Question 1

For a given interest rate change,a 20-year bond's price change will be twice that of a 10-year bond's price change.

Accepted Answer

A) True 
 B)False  False

Question 2

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

Accepted Answer

A) 10.00 years 
B) 8.39 years 
C) 6.45 years 
D) 5.20 years 
E) 7.35 years 
A) 10.00 years 
B) 8.39 years 
C) 6.45 years 
D) 5.20 years 
E) 7.35 years E

Question 3

Which of the following bond terms are generally positively related to bond price volatility?
I. Coupon rate
II. Maturity
III. YTM
IV. Payment frequency

Accepted Answer

A) II and IV only 
B) I and III only 
C) II and III only 
D) II only 
E) II,III,and IV only 
A) II and IV only 
B) I and III only 
C) II and III only 
D) II only 
E) II,III,and IV only D

Question 4

Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years and 60 percent of its cost in the sixth year. If A and B have the same required return,which of the following is/are true?
I. Bond A has a bigger coupon than Bond B.
II. Bond A has a longer duration than Bond B.
III. Bond A is less price-volatile than Bond B.
IV. Bond B has a higher FPV than Bond A.

Accepted Answer

A)  III only 
B)  I,III,and IV only 
C)  I,II,and IV only 
D)  II and IV only 
E)  I,II,III,and IV 
A)  III only 
B)  I,III,and IV only 
C)  I,II,and IV only 
D)  II and IV only 
E)  I,II,III,and IV

Question 5

If a security's realized return is negative,it must have been true that the expected return was greater than the required return.

Accepted Answer

A) True 
 B)False

Question 6

Suppose two bonds of equivalent risk and maturity have different prices such that one is a premium bond and one is a discount bond. The premium bond must have a greater expected return than the discount bond.

Accepted Answer

A) True 
 B)False

Question 7

The preferred stock of ACE pays a constant $1.00 per share dividend. The common stock of ACME just paid a $1.00 dividend per share,but its dividend is expected to grow at 4 percent per year forever. ABLE common stock also just paid a dividend of $1.00 per share,but its dividend is expected to grow at 10 percent per year for five years and then grow at 4 percent per year forever. All three stocks have a 12 percent required return. How much should you be willing to pay for a share of each stock?
 Which stock will give you the best return?
 Explain.

Accepted Answer

ACE: P = 1/0.12 = $8.33
ACME: P = 1(1.04

Question 8

A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.

Accepted Answer

A) True 
 B)False

Question 9

The duration of a four-year maturity 10 percent coupon bond is less than four years.

Accepted Answer

A) True 
 B)False

Question 10

An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually?

Accepted Answer

A) $1,062.81 
B) $1,062.10 
C) $1,053.45 
D) $1,052.99 
E) $1,049.49 
A) $1,062.81 
B) $1,062.10 
C) $1,053.45 
D) $1,052.99 
E) $1,049.49

Question 11

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r)must be

Accepted Answer

A) 13.49 percent. 
B) 5.80 percent. 
C) 7.00 percent. 
D) 1.69 percent. 
E) 4.25 percent. 
A) 13.49 percent. 
B) 5.80 percent. 
C) 7.00 percent. 
D) 1.69 percent. 
E) 4.25 percent.

Question 12

A four-year maturity 0 percent coupon corporate bond with a required rate of return of 12 percent has an annual duration of _______________ years.

Accepted Answer

A) 3.05 
B) 2.97 
C) 3.22 
D) 3.71 
E) 4.00 
A) 3.05 
B) 2.97 
C) 3.22 
D) 3.71 
E) 4.00

Question 13

For large interest rate increases,duration _____________ the fall in security prices,and for large interest rate decreases,duration ______________ the rise in security prices.

Accepted Answer

A) overpredicts; overpredicts 
B) overpredicts; underpredicts 
C) underpredicts; overpredicts 
D) underpredicts; underpredicts 
E) None of the options presented 
A) overpredicts; overpredicts 
B) overpredicts; underpredicts 
C) underpredicts; overpredicts 
D) underpredicts; underpredicts 
E) None of the options presented

Question 14

You have five years until you need to take your money out of your investments to make a planned expenditure. Right now bonds are promising an 8 percent return. You buy a five-year duration bond. After you buy the bond,interest rates fall to 6 percent and stay there for the full five years. You reinvest the coupons and earn 6 percent. Will your realized return be more or less than the originally promised 8 percent?
 Explain.

Accepted Answer

You will earn the promised 8 percent ret

Question 15

An investor owned a 9 percent annual payment coupon bond for six years that was originally purchased at a 9 percent required return. She did not reinvest any coupons (she kept the money under her mattress). She redeemed the bond at par. What was her annual realized rate of return?
 What if she did reinvest the coupons but only earned 5 percent on each coupon?
 Why are your answers not equal to 9 percent?

Accepted Answer

You can't use the bond price formula in

Question 16

Which would have a longer duration:
 (a)a five-year fully amortized installment loan with semiannual payments or (b)a five-year semiannual payment bond,ceteris paribus. Why?

Accepted Answer

The bond will have a longer duration bec

Question 17

Higher interest rates lead to lower bond convexity,ceteris paribus.

Accepted Answer

A) True 
 B)False

Question 18

Explain the effects of coupon and maturity on volatility.

Accepted Answer

The longer the maturity,the greater the

Question 19

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

Accepted Answer

A) $1,261.32 
B) $1,253.12 
C) $1,250.94 
D) $1,263.45 
E) $1,264.79 
A) $1,261.32 
B) $1,253.12 
C) $1,250.94 
D) $1,263.45 
E) $1,264.79

Question 20

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

Accepted Answer

A) $0.00 
B) Overpriced by $14.18 
C) Underpriced by $14.18 
D) Overpriced by $9.32 
E) Underpriced by $9.32 
A) $0.00 
B) Overpriced by $14.18 
C) Underpriced by $14.18 
D) Overpriced by $9.32 
E) Underpriced by $9.32

For a given interest rate change,a 20-year bond's price change will be twice that of a 10-year bond's price change.

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency

If a security's realized return is negative,it must have been true that the expected return was greater than the required return.

Suppose two bonds of equivalent risk and maturity have different prices such that one is a premium bond and one is a discount bond. The premium bond must have a greater expected return than the discount bond.

A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.

The duration of a four-year maturity 10 percent coupon bond is less than four years.

An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually?

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r)must be

A four-year maturity 0 percent coupon corporate bond with a required rate of return of 12 percent has an annual duration of _______________ years.

For large interest rate increases,duration _ the fall in security prices,and for large interest rate decreases,duration __ the rise in security prices.

Which would have a longer duration: (a)a five-year fully amortized installment loan with semiannual payments or (b)a five-year semiannual payment bond,ceteris paribus. Why?

Higher interest rates lead to lower bond convexity,ceteris paribus.

Explain the effects of coupon and maturity on volatility.

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

Introduction

Determinants of Interest Rates

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

Exam 3: Interest Rates and Security Valuation

For a given interest rate change,a 20-year bond's price change will be twice that of a 10-year bond's price change.

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency

If a security's realized return is negative,it must have been true that the expected return was greater than the required return.

Suppose two bonds of equivalent risk and maturity have different prices such that one is a premium bond and one is a discount bond. The premium bond must have a greater expected return than the discount bond.

A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.

The duration of a four-year maturity 10 percent coupon bond is less than four years.

An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually?

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r)must be

A four-year maturity 0 percent coupon corporate bond with a required rate of return of 12 percent has an annual duration of _______________ years.

For large interest rate increases,duration _____________ the fall in security prices,and for large interest rate decreases,duration ______________ the rise in security prices.

Which would have a longer duration: (a)a five-year fully amortized installment loan with semiannual payments or (b)a five-year semiannual payment bond,ceteris paribus. Why?

Higher interest rates lead to lower bond convexity,ceteris paribus.

Explain the effects of coupon and maturity on volatility.

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

Introduction

Determinants of Interest Rates

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

For large interest rate increases,duration _ the fall in security prices,and for large interest rate decreases,duration __ the rise in security prices.