Bond Pricing Quiz

Which of the following best describes yield to maturity (YTM) on a bond?

• The coupon rate the bond pays annually.

• The current market price of the bond compared to its face value.

• The total return an investor can expect if the bond is held until it matures, assuming all payments are made as scheduled.

• The interest rate set by the Federal Reserve that influences bond yields.

What is the most important characteristic to consider when choosing a strong bond comparable?

• Tenor

• Credit Rating

• Trading Volume

• Industry

What rate is used to discount future cash flows to calculate bond price?

• Coupon

• Yield to Maturity

• UST Yield

• Risk Free Rate

Why do bond prices fall when market interest rates rise?

• The bond issuer reduces coupon payments.

• The bond’s fixed payments become less attractive compared to new bonds.

• The bondholder loses their principal at maturity.

• The bond’s maturity date is extended.

Suppose a bond has a coupon rate of 5%. Market interest rates fall to 3%. What is most likely to happen to the bond’s price in the secondary market?

• The bond’s price will fall below par and trade at a discount.

• The bond’s price will fall to zero.

• The bond’s price will stay exactly at par, since coupon payments don’t change.

• The bond’s price will rise above par and trade at a premium.

Which of the following best describes a discount bond?

• A bond sold below its par value because its coupon rate is lower than current market rates.

• A bond sold above its par value because its coupon rate is higher than current market rates.

• A bond that always pays less than its stated coupon rate.

• A bond that the issuer can buy back before maturity.

A bond has a face value of $1,000 and a coupon rate of 3%. New bonds in the market are paying 6%. How will this bond most likely trade?

• At a premium, above $1,000.

• At par, exactly $1,000.

• At a discount, below $1,000.

• At maturity, exactly $0.

Company A (Rated AA), Company B (Rated BBB), and Company C (Rated A) are in the same industry.  Last week, Company A issued a 5yr bond at Treasuries + 100bp and a 30yr bond at Treasuries + 120bp.  Company B issued a 10yr bond at Treasuries + 160bp and a 30yr bond at Treasuries + 180bp last week. Where would you expect a new 10yr bond to price for Company C?

• 
  T+120bp

• T+160bp

• T+135bp

• You don't have enough information

Starbucks (SBUX) has an A– credit rating and is issuing a 7-year bond. Which of the following is the best comparable bond?

• McDonald’s 10-year bond, rated BBB+

• Nike 7-year bond, rated A–

• PepsiCo 5-year bond, rated A

• Chipotle 7-year bond, rated BB+

Company A issued a 5yr bond at Treasuries + 100bp and a 3yr bond at Treasuries + 90bp in January 2025. The same Company issued a 10yr bond last week at Treasuries + 80bp. The current 5s10s spread for Company A is about +5bp.

What is the most reasonable indicative pricing for a new 5yr bond from Company A?

• • T+70bp

• • T+100bp

• • T+75bps

• • T+80bp