Exam 18: The Analysis and Valuation of Bonds

Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.

Suppose the current 6 year spot rate is 8% and the current 5 year spot rate is 7%. What is the one year forward rate in five years?

Assume that you purchase a 10-year $1,000 par value bond, with a 12% coupon, and a yield of 9%. Immediately after you purchase the bond, yields fall to 8% and remain at that level to maturity. Calculate the realized horizon yield, if you hold the bond for 5 years and then sell. Interest is paid annually.

There is an inverse relationship between duration and coupon.

The fundamental determinants of interest rates are the real risk free rate, inflation, and the risk premium.

Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is 10 percent and interest is paid semiannually.

If the price before yields changed was $950, what is the resulting price?

The internal rate of return is that discount rate that sets the present value of cash flows from an investment equal to its par value.

Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.

The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.

The option adjusted duration will approach the duration to maturity, when

Consider a 12%, 15 year bond that pays interest semiannually, and its current price is $675. What is the promised yield to maturity?

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 Macaulay duration of the Talmart corporate bonds?

Yield to maturity and current yield are equal when the bond is selling for exactly par value.

According to the liquidity preference hypothesis yield curves generally slope upward because

What is the current price of a zero coupon bond with a 6% yield to maturity that matures in 15 years?

There is a direct relationship between coupon and price.

The term structure of interest rates is a dynamic function that relates the term to maturity to the yield to maturity of bonds.

A graph of a bond's Price-Yield curve reveals all of the following except

Consider a zero coupon bond that has a current price of $436.19 and matures in 10 years. What is its yield to maturity?