Clinton's
verdict. “My first guess would be that this has been torn off a
roughly-opened letter. So there must have been letters in this drawer
at one time or another. But whether our murderous friend was after a
packet of letters or not, one can't say definitely.”
He stood up and moved under the electric light in order to
examine the fragment closely.
“It's got the local post-mark on it. I can see the VEN. The date's
1925, but the month part has been torn.”
He showed the scrap to Dr. Ringwood and then placed it carefully
in his note-case.
“I hate jumping to conclusions, doctor; but it certainly does look
as if someone had broken in here to get hold of letters. And they
must have been pretty important letters if it was worth while to go the
length of casual murder to secure them.”
Dr. Ringwood nodded.
“He must have been a pretty hard case to murder a defenceless
woman.”
Sir Clinton's face showed a faint trace of a smile.
“There are two sexes, doctor.”
“What do you mean? . . . Oh, of course. I said ‘he must,’ and you
think it might have been a woman?”
“I don't think so; but I hate to prejudge the case, you know. All
that one can really say is that someone came here and killed that
unfortunate woman. The rest's simply conjecture and may be right or
wrong. It's easy enough to make up a story to fit the facts.”
Dr. Ringwood walked across to the nearest chair and sat down.
“My brain's too fagged to produce anything of the sort, I'm afraid,”
he admitted, “but I'd like to hear anything that would explain the
damned business.”
Sir Clinton closed the drawer gently and turned round to face the
doctor.
“Oh, it's easy enough,” he said, “whether it's the true solution or
not's quite another question. You came here about twenty past ten,
were let in by the maid, saw your patient, listened to what the maid
had to tell you—lucky for us you took that precaution or we'd have
missed all that evidence, since she can't tell us now—and left this
house at twenty-five to eleven. We came back again, just an hour
later. The business was done in between those times, obviously.”
“Not much theory there,” the doctor pointed out.
“I'm simply trying it over in my mind,” Sir Clinton explained, “and
it's just as well to have the time-limits clear to start with. Now we go
on. Some time after you had got clear away from here, the murderer
comes along. Let's call that person X, just to avoid all prejudice
about age or sex. Now X has thought out this murder beforehand,
but not very long beforehand.”
“How do you make that out?” Dr. Ringwood demanded.
“Because the two bits of wood which form the handles of the
tourniquet are simply pieces cut off a tree, and freshly cut, by the
look of the ends. X must have had possession of these before
coming into the house—hence premeditation. But if it had been a
case of long premeditation, X would have had something better in
the way of handles. I certainly wouldn't have risked landing on a
convenient branch at the last moment if I'd been doing the job
myself; and X, I may say, strikes me as a remarkably cool,
competent person, as you'll see.”
“Go on,” the doctor said, making no attempt to conceal his
interest.
“Our friend X probably had the cord in his or her pocket and had
constructed the rough tourniquet while coming along the road. Our
friend X was wearing gloves, I may say.”
“How do you know that?” Ringwood asked.
“You'll see later. Now X went up to the front door and rang the
bell. The maid came along, recognised X. . . .”
“How do you know that?” Ringwood repeated.
“I don't know it. I’m just giving you the hypothesis you asked for. I
don't say it's correct. To continue: this person X inquired if Silverdale
(or Mrs. Silverdale, perhaps) was at home. Naturally the maid said
no. Most likely she told X that her companion had scarlatina. Then X
decided to leave a note, and was invited into the house to write it. It
was a long note, apparently; and the maid was told to go to the
kitchen and wait till X had finished. So off she went.”
“Well?”
“X had no intention of putting pen to paper, of course. As soon as
the maid was out of the way, X slipped upstairs and switched on the
light in this room.”
“I'd forgotten it was the light in this window that we saw from the
outside,” Dr. Ringwood interrupted. “Go on.”
“Then, very quietly, by shifting the table on the landing under the
electric light, X removed the bulb that lighted the stair. One can
reach it by standing on that table. Then X shifted the table back to its
place. There were no finger-prints on the bulb—ergo, X must have
been wearing gloves, as I told you.”
“You seem to have got a lot of details,” the doctor admitted. “But
why all this manœuvring?”
“You'll see immediately. I think I said already that whoever did the
business was a very cool and competent person. When all was
ready, X attracted the maid's attention in some way. She came to the
foot of the stairs, suspecting nothing, but probably wondering what X
was doing, wandering about the house. It's quite likely that X made
the sick girl upstairs the pretext for calling and wandering out of
bounds. Anyhow, the maid came to the foot of the stairs and moved
the switch of the landing light. Nothing happened, of course, since
the bulb had been removed. She tried the switch backwards and
forwards once or twice most likely, and then she would conclude that
the lamp was broken or the fuse gone. Probably she saw the
reflection of the light from the room-door. In any case, she came
quite unsuspiciously up the stair.”
Sir Clinton paused, as though to allow the doctor to raise
objections; but none came, so he continued:
“Meanwhile X had taken up a position opposite the door of the
room, at the foot of the second flight of stairs. If you remember, a
person crouching there in semi-darkness would be concealed from
anyone mounting the first flight. The tourniquet was ready, of
course.”
Dr. Ringwood shuddered slightly. Apparently he found Sir
Clinton's picture a vivid one, in spite of the casual tone in which it
had been drawn.
“The girl came up, quite unsuspicious,” Sir Clinton continued.
“She knew X; it wasn't a question of a street-loafer or anything of
that sort. An attack would be the last thing to cross her mind. And
then, in an instant, the attack fell. Probably she turned to go into the
lighted room, thinking that X was there; and then the noose would be
round her neck, a knee would be in her back and . . .”
With a grim movement, Sir Clinton completed his narrative of the
murder more effectively than words could have done.
“That left X a clear field. The girl upstairs was light-headed and
couldn't serve as a witness. X daren't go near her for fear of catching
scarlatina—and that would have been a fatal business, for naturally
we shall keep our eye on all fresh scarlet cases for the next week or
so. It's on the cards that her scarlatina has saved her life.”
Dr. Ringwood's face showed his appreciation of this point.
“And then?” he pressed Sir Clinton.
“The rest's obvious. X came in here, hunting for something which
we haven't identified. Whatever it was, it was in this drawer and X
knew where it was. Nothing else has been disturbed except slightly
—possibly in a hunt for the key of the drawer in case it had been left
lying around loose. Not finding the key, X broke open the drawer and
then we evidently arrived. That must have been a nasty moment up
here. I don't envy friend X's sensations when we rang the front door
bell. But a cool head pulls one through difficulties of that sort. While
we were standing unsuspiciously on the front door steps, X slipped
down stairs, out of the back door, and into the safety of the fog-
screen.”
The Chief Constable rose to his feet as he concluded.
“Then that's what happened, you think?” Doctor Ringwood asked.
“That's what may have happened,” Sir Clinton replied cautiously.
“Some parts of it certainly are correct, since there's sound evidence
to support them. The rest's no more than guess-work. Now I must go
to the 'phone.”
As the Chief Constable left the room, the sick girl upstairs
whimpered faintly, and Dr. Ringwood got out of his chair with a yawn
which he could not suppress. He paused on the threshold and
looked out across the body to the spot at the turn of the stair. Sir
Clinton's word-picture of the murderer crouching there in ambush
with his tourniquet had been a little too vivid for the doctor's
imagination.
Chapter V.
The Bungalow Tragedy
In the course of his career, Sir Clinton Driffield had found it
important to devote some attention to his outward appearance; but
his object in doing so had been different from that of most men, for
he aimed at making himself as inconspicuous as possible. To look
well-dressed, but not too smart; to seem intelligent without betraying
his special acuteness; to be able to meet people without arousing
any speculations about himself in their minds; above all, to eliminate
the slightest suggestion of officialism from his manner: these had
been the objects of no little study on his part. In the days when he
had held junior posts, this protective mimicry of the average man had
served his purposes excellently, and he still cultivated it even though
its main purpose had gone.
Seated at his office desk, with its wire baskets holding packets of
neatly-docketed papers, he would have passed as a junior director in
some big business firm. Only a certain tiredness about his eyes
hinted at the sleepless night he had spent at Heatherfield and Ivy
Lodge, and when he began to open his letters, even this symptom
seemed to fade out.
As he picked up the envelopes before him, his eye was caught by
the brown cover of a telegram, and he opened it first. He glanced
over the wording and his eyebrows lifted slightly. Then, putting down
the document, he picked up his desk-telephone and spoke to one of
his subordinates.
“Has Inspector Flamborough come in?”
“Yes, sir. He's here just now.”
“Send him along to me, please.”
Replacing the telephone on its bracket, Sir Clinton picked up the
telegram once more and seemed to reconsider its wording. He
looked up as someone knocked on the door and entered the room.
“Morning, Inspector. You're looking a bit tired. I suppose you've
fixed up all last night's business?”
“Yes, sir. Both bodies are in the mortuary; the doctor's been
warned about the P.M.’s; the coroner's been informed about the
inquests. And I've got young Hassendean's papers all collected. I
haven't had time to do more than glance through them yet, sir.”
Sir Clinton gave a nod of approval and flipped the telegram
across his desk.
“Sit down and have a look at that, Inspector. You can add it to
your collection.”
Flamborough secured the slip of paper and glanced over it as he
pulled a chair towards the desk.
“ ‘Chief Constable, Westerhaven. Try hassendean bungalow
lizardbridge road justice.’ H'm! Handed in at the G.P.O. at 8.5 a.m.
this morning. Seems to err a bit on the side of conciseness. He could
have had three more words for his bob, and they wouldn't have
come amiss. Who sent it, sir?”
“A member of the Order of the Helpful Hand, perhaps. I found it
on my desk when I came in a few minutes ago. Now you know as
much about it as I do, Inspector.”
“One of these amateur sleuths, you think, sir?” asked the
Inspector, and the sub-acid tinge in his tone betrayed his opinion of
uninvited assistants. “I had about my fill of that lot when we were
handling that Laxfield affair last year.”
He paused for a moment, and then continued:
“He's been pretty sharp with his help. It's handed in at 8.5 a.m.
and the only thing published about the affair is a stop-press note
shoved into the Herald. I bought a copy as I came along the road.
Candidly, sir, it looks to me like a leg-pull.”
He glanced over the telegram disparagingly.
“What does he mean by ‘Lizardbridge road justice’? There's no
J.P. living on the Lizardbridge Road; and even if there were, the thing
doesn't make sense to me.”
“I think ‘justice’ is the signature, Inspector—what one might term
his nom-de-kid, if one leaned towards slang, which of course you
never do.”
The Inspector grinned. His unofficial language differed
considerably from his official vocabulary, and Sir Clinton knew it.
“Justice? I like that!” Flamborough ejaculated contemptuously, as
he put the telegram down on the desk.
“It looks rather as though he wanted somebody's blood,” Sir
Clinton answered carelessly. “But all the same, Inspector, we can't
afford to put it into the waste-paper basket. We're very short of
anything you could call a real clue in both these cases last night,
remember. It won't do to neglect this, even if it does turn out to be a
mare's nest.”
Inspector Flamborough shrugged his shoulders almost
imperceptibly, as though to indicate that the decision was none of
his.
“I'll send a man down to the G.P.O. to make inquiries at once, sir,
if you think it necessary. At that time in the morning there can't have
been many wires handed in and we ought to be able to get some
description of the sender.”
“Possibly,” was as far as Sir Clinton seemed inclined to go. “Send
off your man, Inspector. And while he's away, please find out
something about this Hassendean Bungalow, as our friend calls it.
It's bound to be known to the Post Office people, and you'd better
get on the local P.O. which sends out letters to it. The man who
delivers the post there will be able to tell you something about it. Get
the 'phone to work at once. If it's a hoax, we may as well know that
at the earliest moment.”
“Very well, sir,” said the Inspector, recognising that it was useless
to convert Sir Clinton to his own view.
He picked up the telegram, put it in his pocket, and left the room.
When the Inspector had gone, Sir Clinton ran rapidly through his
letters, and then turned to the documents in the wire baskets. He
had the knack of working his mind by compartments when he chose,
and it was not until Flamborough returned with his report that the
Chief Constable gave any further thought to the Hassendean case.
He knew that the Inspector could be trusted to get the last tittle of
useful information when he had been ordered to do so.
“The Hassendeans have a bungalow on the Lizardbridge Road,
sir,” Flamborough confessed when he came back once more. “I got
the local postman to the 'phone and he gave me as much as one
could expect. Old Hassendean built the thing as a spec., hoping to
get a good price for it. Ran it up just after the war. But it cost too
much, and he's been left with it on his hands. It's just off the road, on
the hill about half-way between here and the new place they've been
building lately, that farm affair.”
“Oh, there?” Sir Clinton answered. “I think I know the place. I've
driven past it often: a brown-tiled roof and a lot of wood on the front
of the house.”
“That's it, sir. The postman described it to me.”
“Anything more about it?”
“It's empty most of the year, sir. The Hassendeans use it as a
kind of summer place—shift up there in the late spring, usually, the
postman said. It overlooks the sea and stands high, you remember.
Plenty of fresh air. But it's shut up just now, sir. They came back to
town over two months ago—middle of September or thereabouts.”
Sir Clinton seemed to wake up suddenly.
“That fails to stir you, Inspector? Strange! Now it interests me
devilishly, I can assure you. We'll run up there now in my car.”
The Inspector was obviously disconcerted by this sudden desire
for travel.
“It's hardly worth your while to go all that way, sir,” he protested. “I
can easily go out myself if you think it necessary.”
Sir Clinton signed a couple of documents before replying. Then
he rose from his chair.
“I don't mind saying, Inspector, that two murders within three
hours is too high an average for my taste when they happen in my
district. It's a case of all hands to the pumps, now, until we manage
to get on the track. I'm not taking the thing out of your hands. It's
simply going on the basis that two heads are better than one. We've
got to get to the bottom of the business as quick as we can.”
“I quite understand, sir,” Flamborough acknowledged without
pique. “There's no grudge in the matter. I'm only afraid that this
business is a practical joke and you'll be wasting your time.”
Sir Clinton dissented from the last statement with a movement of
his hand.
“By the way,” he added, “we ought to take a doctor with us. If
there's anything in the thing at all, I've a feeling that Mr. Justice
hasn't disturbed us for a trifle. Let's see. Dr. Steel will have his hands
full with things just now; we'll need to get someone else. That
Ringwood man has his wits about him, from what I saw of him. Ring
him up, Inspector, and ask him if he can spare the time. Tell him
what it's about, and if he's the sportsman I take him for, he'll come if
he can manage it. Tell him we'll call for him in ten minutes and bring
him home again as quick as we can. And get them to bring my car
round now.”
Twenty minutes later, as they passed up an avenue, Sir Clinton
turned to Dr. Ringwood:
“Recognise it, doctor?”
Dr. Ringwood shook his head.
“Never seen it before to my knowledge.”
“You were here last night, though. Look, there's Ivy Lodge.”
“So I see by the name on the gate-post. But remember it's the
first time I've seen the house itself. The fog hid everything last night.”
Sir Clinton swung the car to the left at the end of the avenue.
“We shan't be long now. It's a straight road out from here to the
place we're bound for.”
As they reached the outskirts of Westerhaven, Sir Clinton
increased his speed, and in a very short time Dr. Ringwood found
himself approaching a long low bungalow which faced the sea-view
at a little distance from the road. It had been built in the shelter of a
plantation, the trees of which dominated it on one side; and the
garden was dotted with clumps of quick-growing shrubs which
helped to give it the appearance of maturity.
Inspector Flamborough stepped down from the back seat of the
car as Sir Clinton drew up.
“The gate's not locked,” he reported, as he went up to it. “Just
wait a moment, sir, while I have a look at the surface of the drive.”
He walked a short distance towards the house, with his eyes on
the ground; then he returned and swung the leaves of the gate open
for the car to pass.
“You can drive in, sir,” he reported. “The ground was hard last
night, you remember; and there isn't a sign of anything in the way of
footmarks or wheel-prints to be seen there.”
As the car passed him, he swung himself aboard again; and Sir
Clinton drove up to near the house.
“We'll get down here, I think, and walk the rest,” he proposed,
switching off his engine. “Let's see. Curtains all drawn. . . . Hullo!
One of the small panes of glass on that front window has been
smashed, just at the lever catch. You owe an apology to Mr. Justice,
Inspector, I think. He's not brought us here to an absolute mare's
nest, at any rate. There's been housebreaking going on.”
Followed by the others, he walked over to the damaged window
and examined it carefully.
“No foot-prints or anything of that sort to be seen,” he pointed out,
glancing at the window-sill. “The window's been shut, apparently,
after the housebreaker got in—if he did get in at all. That would be
an obvious precaution, in case the open window caught someone's
eye.”
He transferred his attention to the casement itself. It was a steel-
framed one, some four feet high by twenty inches wide, which
formed part of a set of three which together made up the complete
window. Steel bars divided it into eight small panes.
“The Burglar's Delight!” Sir Clinton described it scornfully. “You
knock in one pane, just like this; then you put your hand through;
turn the lever-fastener; swing the casement back on its hinges—and
walk inside. There isn't even the trouble of hoisting a sash as you
have to do with the old-fashioned window. Two seconds would see
you inside the house, with only this affair to tackle.”
He glanced doubtfully at the lever handle behind the broken
glass.
“There might be finger-prints on that,” he said. “I don't want to
touch it. Just go round to the front door, Inspector, and see if it's
open by any chance. If not, we'll smash the glass at the other end of
this window and use the second casement to get in by, so as not to
confuse things.”
When the Inspector had reported the front door locked, the Chief
Constable carried out his proposal; the untouched casement swung
open, and they prepared to enter the room, which hitherto had been
concealed from them by the drawn curtains. Sir Clinton led the way,
and as he pushed the curtain out of his road, his companions heard
a bitten-off exclamation.
“Not much of a mare's nest, Inspector,” he continued in a cooler
tone. “Get inside.”
The Inspector, followed by Dr. Ringwood, climbed through the
open casement and stared in astonishment at the sight before them.
The place they had entered was evidently one of the sitting-rooms of
the bungalow, and the dust-sheets which covered the furniture
indicated that the building had been shut up for the winter. In a big
arm-chair, facing them as they entered, sat the body of a girl in
evening dress with a cloak around her shoulders. A slight trail of
blood had oozed from a wound in her head and marked her shoulder
on the right side. On the floor at her feet lay an automatic pistol. One
or two small chairs seemed to have been displaced roughly in the
room, as though some struggle had taken place; but the attitude of
the girl in the chair was perfectly natural. It seemed as though she
had sat down merely to rest and death had come upon her without
any warning, for her face had no tinge of fear in its expression.
“I wasn't far out in putting my money on Mr. Justice, Inspector,”
Sir Clinton said thoughtfully, as he gazed at the dead girl. “It might
have been days before we came across this affair without his help.”
He glanced round the room for a moment, biting his lip as though
perplexed by some problem.
“We'd better have a general look round before touching the
details,” he suggested, at last; and he led the way out of the room
into the hall of the bungalow. “We'll try the rooms as we come to
them.”
Suiting the action to the word, he opened the first door that came
to hand. It proved to be that of a dismantled bedroom. The dressing-
table was bare and everything had been removed from the bed
expect a wire mattress. The second door led into what was obviously
the dining-room of the bungalow; and here again the appearance of
the room showed that the house had been shut up for the season. A
third trial revealed a lavatory.
“H'm! Clean towels hanging on the rail?” Sir Clinton pointed out.
“That's unusual in an empty house, isn't it?”
Without waiting for a minuter examination, he turned to the next
door.
“Some sort of store-room, apparently. These mattresses belong
to the beds, obviously.”
Along one side of the little room were curtained shelves. Sir
Clinton slid back the curtains and revealed the stacked house-
napery, towels, and sheets.
“Somebody seems to have been helping themselves here,” he
indicated, drawing his companions’ attention to one or two places
where the orderly piling of the materials had been disturbed by
careless withdrawals. “We'll try again.”
The next room provided a complete contrast to the rest of the
house. It was a bedroom with all its fittings in place. The bed, fully
made up, had obviously not been slept in. The dressing-table was
covered with the usual trifles which a girl uses in her toilette. Vases,
which obviously did not belong to the normal equipment of the room,
had been collected here and filled with a profusion of expensive
flowers. Most surprising of all, an electric stove, turned on at half
power, kept the room warm.
“She's been living here!” the Inspector exclaimed in a tone which
revealed his astonishment.
Sir Clinton made a gesture of dissent. He crossed the room, and
threw open the door of a cupboard wardrobe, revealing empty hooks
and shelves.
“She'd hardly be living here with nothing but an evening frock in
the way of clothes, would she?” he asked. “You can look round if you
like, Inspector; but I'm prepared to bet that she never set foot in this
room. You won't find much.”
He stepped over to the dressing-table and examined one by one
the knick-knacks placed upon it.
“These things are all split-new, Inspector. Look at this face-
powder box—not been opened, the band's still intact on it. And the
lip-stick's unused. You can see that at a glance.”
Flamborough had to admit the truth of his superior's statements.
“H'm!” he reflected. “Of course it's Mrs. Silverdale, I suppose,
sir?”
“I should think so, but we can make sure about it very soon. In
the meantime, let's finish going round the premises.”
The rest of the survey revealed very little. The remainder of the
house was obviously dismantled for the winter. Only once did Sir
Clinton halt for any time, and that was in the pantry. Here he
examined the cups suspended from hooks on the wall and pointed
out to Flamborough the faint film of accumulated dust on each of
them.
“None of that crockery has been used for weeks, Inspector. One
can't live in a house without eating and drinking, you know.”
“A port of call, then?” the Inspector persisted. “She and young
Hassendean could drop in here without rousing any suspicion.”
“Perhaps,” Sir Clinton conceded abstractedly. “Now we'll get Dr.
Ringwood to give his assistance.”
He led the way back to the room through which they had entered
the house.
“She was dead before that shot was fired, of course,” he said as
they crossed the threshold. “But beyond that there ought to be
something to be seen.”
“What makes you so sure that the shot didn't kill her, sir?” the
Inspector demanded.
“Because there wasn't half enough blood scattered about the
place. She was dead when the shot was fired—must have been
dead for some minutes, I suspect. There was no heart-action to lift
the blood in her body, so consequently it sank under gravity and left
her skull nearly empty of it. Then when the shot was fired, only the
merest trickle came from the wound. I think that's right, isn't it,
doctor?”
“It's quite on the cards,” Dr. Ringwood agreed. “Certainly there
wasn't the normal amount of bleeding that one might have
expected.”
“Then the really important point is: how did she come to die. This
is where we rely on you, doctor. Go ahead, please, and see what
you make of it.”
Dr. Ringwood went over to the arm-chair and began his
examination of the dead girl. His glance travelled first to the open

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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

A. Many investors on fixed incomes buy them.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

A. original issue discount

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

A. original issue discount

AACSB: Reflective Thinking

A. U.S. Treasury 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?

A. a bond whose coupon rate is equal to the market interest rates

AACSB: Reflective Thinking

16. Which of the following is a true statement?

AACSB: Reflective Thinking

A. credit quality risk

AACSB: Reflective Thinking

A. credit quality risk

AACSB: Reflective Thinking

A. credit quality risk

AACSB: Reflective Thinking

20. A bond's current yield is defined as

AACSB: Reflective Thinking

A. They are able to avoid interest rate risk.

AACSB: Reflective Thinking

A. They are able to avoid interest rate risk.

AACSB: Reflective Thinking

A. credit quality risk

AACSB: Reflective Thinking

A. credit quality risk bonds

AACSB: Reflective Thinking

A. $5.50, $6.45, $0, respectively

AACSB: Analytical Thinking

A. $2.50, $3.15, $0, respectively

AACSB: Analytical Thinking

A. $4.00, $4.75, $0, respectively

4 percent coupon corporate bond (paid semiannually): 0.5 × 4% × $1,000 = $20.00.

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking

AACSB: Analytical Thinking