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Multiple Choice Quiz
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1
The probability of default reduces the
A)promised yield
B)expected yield
C)coupon rate
D)discount rate
2
Governments can default on Treasury bonds.
A)True
B)False
3
What is the expected payout on a bond with a 20% chance of paying $800 and a 80% chance of paying $1050?
A)$160
B)$210
C)$800
D)$1,000
4
What is the expected payout on a bond with a 25% chance of paying $750 and a 75% chance of paying $1150?
A)$187.50
B)$862.50
C)$1,050.00
D)$1,150.00
5
A corporate bond has one year until maturity. The bond pays an interest of $50 and principal of $1,000 at the time of maturity. The bond has 10% probability of default and payment under default is $400, and an investor buys the bond for $938.10. Calculate the promised yield on the bond. (Assume no default.)
A)6.6%
B)11.93%
C)5.0%
D)9.07%
6
If the discount rate on the bond is 5% and the expected payment in year 1 is $952.50, calculate the price of the bond.
A)$1050.59
B)$985.00
C)$907.14
D)$940.75
7
What is the promised yield on a 4% annual coupon bond with a $500 par value if the PV of the expected payout is $400?
A)10%
B)20%
C)30%
D)40%
8
The bond value can be expressed as
A)value of put option on assets − bond value assuming no chance of default
B)bond value assuming no chance of default − value of put option on assets
C)value of call option on assets − bond value assuming no chance of default
D)value of call option on assets − value of put option on assets
9
The bond value can be expressed as
A)value of put option on assets − bond value assuming no chance of default
B)value of call option on assets − value of put option on assets
C)value of call option on assets − bond value assuming no chance of default
D)asset value − value of call option on assets
10
The higher the leverage and longer the maturity:
A)The higher the value
B)The lesser the proportion of risk that is assumed by shareholders
C)The greater the proportion of risk that is assumed by debt-holders
D)None of these options
11
A Moody's bond rating of Baa is referred to as
A)investment grade bonds
B)yankee bonds
C)Eurobonds
D)junk bonds
12
The lowest Moody's rating for investment grade bonds is
A)A
B)Baa
C)Caa
D)Ba
13
The lowest S&P's and Fitch rating for investment grade bonds is
A)AA
B)BBB
C)BB
D)CC
14
The highest S&P's and Fitch rating for junk bonds is
A)AA
B)BBB
C)BB
D)CC
15
You can insure corporate bonds by using
A)Yield spread
B)Put option
C)Credit default swap
D)Default put





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