Deck 12: Principles of Bond Valuation and Investment

Question 1

A descending term structure reflects the view that rates will increase in the future.

Answer 1

False

Question 2

Current yield does not take the maturity date into consideration.

Answer 2

True
Explanation: The current yield does not take into consideration the maturity date of a debt instrument. A bond with 1 year to run and another with 20 years to run would have the same current yield quote if interest payments were $100 and the price was $950.

Question 3

The term structure of interest rates depicts the relationship between maturity and interest rates.

Answer 3

True
Explanation: The term structure of interest rates depicts the relationship between maturity and interest rates. It is sometimes called a yield curve because yields on existing securities having maturities from three months to 30 years are plotted on a graph to develop the curve.

Question 4

Short-term rates are more volatile than long-term rates.

Question 5

Current yield is always the best measure of a bond's yield.

Question 6

Yield to maturity considers annual interest, difference between current price and maturity value, and years to maturity.

Question 7

A basis point is one-tenth of l%.

Question 8

Historically, interest rates have been coincident indicators in the economy.

Question 9

The price of a lower coupon rate bond is more sensitive to interest rate changes than higher coupon rate bonds.

Question 10

Current yield is the annual interest divided by the price of the bond.

Question 11

Inflationary expectations have no effect on bond prices.

Question 12

Yield to maturity is equivalent to market rate of interest.

Question 13

The price of a bond represents simply the future value of interest payments.

Question 14

Inflationary expectations have the greatest impact on short-term rates.

Question 15

The reinvestment assumption would have no effect on yield if the bond is held to maturity.

Question 16

An ascending term structure reflects the view that rates will increase in the future.

Question 17

Yield to maturity can be thought of as the internal rate of return of the bond.

Question 18

The approximate yield to maturity method tends to understate the true yield for bonds trading at a discount.

Question 19

If the market price of a bond is less than the call price, yield to call is a reasonable calculation for yield.

Question 20

A drop in interest rates causes proportionally greater gains than increases in rates will cause losses.

Question 21

Which is not a theory related to the term structure of interest ratio?

A)Expectations hypothesis
B)Liquidity preference theory
C)Efficient market hypothesis
D)Market segmentation theory

Question 22

If an investor needs to increase the quality of his portfolio during the low-confidence periods of a recession, he can enjoy usually high returns on lower-grade instruments relative to higher grades.

Question 23

When should an investor calculate both yield to maturity and yield to call?

A)Whenever there is a call provision
B)When the sum of the present values of the interest payments exceeds the call price
C)When the market price is greater than or equal to the call price
D)Whenever the funds can be reinvested
E)When interest rates increase above the coupon rate

Question 24

Lower-quality bonds tend to be in high demand during a recession.

Question 25

The anticipated realized yield represents the return over the holding period.

Question 26

Which of the following bond pricing rules is incorrect?

A)Bond prices and interest rates are inversely related
B)Prices of long-term bonds are less sensitive to changes in interest rates than short-term bonds
C)Bond price sensitivity increases at a decreasing rate as maturity increases
D)Bond prices are more sensitive to a decline in market yield to maturity

Question 27

What will happen to the market value of a bond if interest rates increase?

A)The market value will decrease
B)The market value will increase
C)The market value will increase or decrease, depending on the general economic climate
D)The market value should remain level

Question 28

The expectations hypothesis is that any long-term rate is an average of the expectations of future short-term rate over the applicable time horizon.

Question 29

Assuming interest rates are expected to fall, which of the following will most likely maximize price increase?

A)Commercial paper
B)U.S. Treasury bills
C)30-year corporate bonds
D)There is not enough information to tell

Question 30

Interest rate changes affect low-quality issues to a greater degree than high-quality issues.

Question 31

The total return an investor would receive from income plus capital appreciation, assuming a bond is held to maturity, is called the:

A)call premium.
B)current yield.
C)yield to maturity.
D)capital gains yielD.
E)More than one of the above

Question 32

The Oxford Fixed Income Fund invests heavily in bonds. If the fund manager thinks that interest rates are going to fall, what changes should she make in her investment portfolio?

A)Increase investment in long-term bonds
B)Increase investment in short-term debt instruments
C)Increase investment in equity securities
D)Buy callable bonds
E)Buy real assets

Question 33

The market segmentation theory focuses on:

A)the impact of institutional investors on the yield curve.
B)the maturity preferences of banks and those of life insurance companies.
C)phases of the business cycle.
D)All of the above

Question 34

Deep discount bonds are not prone to calls because they sell at low prices.

Question 35

Deep discount bonds reflect questionable quality.

Question 36

The upward slope of the yield curve is caused by investors' recognition of the relative difficulty of converting long-term securities to cash. This is the:

A)expectations hypothesis.
B)liquidity preference theory.
C)market segmentation theory.
D)More than one of the above

Question 37

What effect, if any, will decrease in interest rates have on bond values?

A)Bond values will increase
B)Bond values will decrease
C)Bond values may increase or decrease, depending on the maturity, quality, and coupon rate
D)None of the above

Question 38

The value of a bond at any given time is the sum of:

A)the future interest payments and the par value.
B)the present value of future interest payments and the present value of the par value.
C)the future value of the interest payments and the future value of the par value.
D)the present value of future interest payments and the market value.
E)the present value of future interest payments and the future value of the par value.

Question 39

What formula measure would an investor use to calculate the yield on a 20-year bond with 10 years to maturity, if he or she only intends to hold the bond for 5 years?

A)Anticipated realized yield
B)Yield to call
C)Current yield
D)Yield to maturity
E)Any one of the above will measure the yield

Question 40

The term structure of interest rates refers to:

A)the relationships between interest rates and term to maturity.
B)the idea that any long-term rate is the average of expected future short-term rates.
C)a general expectation of higher future interest rates.
D)the idea that the terms of the bond may change as time to maturity changes.
E)More than one of the above are true

Question 41

What would be the current yield of a 6% coupon bond priced at $950?

Question 42

A 15-year, 7% coupon rate bond is selling for $771.82. What is the current yield of the bond?

A)22.8%
B)7.0%
C)9.1%
D)10.0%
E)30.7%

Question 43

ABC Corp. issued a 12%, 20-year coupon rate bond 5 years ago. Interest rates are now 8%. Based on semi-annual analysis and using the table below, what is the current price of the bond?

Question 44

When the bond investor believes interest rates are going to fall, the best strategy would be to:

A)take a bearish position in the market by selling long-term bonds.
B)take a bullish position in the market by buying long-term bonds.
C)move out of bonds completely.
D)keep his portfolio unchangeD.

Question 45

Short-term interest rates have _________ volatility in comparison to long-term interest rates.

A)Much less
B)More
C)Equal
D)Slightly less

Question 46

As the economy recovers from a recession, what changes can be expected in the yield spread of corporate Baa bonds and U.S. government bonds?

A)The yield on Baa bonds will approach that of government securities
B)The yield spread between U.S. government bonds and BBB corporate bonds will stay the same
C)The yield spread will increase
D)Either A or B will occur

Question 47

A down-sloping yield curve indicates:

A)investors' anticipation of lower interest rates.
B)investors' anticipation of lower inflation.
C)that institutional investors are selling long-term bonds.
D)More than one of the above

Question 48

The most widely used theory to explain the term structure of interest rates is the:

A)liquidity preference theory.
B)market segmentation theory.
C)expectations hypothesis.
D)interest allocation theory.

Question 49

a) What is the approximate yield to maturity of a 10% coupon rate, $1,000 par value bond which is currently priced at $1,200 with 11 years to maturity?
b) What would be the yield to call if the call can be made in 7 years at a price of $1,025?

Question 50

The investor in deep-discount bonds generally accepts a lower yield because of:

A)the unique conversion feature associated with deep discount bonds.
B)the extremely low risk of a call.
C)the fact that the return represents pure interest income.
D)More than one of the above

Question 51

Yield to maturity takes into account everything except:

A)annual interest received.
B)the difference between the current bond price and its maturity value.
C)the number of years to maturity.
D)the number of years since the bond's purchase.

Question 52

What is the approximate yield to maturity of an 8% coupon bond, with a par value of $1,000? The bond is currently selling for $920 and has five years to maturity.

Question 53

The impact of interest rate changes on bond prices can be magnified by:

A)investing in speculative high-risk high-yield bonds.
B)investing in higher-quality corporate bonds.
C)investing in short-term bonds.
D)More than one of the above