Question 1

Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.

Accepted Answer

A) 15% 
B) 16.5% 
C) 7.65% 
D) 8.52% 
E) 9.64% 
A) 15% 
B) 16.5% 
C) 7.65% 
D) 8.52% 
E) 9.64%

Question 2

The annual interest paid on a bond relative to its prevailing market price is called its ____.

Accepted Answer

A) Promised yield 
B) Yield to maturity 
C) Coupon rate 
D) Effective yield 
E) Current yield 
A) Promised yield 
B) Yield to maturity 
C) Coupon rate 
D) Effective yield 
E) Current yield

Question 3

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6% and a required rate of return of 8%.

Accepted Answer

A) 7.04 
B) 7.17 
C) 7.31 
D) 7.38 
E) 8.12 
A) 7.04 
B) 7.17 
C) 7.31 
D) 7.38 
E) 8.12

Question 4

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. If interest rates increase 50 basis points, what will be the approximate price change for the Talmart bond?

Accepted Answer

A) -17.0% 
B) -1.7% 
C) 1.7% 
D) 1.8% 
E) 17.0% 
A) -17.0% 
B) -1.7% 
C) 1.7% 
D) 1.8% 
E) 17.0%

Question 5

Consider a bond with a duration of 7 years having a yield to maturity of 7% and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

Accepted Answer

A) 3.62% 
B) 3.45% 
C) -3.38% 
D) 3.38% 
E) -3.62% 
A) 3.62% 
B) 3.45% 
C) -3.38% 
D) 3.38% 
E) -3.62%

Question 6

The price-yield curve is a concave curve representing the relationship of bond prices and yields.

Accepted Answer

A) True 
 B)False

Question 7

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a ____ coupon and a ____ term to maturity.

Accepted Answer

A) Low, short 
B) Low, long 
C) High, short 
D) High, long 
E) Zero, very long 
A) Low, short 
B) Low, long 
C) High, short 
D) High, long 
E) Zero, very long

Question 8

If you expected interest rates to rise, 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 9

According to the segmented-market hypothesis a downward sloping 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 10

Option adjusted duration can be calculated as

Accepted Answer

A) Duration of noncallable bond - duration of call option on the bond. 
B) Duration of noncallable bond + duration of call option on the bond. 
C) Duration of callable bond - duration of call option on the bond. 
D) Duration of callable bond + duration of call option on the bond. 
E) None of the above. 
A) Duration of noncallable bond - duration of call option on the bond. 
B) Duration of noncallable bond + duration of call option on the bond. 
C) Duration of callable bond - duration of call option on the bond. 
D) Duration of callable bond + duration of call option on the bond. 
E) None of the above.

Question 11

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

Accepted Answer

A) Expectations hypothesis 
B) Liquidity preference hypothesis 
C) Segmented market hypothesis 
D) Preferred habitat hypothesis 
E) Hedging pressure hypothesis 
A) Expectations hypothesis 
B) Liquidity preference hypothesis 
C) Segmented market hypothesis 
D) Preferred habitat hypothesis 
E) Hedging pressure hypothesis

Question 12

A 15-year bond, purchased 5 years ago, has a $1,000 par value bond, a 10 percent coupon and a yield to maturity of 12%. Interest is paid annually. The bond's price is

Accepted Answer

A) $864 
B) $887 
C) $1152 
D) $1123 
E) None of the above 
A) $864 
B) $887 
C) $1152 
D) $1123 
E) None of the above

Question 13

Estimate the percentage price change for a 5-year $1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.

Accepted Answer

A) 2.1% 
B) -2.1% 
C) 4.4% 
D) -4.4% 
E) None of the above 
A) 2.1% 
B) -2.1% 
C) 4.4% 
D) -4.4% 
E) None of the above

Question 14

Which of the following statements is true?

Accepted Answer

A) An inverse relationship exists between coupon and convexity. 
B) A direct relationship exists between maturity and convexity. 
C) An inverse relationship exists between yield and convexity. 
D) Choices a and c only 
E) All of the above statements are true 
A) An inverse relationship exists between coupon and convexity. 
B) A direct relationship exists between maturity and convexity. 
C) An inverse relationship exists between yield and convexity. 
D) Choices a and c only 
E) All of the above statements are true

Question 15

Which of the four major yield spreads defines the difference in yields between pure government agency bonds and corporate bonds?

Accepted Answer

A) Segments 
B) Sectors 
C) Coupons 
D) Seasoning 
E) Maturity 
A) Segments 
B) Sectors 
C) Coupons 
D) Seasoning 
E) Maturity

Question 16

The position of a bondholder that is long a callable bond is equal to being

Accepted Answer

A) Long a noncallable bond + long a call option on the bond. 
B) Long a noncallable bond + short a call option on the bond. 
C) Short a noncallable bond + long a call option on the bond. 
D) Short a noncallable bond + short a call option on the bond. 
E) None of the above. 
A) Long a noncallable bond + long a call option on the bond. 
B) Long a noncallable bond + short a call option on the bond. 
C) Short a noncallable bond + long a call option on the bond. 
D) Short a noncallable bond + short a call option on the bond. 
E) None of the above.

Question 17

The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.

Accepted Answer

A) True 
 B)False

Question 18

Exhibit 18.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with 5 years to maturity and a 6% coupon has a yield to maturity of 8%. Interest is paid semiannually.
-Refer to Exhibit 18.1. Calculate the modified duration for the bond.

Accepted Answer

A) 4.19 years 
B) 4.36 years 
C) 8.72 years 
D) 8.38 years 
E) 9.52 years 
A) 4.19 years 
B) 4.36 years 
C) 8.72 years 
D) 8.38 years 
E) 9.52 years

Question 19

Consider a bond with a 9% coupon and a current yield of 8 1/2%. What is this bond's price?

Accepted Answer

A) $1058.82 
B) $1009.00 
C) $1085.00 
D) $1062.44 
E) $1077.96 
A) $1058.82 
B) $1009.00 
C) $1085.00 
D) $1062.44 
E) $1077.96

Question 20

A 12-year, 8 percent bond with a YTM of 12 percent has a Macaulay duration of 9.5 years. If interest rates decline by 50 basis points, what will be the percent change in price for this bond?

Accepted Answer

A) +4.48% 
B) +4.61% 
C) +8.48% 
D) +8.96% 
E) +17.92% 
A) +4.48% 
B) +4.61% 
C) +8.48% 
D) +8.96% 
E) +17.92%

Exam 18: The Analysis and Valuation of Bonds

Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.

The annual interest paid on a bond relative to its prevailing market price is called its ____.

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6% and a required rate of return of 8%.

Consider a bond with a duration of 7 years having a yield to maturity of 7% and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

The price-yield curve is a concave curve representing the relationship of bond prices and yields.

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a ____ coupon and a ____ term to maturity.

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

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

Option adjusted duration can be calculated as

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

A 15-year bond, purchased 5 years ago, has a $1,000 par value bond, a 10 percent coupon and a yield to maturity of 12%. Interest is paid annually. The bond's price is

Estimate the percentage price change for a 5-year $1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.

Which of the following statements is true?

Which of the four major yield spreads defines the difference in yields between pure government agency bonds and corporate bonds?

The position of a bondholder that is long a callable bond is equal to being

The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.

Exhibit 18.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A $1000 par value bond with 5 years to maturity and a 6% coupon has a yield to maturity of 8%. Interest is paid semiannually. -Refer to Exhibit 18.1. Calculate the modified duration for the bond.

Consider a bond with a 9% coupon and a current yield of 8 1/2%. What is this bond's price?

A 12-year, 8 percent bond with a YTM of 12 percent has a Macaulay duration of 9.5 years. If interest rates decline by 50 basis points, what will be the percent change in price for this bond?

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

Filters

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a coupon and a term to maturity.