Exam 3: Valuing Bonds

Which of the following statements about the relationship between interest rates and bond prices is true? I. There is an inverse relationship between bond prices and interest rates. II) There is a direct relationship between bond prices and interest rates. III. The price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates. (Assuming that coupon rate is the same for both) IV. The price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates. (Assuming that the coupon rate is the same for both)

A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and maturing in five years. The interest payments are made annually. Calculate the yield to maturity of the bond (in euros) if the price of the bond is 106 euros.

Which of the following statements is true? I. The spot interest rate is a weighted average of yields to maturity II. Yield to maturity is the weighted average of spot interest rates and estimated forward rates III. The yield to maturity is always higher than the spot rates

Briefly discuss the concept of volatility.

Treasury bonds do not have default risk, but are subject to inflation risk.

What is the relationship between interest rates and bond prices?

Briefly explain the expectations theory.

How can one invest today at the 2-year forward rate of interest? I. By buying a 2-year bond and selling a 1-year bond with the same coupon II. By buying a 1-year bond and selling a 2-year bond with the same coupon III. By buying a 1-year bond and then after a year reinvesting in a further 1-year bond

The expectations hypothesis states that the forward interest rate is the: I. expected future spot rate II. always greater than the spot rate III. yield to maturity

The longer a bond's duration greater is its volatility.

In the US, most bonds make coupon payments annually.

The type of bonds where the identities of bonds' owners are recorded and the coupon interest payments are sent automatically are called:

A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and maturing in five years. The interest payments are made annually. Calculate the price of the bond (in euros)if the yield to maturity is 3.5%.

The duration of a zero coupon bond is the same as its maturity.

Interest represented by "r2" is:

If a bond's volatility is 5% and the interest rate changes by 0.5% (points) then the price of the bond:

Volatility of a bond is given by: I. Duration/ (1 + yield) II. Slope of the curve relating the bond price to the interest rate III. Yield to maturity

A four-year bond has an 8% coupon rate and a face value of $1000. If the current price of the bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest payments).

If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real rate of interest?

A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon interest payments.