Question 1

Bond price volatility varies directly with the term to maturity and directly with the coupon.

Accepted Answer

A) True 
 B)False

Question 2

Zappo Corporation just issued $1,000 face value bonds that will mature in 20 years and have a 7% coupon rate. Interest is paid semi-annually and the required rate of return is 9 percent for these bonds. The bonds have a 5 year call provision that will pay a call premium of $1,050 if they are called in. What is the price of the Zappo Corporation bond?

Accepted Answer

A) $815.98 
B) $817.43 
C) $826.35 
D) $920.87 
E) $953.07 
A) $815.98 
B) $817.43 
C) $826.35 
D) $920.87 
E) $953.07

Question 3

Exhibit 18.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is 6 percent for these bonds.
-Refer to Exhibit 18.2. What is the Modified duration of the Talmart corporate bonds?

Accepted Answer

A) 3.43 
B) 3.64 
C) 3.76 
D) 3.85 
E) 4.11 
A) 3.43 
B) 3.64 
C) 3.76 
D) 3.85 
E) 4.11

Question 4

If the coupon payments are not reinvested during the life of the issue then the

Accepted Answer

A) Promised yield is greater than the realized yield. 
B) Promised yield is less than the realized yield. 
C) Nominal yield declines. 
D) Nominal yield is greater than the promised yield. 
E) Current yield equals the yield to maturity. 
A) Promised yield is greater than the realized yield. 
B) Promised yield is less than the realized yield. 
C) Nominal yield declines. 
D) Nominal yield is greater than the promised yield. 
E) Current yield equals the yield to maturity.

Question 5

Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6% coupon and a yield to maturity of 8%. Interest is paid annually.

Accepted Answer

A) 6.44 years 
B) 5.25 years 
C) 4.44 years 
D) 2.50 years 
E) None of the above 
A) 6.44 years 
B) 5.25 years 
C) 4.44 years 
D) 2.50 years 
E) None of the above

Question 6

Assume that you purchase a 5-year $1,000 par value bond, with a 6% coupon, and a yield of 7%. Immediately after you purchase the bond, yields rise to 8% and remain at that level to maturity. Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.

Accepted Answer

A) 6.0% 
B) 7.11% 
C) 8.0% 
D) 15.25% 
E) 8.18% 
A) 6.0% 
B) 7.11% 
C) 8.0% 
D) 15.25% 
E) 8.18%

Question 7

Exhibit 18.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is 6 percent for these bonds.
-Refer to Exhibit 18.2. What is the price of the Talmart corporate bonds?

Accepted Answer

A) $965.63 
B) $966.13 
C) $1,034.65 
D) $1,135.10 
E) $1,051.97 
A) $965.63 
B) $966.13 
C) $1,034.65 
D) $1,135.10 
E) $1,051.97

Question 8

If the coupon payments are not reinvested during the life of the issue then the

Accepted Answer

A) Promised yield is greater than realized yield. 
B) Promised yield is less than realized yield. 
C) Nominal yield declines. 
D) Nominal yield is greater than promised yield. 
E) Current yield equals the yield to maturity. 
A) Promised yield is greater than realized yield. 
B) Promised yield is less than realized yield. 
C) Nominal yield declines. 
D) Nominal yield is greater than promised yield. 
E) Current yield equals the yield to maturity.

Question 9

Reinvestment risk is greatest for bonds that have

Accepted Answer

A) Short maturities and low coupon rates 
B) Long maturities and high coupon rates 
C) Short maturities and high coupon rates 
D) Long maturities and low coupon rates 
E) None of the above 
A) Short maturities and low coupon rates 
B) Long maturities and high coupon rates 
C) Short maturities and high coupon rates 
D) Long maturities and low coupon rates 
E) None of the above

Question 10

The major problem facing a bond analyst is the ability to forecast the basic interest rate level since yield spreads are generally inconsequential.

Accepted Answer

A) True 
 B)False

Question 11

According to the segmented-market hypothesis a rising yield curve indicates that

Accepted Answer

A) demand for long term bonds has fallen and demand for short term bonds has fallen. 
B) demand for long term bonds has risen and demand for short term bonds has fallen. 
C) demand for long term bonds has fallen and demand for short term bonds has risen. 
D) demand for long term bonds has risen and demand for short term bonds has risen. 
E) none of the above. 
A) demand for long term bonds has fallen and demand for short term bonds has fallen. 
B) demand for long term bonds has risen and demand for short term bonds has fallen. 
C) demand for long term bonds has fallen and demand for short term bonds has risen. 
D) demand for long term bonds has risen and demand for short term bonds has risen. 
E) none of the above.

Question 12

The term structure of interest rates is a static function that relates the

Accepted Answer

A) Term to call and the yield to maturity. 
B) Term to maturity and the yield to maturity. 
C) Term to call and the yield to call. 
D) Term to maturity and the coupon rate. 
E) Term to maturity and the current yield. 
A) Term to call and the yield to maturity. 
B) Term to maturity and the yield to maturity. 
C) Term to call and the yield to call. 
D) Term to maturity and the coupon rate. 
E) Term to maturity and the current yield.

Question 13

Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

Accepted Answer

A) 10.23% 
B) 18.45% 
C) 2.31% 
D) 17.77% 
E) 9.26% 
A) 10.23% 
B) 18.45% 
C) 2.31% 
D) 17.77% 
E) 9.26%

Question 14

Exhibit 18.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with 4 years to maturity and a 5% coupon has a yield to maturity of 6%. Interest is paid annually.
-Refer to Exhibit 18.3. Estimate the percentage price change for this 4-year $1,000 par value bond, with annual 5% coupon, if the yield falls from 6% to 5.5%.

Accepted Answer

A) -3.50% 
B) -1.75% 
C) 1.75% 
D) 3.50% 
E) None of the above 
A) -3.50% 
B) -1.75% 
C) 1.75% 
D) 3.50% 
E) None of the above

Question 15

The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.

Accepted Answer

A) True 
 B)False

Question 16

According to the expectations hypothesis, a rising yield curve indicates that investors' demand for long maturity bonds is expected to rise.

Accepted Answer

A) True 
 B)False

Question 17

If you expected interest rates to fall, you would prefer to own bonds with

Accepted Answer

A) short maturities and low coupons. 
B) long maturities and high coupons . 
C) long maturities and low coupons. 
D) short maturities and high coupons. 
E) none of the above. 
A) short maturities and low coupons. 
B) long maturities and high coupons . 
C) long maturities and low coupons. 
D) short maturities and high coupons. 
E) none of the above.

Question 18

A 5-year bond has a $1,000 par value bond, a 12% coupon and a yield to maturity of 8%. Interest is paid semiannually. The bond's price is

Accepted Answer

A) $864.65 
B) $1081.78 
C) $852.80 
D) $1162.22 
E) None of the above 
A) $864.65 
B) $1081.78 
C) $852.80 
D) $1162.22 
E) None of the above

Question 19

Consider a bond portfolio manager who expects interest rates to decline and has to choose between the following two bonds. Bond A: 10 years to maturity, 5% coupon, 5% yield to maturity
Bond B: 10 years to maturity, 3% coupon, 4% yield to maturity

Accepted Answer

A) Bond A because it has a higher coupon rate. 
B) Bond A because it has a higher yield to maturity. 
C) Bond B because it has a lower coupon rate. 
D) Bond A or Bond B because the maturities are the same. 
E) None of the above. 
A) Bond A because it has a higher coupon rate. 
B) Bond A because it has a higher yield to maturity. 
C) Bond B because it has a lower coupon rate. 
D) Bond A or Bond B because the maturities are the same. 
E) None of the above.

Question 20

For a given change in yield bond price volatility is inversely related to term to maturity.

Accepted Answer

A) True 
 B)False

Exam 18: The Analysis and Valuation of Bonds

Bond price volatility varies directly with the term to maturity and directly with the coupon.

If the coupon payments are not reinvested during the life of the issue then the

Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6% coupon and a yield to maturity of 8%. Interest is paid annually.

Assume that you purchase a 5-year $1,000 par value bond, with a 6% coupon, and a yield of 7%. Immediately after you purchase the bond, yields rise to 8% and remain at that level to maturity. Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.

If the coupon payments are not reinvested during the life of the issue then the

Reinvestment risk is greatest for bonds that have

The major problem facing a bond analyst is the ability to forecast the basic interest rate level since yield spreads are generally inconsequential.

According to the segmented-market hypothesis a rising yield curve indicates that

The term structure of interest rates is a static function that relates the

Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.

According to the expectations hypothesis, a rising yield curve indicates that investors' demand for long maturity bonds is expected to rise.

If you expected interest rates to fall, you would prefer to own bonds with

A 5-year bond has a $1,000 par value bond, a 12% coupon and a yield to maturity of 8%. Interest is paid semiannually. The bond's price is

Consider a bond portfolio manager who expects interest rates to decline and has to choose between the following two bonds. Bond A: 10 years to maturity, 5% coupon, 5% yield to maturity Bond B: 10 years to maturity, 3% coupon, 4% yield to maturity

For a given change in yield bond price volatility is inversely related to term to maturity.

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

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