Question 1

Any security that returns a greater percentage of the price sooner is less price-volatile.

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

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, the only way a new investor can expect to earn the new higher required return is to pay less for the bond, so the price has to fall. Traders sell the existing bond in favor of newer, higher rate bonds, dropping the price and raising the expected return.

Question 4

A fairly priced bond with a coupon less than the expected return must sell at a discount from par.

Accepted Answer

A) True 
 B)False

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

A 4-year maturity 0% coupon corporate bond with a required rate of return of 12% 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 7

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.

Question 8

Duration is

Accepted Answer

A)  the elasticity of a security's value to small coupon changes. 
B)  the weighted average time to maturity of the bond's cash flows. 
C)  the time until the investor recovers the price of the bond in today's dollars. 
D)  greater than maturity for deep discount bonds and less than maturity for premium bonds. 
E)  the second derivative of the bond price formula with respect to the ytm. 
A)  the elasticity of a security's value to small coupon changes. 
B)  the weighted average time to maturity of the bond's cash flows. 
C)  the time until the investor recovers the price of the bond in today's dollars. 
D)  greater than maturity for deep discount bonds and less than maturity for premium bonds. 
E)  the second derivative of the bond price formula with respect to the ytm.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 11

All else equal, the holder of a fairly priced premium bond must expect a capital loss over the holding period.

Accepted Answer

A) True 
 B)False

Question 12

You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?

Accepted Answer

A)  8.89% 
B)  8.51% 
C)  5.84% 
D)  4.44% 
E)  2.96% 45 = 2 x PVIFA (rr%, 3) + 47 x (PVIF (rr%, 3)) 
A)  8.89% 
B)  8.51% 
C)  5.84% 
D)  4.44% 
E)  2.96% 45 = 2 x PVIFA (rr%, 3) + 47 x (PVIF (rr%, 3))

Question 13

The longer the time to maturity, the lower the security's price sensitivity to an interest rate change, ceteris paribus.

Accepted Answer

A) True 
 B)False

Question 14

Is the realized rate of return related to the expected return? The required return? Explain.

Accepted Answer

Yes and no. The required return determin

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

A semiannual payment bond with a $1,000 par has a 7% quoted coupon rate, a 7% 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 F1F1F1S1F1F1F10[(t * CFt/(1.035)t)]/(2 * $1,000) 
A)  10.00 years 
B)  8.39 years 
C)  6.45 years 
D)  5.20 years 
E)  7.35 years F1F1F1S1F1F1F10[(t * CFt/(1.035)t)]/(2 * $1,000)

Question 17

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 18

An 8-year annual payment 7% coupon Treasury bond has a price of $1,075. The bond's annual Err must be

Accepted Answer

A)  13.49% 
B)  5.80% 
C)  7.00% 
D)  1.69% 
E)  4.25% 1075 = 70 F1F1F1S1F1F1F10 PVIFA (Err%, 8) + 1000 F1F1F1S1F1F1F10 PVIF (Err%, 8), trial and error or calculator 
A)  13.49% 
B)  5.80% 
C)  7.00% 
D)  1.69% 
E)  4.25% 1075 = 70 F1F1F1S1F1F1F10 PVIFA (Err%, 8) + 1000 F1F1F1S1F1F1F10 PVIF (Err%, 8), trial and error or calculator

Question 19

You would want to purchase a security if P ____________ PV or Err ____________ rrr.

Accepted Answer

A)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10 
B)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10 
C)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10 
D)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10 
A)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10 
B)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10 
C)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10 
D)  F1F1F1S1F1F1F10; F1F1F1S1F1F1F10

Question 20

The lower the level of interest rates, the greater a bond's price sensitivity to interest rate changes.

Accepted Answer

A) True 
 B)False

Exam 3: Interest Rates and Security Valuation

Any security that returns a greater percentage of the price sooner is less price-volatile.

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

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

A fairly priced bond with a coupon less than the expected return must sell at a discount from par.

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

A 4-year maturity 0% coupon corporate bond with a required rate of return of 12% has an annual duration of _______________ years.

Convexity arises because

Duration is

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

A decrease in interest rates will

All else equal, the holder of a fairly priced premium bond must expect a capital loss over the holding period.

You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?

The longer the time to maturity, the lower the security's price sensitivity to an interest rate change, ceteris paribus.

Is the realized rate of return related to the expected return? The required return? Explain.

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

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

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

An 8-year annual payment 7% coupon Treasury bond has a price of $1,075. The bond's annual Err must be

You would want to purchase a security if P ____________ PV or Err ____________ rrr.

The lower the level of interest rates, the greater a bond's price sensitivity to interest rate changes.

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

Mutual Funds and Hedge Funds

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

You would want to purchase a security if P PV or Err rrr.