Investments Mini-Quiz: Bond Returns

  1. All the following statements concerning bond yields are correct EXCEPT:
    1. Nominal yield is higher than current yield for a premium bond.
    2. Yield to maturity is higher for a premium bond than for a discount bond.
    3. The after-tax yield for a bond is the product of its current yield and unity minus the investor's marginal tax rate.
    4. The after-tax yield varies inversely with the investor's marginal tax rate.

  2. All the following statements concerning bond yields are correct EXCEPT:
    1. A premium bond will provide a higher annual yield to maturity than a discount bond if each has the same coupon rate.
    2. The tax-equivalent yield of a municipal security is the yield a taxable security must earn before taxes.
    3. The tax-free equivalent yield of a taxable yield is calculated by multiplying the taxable yield by 1 minus the investor's marginal income tax bracket.
    4. The yield-to-call for a bond selling on the market at par will usually be greater than the bond's yield to maturity.

  3. It is generally understood that a dollar today is worth more than a dollar in the future for all the following reasons EXCEPT:
    1. Most individuals prefer the certainty of having a dollar today to the uncertainty of receiving a dollar in the future.
    2. Many individuals regard current needs as more pressing than future needs.
    3. A dollar available today may be invested to earn a return in the form of interest or investment earnings.
    4. Taxation in the future will always be greater than taxation at present.

  4. The opportunity cost of not receiving a dollar today is:
    1. The return forfeited by receiving the dollar in the future, as measured by the interest rate.
    2. The uncertainty of not receiving the dollar in the future.
    3. The cost of printing and distributing the dollar.
    4. The sublimation of future goals.

  5. If an investor held long-term U.S. Treasury bonds currently, the investor would most likely sell them and hold money if he or she believed that interest rates will
    1. Rise far above present levels.
    2. Not change from present levels.
    3. Fluctuate up and down within a narrow range.
    4. Fall below present levels.


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