Deck 11: Bond Prices and Yields

Question 1

The most common type of bond which obligates its issuer to pay a fixed sum of money at a future maturity date, plus periodic interest payments is referred to as a:

A) pure bond
B) premium bond
C) government bond
D) straight bond
E) conversion bond

Answer 1

D

Question 2

A callable bond.

A) Can be redeemed by the issuer prior to maturity
B) Can be exchanged for shares of common stock
C) Can have its maturity date extended by the issuer
D) Is a bond that pays no regular interest payments
E) Can be redeemed at the discretion of the bondholder

Answer 2

A

Question 3

The annual interest on a bond divided by the bond's value is the

A) coupon rate
B) current yield
C) yield to maturity
D) realized yield
E) par yield

Answer 3

A

Question 4

The yield that a bond will earn given that it is redeemed by the issuer at the earliest possible date is called the

A) coupon rate
B) current yield
C) yield to maturity
D) realized yield
E) yield to call

Question 5

The ________ prevents the issuer from redeeming the bond.

A) Silent period
B) Call protection period
C) Call resolution restriction
D) Deferral provision
E) Vesting period

Question 6

Which one of the following measures a bond's sensitivity to changes in market interest rates?

A) yield to call
B) yield to market
C) duration
D) immunization
E) target date valuation

Question 7

A bond's annual interest payment divided by its market price is the bond's ________.

A) coupon rate
B) current yield
C) yield to maturity
D) realized yield
E) par yield

Question 8

The price paid to redeem a bond prior to maturity is the

A) market price
B) deferred price
C) redemption value
D) call price
E) par value

Question 9

The quoted price that excludes any accrued interest is called the

A) Dirty price
B) Par value
C) Clean price
D) Maturity value
E) Discount value

Question 10

A(n) ______ bond has a market price that is less than par value.

A) Undervalued
B) Discount
C) Par
D) Premium
E) Callable

Question 11

A discount bond is a bond that

A) Is guaranteed by the Bank of Canada
B) Is Callable
C) Is selling above par
D) Has a high credit rating
E) Has a face value exceeding the market value

Question 12

The dirty price of a bond is the

A) Market price excluding any accrued interest
B) Quoted bid price
C) Issue price
D) Previous day's market price
E) Amount you actually pay

Question 13

Which one of the following is the correct definition of a coupon rate

A) semi-annual interest payment/par value
B) annual interest/par value
C) annual interest/market value
D) semi-annual coupon/bond price
E) annual coupon/bond price

Question 14

The ________ is the discount rate that equates a bond's price with the present value of its cash flows. Such a rate shows the promised return on a bond.

A) coupon rate
B) current yield
C) yield to maturity
D) realized yield
E) par yield

Question 15

A(n) ______ bond has a market price that is greater than par value.

A) Undervalued
B) Discount
C) Par
D) Premium
E) Callable

Question 16

________ risk is the possibility that a bond will lose value if interest rates rise.

A) Reinvestment
B) Interest rate
C) Default
D) Convexity
E) Call

Question 17

The return you actually earn from owning a bond is called the ________.

A) coupon rate
B) current yield
C) yield to maturity
D) realized yield
E) par yield

Question 18

________ measures a bond's price sensitivity to changes in interest rates. It also measures the average number of years to a bond's discounted cash flows.

A) Maturity
B) Immunization
C) Dedication
D) Dynamic pricing
E) Duration

Question 19

A change in a bond's price caused by which one of the following is defined as the dollar value of an 01?

A) change in yield to call due to passage of one year
B) change in yield to maturity of one percent
C) change in yield to maturity of one basis point
D) change in coupon rate of one percent
E) change in coupon rate of one basis point

Question 20

A premium bond is a bond that

A) Is guaranteed by the Bank of Canada
B) Is Callable
C) Is selling above par
D) Has a high credit rating
E) Has a face value exceeding the market value

Question 21

A portfolio created to prepare for future cash outlays is a(n) _______ portfolio.

A) protected
B) matched
C) dedicated
D) special purpose
E) anticipation

Question 22

Which of the following is the primary reason why the realized yield on a bond differs from the yield-to-maturity?
I) Purchasing a bond at a value other than par
II) Selling prior to maturity at a value other than par
III) Having coupon payments semiannually rather than annually
IV) Reinvesting coupon payments at current market rates

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

Question 23

Ignoring the possibility of default, all bonds

A) Have a value that is equal to the present value of the coupon payments
B) Have a call value that is less than the face value
C) Have a market value equal to the face value
D) Sell at a premium
E) Have par value at maturity

Question 24

Which of the following will increase if the coupon rate increases?
I) face value
II) market value
III) yield-to-maturity
IV) current yield

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

Question 25

______ are debt securities with no maturity.

A) Notes
B) Bills
C) Consols
D) Bonds
E) Annuities

Question 26

The yield-to-maturity of a par bond is:

A) Greater than the current yield
B) Less than the current yield
C) Equal to the coupon rate
D) Less than the coupon rate
E) Greater than the coupon rate

Question 27

____ is the property of curvature in a graph expressing the percentage change in bond price in response to changes in interest rates.

A) Breadth
B) Convexity
C) Continuity
D) Duration
E) Tick

Question 28

The yield value of a 32^nd is the change needed in which one of the following to cause a bond's price to change by 1/32^nd?

A) current yield
B) yield to maturity
C) coupon rate
D) call premium
E) call date

Question 29

A callable bond is most likely to be called when:

A) The stock price increases.
B) The stock price decreases.
C) Interest rates increase.
D) Interest rates decrease.
E) Debt for the company is given a lower credit rating.

Question 30

Rebalancing a portfolio periodically so that the duration continues to match the target date is called

A) Portfolio updating
B) Dedication rematching
C) Portfolio marking
D) Portfolio matching
E) Dynamic immunization

Question 31

Which of the following bonds will have the smallest price change from the same change in interest rates, all else the same?

A) 5-year, 10 percent coupon.
B) 5-year, 6 percent coupon.
C) 10-year, 10 percent coupon.
D) 10-year, 6 percent coupon.
E) 10-year, zero coupon.

Question 32

For a change in a bond's yield to maturity, the absolute magnitude in the change of the bond's price is ________ related to the bond's coupon rate.

A) Positively
B) Negatively
C) Not
D) Directly
E) Inversely.

Question 33

You purchased a bond one month ago for $890. The price of the bond today is $940. Which of the following is true?

A) The coupon rate of the bond has increased.
B) The current yield of the bond has increased.
C) The yield to maturity of the bond has decreased.
D) The bond discount has increased.
E) The bond price increase is due to "pull to par."

Question 34

For a change in a bond's yield to maturity, the resulting change in the bond's price is ________ related to the bond's coupon rate.

A) Positively
B) Negatively
C) Not
D) Directly
E) Insufficient information.

Question 35

The fact that a bond's interest payments may be invested at a rate that is less than the bond's yield-to-maturity is ________ risk.

A) Maturity
B) Reinvestment
C) Immunization
D) Price
E) Market

Question 36

The process of ________ involves constructing a bond portfolio in a manner that helps ensure the target date value.

A) Dedication
B) Immunization
C) Consol
D) Analyzation
E) Portfolio matching

Question 37

The risk that a dedicated portfolio will decrease in value due to interest rate changes is ________ risk.

A) price
B) immunization
C) market
D) coupon rate
E) maturity

Question 38

Debt securities with less than ten years to maturity when issued are called ______.

A) Notes
B) Bills
C) Consols
D) Bonds
E) Annuities

Question 39

Bonds are more interest sensitive: I) the higher the coupon rate
II) the lower the coupon rate
III) the longer the time to maturity
IV) the shorter the time to maturity

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

Question 40

All else the same, which of the following bond combinations would have the greatest difference in sensitivity to changes in interest rates?

A) A 2-year and a 7-year bond.
B) A 25-year and a 30-year bond.
C) A 10-year and a 15-year bond.
D) A 7-year and a 12-year bond.
E) A 13-year and an 18-year bond.

Question 41

The risk that investors are forced to place earnings from a bond into a lower yielding investment is known as

A) refinancing risk.
B) market risk.
C) reinvestment risk.
D) credit risk.
E) liquidity risk.

Question 42

Immunization works by offsetting ________ risk and ________ risk.

A) market; interest rate
B) reinvestment; interest rate
C) default; reinvestment
D) interest rate; credit
E) credit; default

Question 43

When a callable bond is selling at a premium, investors should expect to earn the ________ over the time they hold the bond.

A) Current yield.
B) Yield to maturity.
C) Coupon rate.
D) Yield to call.
E) Converted yield.

Question 44

A discount bond

A) Has a coupon rate that is greater than the yield-to-maturity
B) Has a coupon rate that is less than the market rate of interest
C) Has a par value that is less than the market value
D) Is selling for more than face value
E) Is the name given to a bond that has been called prior to maturity

Question 45

Which of the following is commonly a dedicated portfolio?

A) Bond mutual fund.
B) Pension fund.
C) Money market fund.
D) Savings account.
E) Hybrid fund.

Question 46

Your company will owe a single payment of $20 million dollars to a pension fund in 10 years. The current yield to maturity for investment grade bonds with 10 years to maturity is 7 percent. What is the best method to immunize this portfolio? Buy bonds with:

A) an average coupon rate of 7 percent.
B) a maturity of 10 years.
C) a duration of 10 years.
D) a yield to maturity of 7 percent.
E) a face value of $20 million.

Question 47

Reinvestment risk occurs when interest rates:

A) increase.
B) decrease.
C) remain the same.
D) increase twice.
E) Interest rates are not related to reinvestment risk.

Question 48

As a bond's yield increases, its price ________. As a bond's yield decreases, its price ________.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
E) Insufficient information.

Question 49

All else the same, a bond's interest rate risk is most dependent on the bond's:

A) current yield to maturity.
B) coupon rate.
C) maturity.
D) current yield.
E) price.

Question 50

A bond has a yield-to-maturity that is equal to the coupon rate. Knowing this, you also know that the

A) Time to maturity can be any value
B) Market value is greater than the face value
C) Bond must pay daily interest
D) Maturity value is greater than the current market value
E) Bond must pay interest annually

Question 51

All else the same, as a premium bond approaches maturity its price ______, and the price of a discount bond ______.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
E) Insufficient information.

Question 52

For a premium bond, the

A) Current yield is equal to the coupon rate but less than the yield-to-maturity
B) Yield-to-maturity exceeds both the coupon rate and the current yield
C) Coupon rate is equal to the yield-to-maturity, but less than the current yield
D) Current yield is less than either the coupon rate or the yield-to-maturity
E) Coupon rate exceeds both the yield-to-maturity and the current yield

Question 53

For an absolute change in interest rates, the price gain on a bond caused by a decrease in yield is ________ the price loss caused by an increase in yield.

A) greater than
B) the same as
C) less than
D) Greater than if the bond is selling at a premium, less than if the bond is selling at a discount.
E) Greater than if the bond is selling at a discount, less than if the bond is selling at a premium.

Question 54

Modified duration is calculated as:

A) Macaulay duration/(1 + YTM)/2
B) Macaulay duration $\times$ (1 + YTM/2)
C) (1 + YTM)/2 $\times$ Macaulay duration
D) Macaulay duration/(1 + YTM/2)
E) Macaulay duration/(1 + YTM)²

Question 55

You had created a bond portfolio last year that had a portfolio duration of 12 years, which was your target date. Today, you revise your portfolio such that it now has a duration of 11 years. You are following a strategy known as

A) Portfolio matching
B) Maturity reduction
C) Dynamic immunization
D) Yield reduction
E) Call protection

Question 56

To immunize your portfolio, you should

A) Avoid callable bonds
B) Match the maturity dates of your coupon bonds to your target date
C) Only buy zero-coupon bonds
D) Purchase only par value bonds
E) Match your portfolio's duration to the target date

Question 57

For a given change in interest rates, the longer the bond's maturity, the ________ the price change.

A) greater
B) same
C) smaller
D) Greater for a premium bond, smaller for a discount bond.
E) None of the above.

Question 58

All else the same, for a callable bond, an increase in the call premium will ________ the yield to call.

A) always increase
B) always decrease
C) not change
D) increase if the bond is selling at a premium
E) decrease if the bond is selling at s discount

Question 59

For a given change in interest rates, a bond's price change is _____ related to the bond's coupon rate.

A) directly
B) not
C) inversely
D) Directly if the bond is selling at a premium, inversely if the bond is selling at a discount.
E) Directly if the bond is selling at a discount, inversely if the bond is selling at a premium.

Question 60

You are buying a $1,000 face value bond from your dealer. The bond pays interest semiannually on February 1 and August 1. Assume that every month has 30 days only. Today is May 30. How many months of accrued interest must you pay when you make this purchase?

A) 1 month
B) 2 months
C) 3months
D) 4 months
E) 5 months

Question 61

In general, the duration of a coupon bond

A) is twice the bond's maturity in years.
B) is half the bond's maturity in years.
C) is equal to the bond's maturity in years divided by its yield-to-maturity.
D) is the same as the bond's maturity in years.
E) none of the above.

Question 62

For a bond selling at a discount, which of the following relationships is true?

A) Coupon rate = Current yield = Yield to maturity
B) Coupon rate > Current yield < Yield to maturity
C) Coupon rate < Current yield > Yield to maturity
D) Coupon rate > Current yield > Yield to maturity

Question 63

The current yield and yield-to-maturity on bonds are equal

A) if bonds are sold at a premium.
B) if bonds are sold at a discount.
C) if bonds are sold at par.
D) when interest rates are starting to rise.
E) when bonds are held for less than a year.

Question 64

All else the same, which of the following bonds will have the longest duration?

A) 5-year, 6 percent coupon
B) 5-year, 8 percent coupon
C) 10-year, 8 percent coupon
D) 15-year, 6 percent coupon
E) 15-year, 8 percent coupon

Question 65

A bond pays semiannual interest payments of $44.50. What is the coupon rate if the par value is $1,000?

A) 8.90%
B) 4.50%
C) 4.45%
D) 9.00%
E) 14.50%

Question 66

Which of the following bonds will have the greatest price change for a given change in interest rates?

A) 2-year, 4 percent coupon
B) 2-year, 6 percent coupon
C) 3-year, 4 percent coupon
D) 4-year, 4 percent coupon
E) 4-year, 6 percent coupon

Question 67

All else the same, as the yield to maturity of a bond increases, the duration of the bond will ________.

A) increase
B) decrease
C) remain the same
D) increase only if the bond is selling at a premium
E) decrease only if the bond is selling at a premium

Question 68

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 12 years ago. The bond currently sells for $1,000 and has 8 years left to maturity. This bond's _________ must be 10%. I. Yield to maturity.
II) Current yield.
III) Coupon rate

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

Question 69

You purchased a bond with a 7 percent yield to maturity. One year later, interest rates fall to 6 percent. If you hold the bond to maturity, your realized yield will be:

A) less than 6 percent.
B) 6 percent.
C) between 6 and 7 percent.
D) 7 percent.
E) greater than 7 percent.

Question 70

For a bond selling at par value, which of the following relationships is true

A) Coupon rate = Current yield = Yield to maturity
B) Coupon rate > Current yield < Yield to maturity
C) Coupon rate < Current yield > Yield to maturity
D) Coupon rate < Current yield < Yield to maturity
E) Coupon rate > Current yield > Yield to maturity

Question 71

The convexity adjustment

A) under estimates bond price increases.
B) over estimates bond price decreases.
C) is more accurate for large changes in interest rates.
D) is less accurate for small interest rate changes.
E) adds precision to bond price changes.

Question 72

A bond with a par value of $1,000 has a coupon rate of 7.2 percent and a price of $909.34. What is the current yield of the bond?

A) 3.96%
B) 8.14%
C) 7.92%
D) 7.63%
E) 7.20%

Question 73

Suppose there is a bond that is callable at par value. If the bond is selling at a premium, the yield to call of the bond will be ________ the yield to maturity.

A) greater than
B) less than
C) The same as
D) less than or greater than
E) Insufficient information.

Question 74

A high convexity value on a bond suggests

A) the non-existence of reinvestment risk.
B) a higher price increase when interest rates fall.
C) a lower price decrease when interest rates fall.
D) the duration is equal to maturity.
E) price changes are identical for both increase and decrease in interest rates.

Question 75

Which of the following is NOT a property of Macaulay's duration?

A) All else the same, the longer a bond's maturity, the longer is its duration.
B) All else the same, a bond's duration increases at a decreasing rate as maturity lengthens.
C) All else the same, the higher a bond's coupon, the shorter is its duration.
D) All else the same, a higher yield to maturity implies a shorter duration, and a lower yield to maturity implies a longer duration.
E) Answers A to D are all true.

Question 76

For a bond selling at a premium, which of the following relationships is true?

A) Coupon rate = Current yield = Yield to maturity
B) Coupon rate > Current yield < Yield to maturity
C) Coupon rate < Current yield > Yield to maturity
D) Coupon rate < Current yield < Yield to maturity
E) Coupon rate > Current yield > Yield to maturity

Question 77

A bond with a face value of $1,000 has a current yield of 6.5 percent and a coupon rate of 7 percent. What is the price of the bond?

A) $1,054.80
B) $612.73
C) $1,076.92
D) $1,126.40
E) $538.46

Question 78

If the coupon payment were to increase, the ________ value of the bond would also increase.

A) Par
B) Face
C) Market
D) Call
E) Stated

Question 79

Which of the following will affect a bond's Macaulay duration?
I) The current yield to maturity.
II) The coupon rate.
III) The maturity.

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

Question 80

A bond with par value of $3,000 has a coupon rate of 6.5%. What is the dollar amount of each semiannual interest payment?

A) $65.00
B) $97.50
C) $185.00
D) $195.00
E) None of the above