Question 1

A 10-year maturity coupon bond has a six-year duration. An equivalent 20-year bond with the same coupon has a duration

Accepted Answer

A) equal to 12 years. 
B) less than six years. 
C) less than 12 years. 
D) equal to six years. 
E) greater than 20 years. 
A) equal to 12 years. 
B) less than six years. 
C) less than 12 years. 
D) equal to six years. 
E) greater than 20 years.

Question 2

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate,a 6 percent promised YTM,and six years to maturity. What is the bond's duration?

Accepted Answer

A) 5.31 years 
B) 5.25 years 
C) 4.76 years 
D) 4.16 years 
E) 3.19 years 
A) 5.31 years 
B) 5.25 years 
C) 4.76 years 
D) 4.16 years 
E) 3.19 years

Question 3

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

Accepted Answer

A) greater than its PV. 
B) less than par. 
C) less than its E(r). 
D) less than its PV. 
E) $1,000.00. 
A) greater than its PV. 
B) less than par. 
C) less than its E(r). 
D) less than its PV. 
E) $1,000.00.

Question 4

Conceptually,why does a bond's price fall when required returns rise on an existing fixed income security?

Accepted Answer

Since the cash flows are set by contract

Question 5

Ignoring default risk,if a bond's expected return is greater than its required return,then the bond's market price must be greater than the present value of the bond's cash flows.

Accepted Answer

A) True 
 B)False

Question 6

A 10-year maturity zero coupon bond will have lower price volatility than a 10-year bond with a 10 percent coupon.

Accepted Answer

A) True 
 B)False

Question 7

A bond that pays interest annually has a 6 percent promised yield and a price of $1,025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is six years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

Accepted Answer

A) $1,042.33 
B) $995.99 
C) $1,054.01 
D) $987.44 
E) None of the options presented 
A) $1,042.33 
B) $995.99 
C) $1,054.01 
D) $987.44 
E) None of the options presented

Question 8

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7 percent. By how much is the bond mispriced?

Accepted Answer

A) $0.00 
B) Overpriced by $7.29 
C) Underpriced by $7.29 
D) Overpriced by $4.43 
E) Underpriced by $4.43 
A) $0.00 
B) Overpriced by $7.29 
C) Underpriced by $7.29 
D) Overpriced by $4.43 
E) Underpriced by $4.43

Question 9

A bond that pays interest semiannually has a 6 percent promised yield and a price of $1,045. Annual interest rates are now projected to increase 50 basis points. The bond's duration is five years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

Accepted Answer

A) $1,020.35 
B) $1,069.65 
C) $1,070.36 
D) $1,019.64 
E) None of the options presented 
A) $1,020.35 
B) $1,069.65 
C) $1,070.36 
D) $1,019.64 
E) None of the options presented

Question 10

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

Accepted Answer

A) $924.18. 
B) $1,000.00. 
C) $879.68. 
D) $1,124.83. 
E) not possible to determine from the information given. 
A) $924.18. 
B) $1,000.00. 
C) $879.68. 
D) $1,124.83. 
E) not possible to determine from the information given.

Question 11

An annual payment bond has a 9 percent required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change?

Accepted Answer

A) -2.75 percent 
B) 33.33 percent 
C) 1.95 percent 
D) -1.95 percent 
E) 2.75 percent 
A) -2.75 percent 
B) 33.33 percent 
C) 1.95 percent 
D) -1.95 percent 
E) 2.75 percent

Question 12

A decrease in interest rates will

Accepted Answer

A) decrease the bond's PV. 
B) increase the bond's duration. 
C) lower the bond's coupon rate. 
D) change the bond's payment frequency. 
E) not affect the bond's duration. 
A) decrease the bond's PV. 
B) increase the bond's duration. 
C) lower the bond's coupon rate. 
D) change the bond's payment frequency. 
E) not affect the bond's duration.

Question 13

A security has an expected return less than its required return. This security is

Accepted Answer

A) selling at a premium to par. 
B) selling at a discount to par. 
C) selling for more than its PV. 
D) selling for less than its PV. 
E) a zero coupon bond. 
A) selling at a premium to par. 
B) selling at a discount to par. 
C) selling for more than its PV. 
D) selling for less than its PV. 
E) a zero coupon bond.

Question 14

What is convexity?
 How does convexity affect duration-based predicted price changes for interest rates changes?
Convexity is a measure of the nonlinearity (curvature)of a change in a bond's price caused by a change in interest rates. The level of convexity increases for greater interest rate changes. Duration is a linear estimate of a bond's price change as the interest rate changes from its current level. Due to convexity,the greater the interest rate change,the greater the error in using duration to estimate the bond's price change. For a multimillion-dollar bond portfolio,the dollar errors can be quite significant. In abnormal markets,bond investors may face more or less risk than the bond's duration would imply.
Calculus

Accepted Answer

Duration is the first derivative of the

Question 15

A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r)?

Accepted Answer

A) 8.00 percent 
B) 10.21 percent 
C) 9.98 percent 
D) 9.03 percent 
E) 3.53 percent 
A) 8.00 percent 
B) 10.21 percent 
C) 9.98 percent 
D) 9.03 percent 
E) 3.53 percent

Question 16

The higher a bond's coupon,the lower the bond's price volatility.

Accepted Answer

A) True 
 B)False

Question 17

The greater a security's coupon,the lower the security's price sensitivity to an interest rate change,ceteris paribus.

Accepted Answer

A) True 
 B)False

Question 18

A 15-year,7 percent coupon annual payment corporate bond has a PV of $1,055.62. However,you pay $1,024.32 for the bond. By how many basis points is your E(r)different from your r?

Accepted Answer

r = 6.41%
1,055.62 = 70 × [PVI

Question 19

The required rate of return on a bond is

Accepted Answer

A) the interest rate that equates the current market price of the bond with the present value of all future cash flows received. 
B) equivalent to the current yield for non-par bonds. 
C) less than the E(r)for discount bonds and greater than the E(r)for premium bonds. 
D) inversely related to a bond's risk and coupon. 
E) none of the options. 
A) the interest rate that equates the current market price of the bond with the present value of all future cash flows received. 
B) equivalent to the current yield for non-par bonds. 
C) less than the E(r)for discount bonds and greater than the E(r)for premium bonds. 
D) inversely related to a bond's risk and coupon. 
E) none of the options.

Question 20

Convexity arises because

Accepted Answer

A) bonds pay interest semiannually. 
B) coupon changes are the opposite sign of interest rate changes. 
C) duration is an increasing function of maturity. 
D) present values are a nonlinear function of interest rates. 
E) duration increases at higher interest rates. 
A) bonds pay interest semiannually. 
B) coupon changes are the opposite sign of interest rate changes. 
C) duration is an increasing function of maturity. 
D) present values are a nonlinear function of interest rates. 
E) duration increases at higher interest rates.

Exam 3: Interest Rates and Security Valuation

A 10-year maturity coupon bond has a six-year duration. An equivalent 20-year bond with the same coupon has a duration

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate,a 6 percent promised YTM,and six years to maturity. What is the bond's duration?

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

Conceptually,why does a bond's price fall when required returns rise on an existing fixed income security?

Ignoring default risk,if a bond's expected return is greater than its required return,then the bond's market price must be greater than the present value of the bond's cash flows.

A 10-year maturity zero coupon bond will have lower price volatility than a 10-year bond with a 10 percent coupon.

A bond that pays interest annually has a 6 percent promised yield and a price of $1,025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is six years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7 percent. By how much is the bond mispriced?

A bond that pays interest semiannually has a 6 percent promised yield and a price of $1,045. Annual interest rates are now projected to increase 50 basis points. The bond's duration is five years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

An annual payment bond has a 9 percent required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change?

A decrease in interest rates will

A security has an expected return less than its required return. This security is

A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r)?

The higher a bond's coupon,the lower the bond's price volatility.

The greater a security's coupon,the lower the security's price sensitivity to an interest rate change,ceteris paribus.

A 15-year,7 percent coupon annual payment corporate bond has a PV of $1,055.62. However,you pay $1,024.32 for the bond. By how many basis points is your E(r)different from your r?

The required rate of return on a bond is

Convexity arises because

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

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