Deck 12: Principles of Bond Valuation and Investment

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

Inflationary expectations have no effect on bond prices.

Question 7

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

Question 8

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

Question 9

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

Question 10

A basis point is one tenth of l percent.

Question 11

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

Question 12

Current yield does not take the maturity date into consideration.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

Yield to maturity is equivalent to market rate of interest.

Question 20

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

Question 21

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 22

Deep discount bonds reflect questionable quality.

Question 23

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

Question 24

Bond investors tend to place less emphasis on independent analysis of quality than do common stock investors.

Question 25

The key to a pure pickup yield swap is that the bond price of one or both bonds has to be in disequilibrium.

Question 26

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 27

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 28

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 29

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 30

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 31

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 32

Swaps may be utilized for tax-adjustment purposes and are very popular at the end of the year.

Question 33

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 34

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 35

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

Question 36

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 37

What is the price of a $1,000 perpetual par bond with a coupon rate of 10 percent and a current yield of 8 percent?

A)$1,000
B)$800
C)$920
D)$1,250
E)$925.93

Question 38

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

Question 39

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 40

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

Question 41

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 bonds purchase

Question 42

Swaps may be utilized to take advantage of

A)A capital loss
B)A disequilibrium in bond prices
C)Conversion privileges
D)All of the above

Question 43

The Feldstein and Eckstein classic study found all of the following about bond yields except they are

A)Inversely related to the money supply
B)Directly related to economic activity
C)Directly related to the level of inflation
D)Directly related to the supply of loanable funds by the government

Question 44

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 45

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 46

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

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

Question 47

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 48

The term "swap" refers to

A)Selling low yielding bonds and buying higher yielding bonds
B)Exchanging debt and equity instruments
C)Exchanging bonds for other bonds with similar attributes
D)None of the above

Question 49

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 50

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 51

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 52

The procedure of selling out of a given bond position and immediately buying into another one with similar attributes in an attempt to improve overall portfolio return performance is referred to as:

A)A hedge
B)A bond swap
C)Bond arbitrage
D)An unfriendly bond takeover

Question 53

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 hypotheses
D)Interest allocation theory

Question 54

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

Question 55

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 56

When one invests in a private placement bond offering,they can generally expect to receive a slightly higher yield than on public bond offerings,because:

A)Of a very large secondary market for the private placement bonds
B)Of a very small secondary market for the private placement bonds
C)Of the large size of the borrowing firm in the private placement
D)There is less risk in a private placement than in a public one

Question 57

With a pure pickup yield swap

A)The owner thinks he can decrease the yield to maturity by selling a bond and buying a different bond of less risk
B)The market is assumed to be totally efficient
C)The key to the swap is that the bond price of one or both bonds has to be in disequilibrium
D)None of the above

Question 58

A down-sloping yield curve indicates

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

Question 59

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 60

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

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

Question 61

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

Question 62

What is the approximate yield to maturity of an 8 percent coupon bond,with a par value of $1000.The bond is currently selling for $920 and has five years to maturity.

Question 63

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

Question 64

a)What is the approximate yield to maturity of a 10 percent coupon rate,$1000 par value bond which is currently priced at $1200 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 $1025?