Deck 6: Pricing Fixed-Income Securities

Question 1

If a bond is a par bond, then:

A) the yield to maturity is less than the coupon rate.
B) the yield to maturity is greater than the coupon rate.
C) the yield to maturity is equal to the coupon rate.
D) its duration must be greater than its maturity.
E) its duration must be equal to its maturity.

Answer 1

C

Question 2

If a bond is a discount bond, then:

A) the yield to maturity is less than the coupon rate.
B) the yield to maturity is greater than the coupon rate.
C) the yield to maturity is equal to the coupon rate.
D) its duration must be greater than its maturity.
E) its duration must be equal to its maturity.

Answer 2

B

Question 3

Cash in your possession today:

A) is worth less than the same amount of cash received in the future.
B) is worth more than the same amount of cash received in the future.
C) Is worth the same as the same amount of cash to be received in the future.
D) may be worth more or less than the same amount of cash received in the future depending on the market interest rate.
E) may be worth more or less than the same amount of cash received in the future depending on the type of investment made.

Answer 3

B

Question 4

If $1,500 is invested today, the initial investment plus interest will be worth $2,700 in seven years. What is the annual interest rate on the investment?

A) 6.51%
B) 8.05%.
C) 8.76%.
D) 9.12%.
E) 10.43%

Question 5

To the nearest dollar, what is the value today of an investment that pays $15,000 in seven years, assuming an annual opportunity cost of 9%?

A) $7,473
B) $27,421
C) $8,206
D) $7,130
E) None of the above

Question 6

For the same change in interest rates bondholder's will realize:

A) a greater capital gain when rates rise than capital loss when rates fall
B) a greater capital gain when rates fall than capital loss when rates rise
C) a greater capital loss when rates rise than capital gain when rates fall
D) a greater capital loss when rates fall than capital gain when rates rise
E) the same capital gain or loss when rates rise or fall

Question 7

How much would you pay for a security that pays $150 at the end of each of the next three years plus another $500 at the end of the third year if the relevant interest rate is 9%?

A) $618
B) $628
C) $765
D) $950
E) None of the above

Question 8

If you invest $2,000 today at 9% compounded interest for two years, the value of the investment to the nearest dollar at the end of the two years will be:

A) $2,376
B) $2,360
C) $2,180.
D) $1,640.
E) $1,624.

Question 9

What is the effective annual rate of an investment that offers 8%, compounded quarterly?

A) 8.00%
B) 8.16%
C) 8.24%
D) 8.32%
E) 8.64%

Question 10

A bank quotes you an effective annual rate of 10% on a semi-annual investment. What is the annual simple interest rate?

A) 9.76%
B) 10.00%
C) 10.25%
D) 10.79%
E) 10.96%

Question 11

Two bonds with different coupon amounts are priced to yield the same yield to maturity. For a given change in market rate:

A) the bond with the lower coupon will always change more in price than the bond with the higher coupon.
B) the bond with the higher coupon will always change more in price than the bond with the lower coupon.
C) the bond with the lower coupon rate will only change more in price than the bond with the higher coupon rate if the market rate decreases.
D) The bond with the higher coupon rate will only change more in price than the bond with the lower coupon rate if the market rate increases.
E) the price change will be the same for both bonds.

Question 12

If the holder of a bond can demand that the issuer convert the bond into common stock of a different company at a predetermined price at a set time in the future, the bond has a(n) ______________ option.

A) call
B) put
C) conversion
D) extension
E) exchange

Question 13

What is the effective annual cost of a credit card that charges 18%, compounded monthly?

A) 16.63%
B) 18.00%
C) 18.81%
D) 19.56%
E) 19.61%

Question 14

If $2,500 is invested today, the initial investment plus interest will be worth $5,000 in eight years. What is the annual interest rate on the investment?

A) 1.09%
B) 5.00%.
C) 9.05%.
D) 10.00%.
E) 20.90%

Question 15

To the nearest dollar, what is the value today of an investment that pays $1,000,000 in 15 years, assuming an annual opportunity cost of 8%?

A) $555,265
B) $315,242
C) $463,193
D) $3,238,387
E) None of the above

Question 16

A bank quotes you a rate of 7% on a CD, compounded quarterly. What is the effective annual rate?

A) 6.79%
B) 6.81%
C) 6.87%
D) 7.13%
E) 7.19%

Question 17

If a bond is a premium bond, then:
A) the yield to maturity is greater than the coupon rate.

A) the yield to maturity is less than the coupon rate.
B) the yield to maturity is equal to the coupon rate.
C) its duration must be greater than its maturity.
D) its duration must be equal to its maturity.

Question 18

If the holder of a bond can demand redemption of the bond at a predetermined price at a set time in the future, the bond has a(n) ______________ option.

A) call
B) put
C) conversion
D) extension
E) exchange

Question 19

If you invest $3,000 today at 8% compounded interest for three years, the value of the investment to the nearest dollar at the end of the three years will be:

A) $3,000
B) $3,240
C) $3,720.
D) $3,779.
E) $4,081.

Question 20

To the nearest dollar, what is the value today of an investment that pays $10,000 in five years, assuming an annual opportunity cost of 6%?

A) $7,473
B) $11,592
C) $8,626
D) $7,130
E) None of the above

Question 21

A bond that has an annual coupon rate of 11% has three years to maturity. If the current discount rate is 16%, what is the bond's Macaulay's duration?

A) 3.00 years
B) 2.991. years
C) 2.89 years
D) 2.79 years
E) 2.69 years

Question 22

A bond's Macaulay duration is 7.95 years. If the current annual interest rate is 7%, what is the modified duration of this bond?

A) 7.00 years
B) 7.88 years
C) 7.43 years
D) 7.95 years
E) 8.51 years

Question 23

A 90-day Treasury bill is quoted as having a price of $987.50. What is its bond equivalent yield?
F) 5.00%
G) 5.13% h. 5.23%
I) 5.62%
J) 5.79%

Question 24

What is the Macaulay's duration of a 10 year zero-coupon bond with a face value of $1,000 and a market rate of 8%, compounded annually is:

A) 10 years
B) 11 years
C) 12 years
D) 13 years
E) None of the above

Question 25

A bank buys a $10,000 Treasury bill with a maturity of 1 year. Current market rates are 8%. If interest rates rise to 8.25%, what is the approximate change in the price of the T-bill?

A) -0.02%
B) -0.23%
C) -2.31%
D) -23.15%
E) -231.15%

Question 26

All other things the same, low coupon bonds have greater relative price volatility than high coupon bonds.

Question 27

All other things the same, longer maturity bonds have greater relative price volatility than shorter maturity bonds.

Question 28

A stripped security:

A) pays no interest.
B) has no par value.
C) is easier to value than a traditional bond.
D) should sell as a package of zero coupon bonds.
E) None of the above

Question 29

The effective annual interest rate will never be less than the simple interest rate.

Question 30

The greater the compounding frequency, the higher the future value, everything else the same.

Question 31

The Macaulay's duration of a 10-year, 10% bond with a face value of $1,000 and a market rate of 8%, compounded annually is:

A) 10 years
B) 11 years
C) 12 years
D) 13 years
E) None of the above

Question 32

Duration:

A) is always greater than maturity.
B) rises as the coupon payment rises.
C) measures how bond prices change with changes in maturity.
D) is a measure of total return.
E) is a measure of how price sensitive a bond is to a change in interest rates.

Question 33

A bond that with a 12% coupon rate (paid semi-annually) has two years to maturity. If the current discount rate is 10%, what is the bond's Macaulay's duration?

A) 4.00 years
B) 3.47 years
C) 2.00 years
D) 1.73 years
E) 1.50 years

Question 34

Which of the following is false?

A) As interest rates rise, bond prices rise, everything else the same.
B) Given an absolute change in interest rates, the percentage increase in a bond's price will be greater than the percentage decrease, everything else the same.
C) Long-term bonds change proportionately more in price than short-term bonds for a given rate change, everything else the same.
D) A bond with a lower coupon will change more in price than a bond with a higher coupon, everything else the same.
E) A bond's duration is a measure of its price elasticity.

Question 35

A 90-day Treasury bill is quoted as having a 6% bond equivalent yield. What is the effective annual yield?

A) 6.00%
B) 6.14%
C) 6.23%
D) 6.62%
E) 6.79%

Question 36

Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

A) A 25-year 11% coupon bond.
B) A 25-year 7.5% coupon bond.
C) A 25-year zero-coupon bond.
D) A 3-year zero coupon bond.
E) A 3-year bond with a 7.5% coupon.

Question 37

A bond that has an annual coupon rate of 15% has two years to maturity. If the current discount rate is 8%, what is the bond's Macaulay's duration?

A) 2.00 years
B) 1.99 years
C) 1.88 years
D) 1.77 years
E) 1.66 years

Question 38

For a given absolute change in interest rates, the percentage increase in an option free bond's price will be less than the percentage decrease.

Question 39

Bond prices and interest rates move in the same direction.

Question 40

A three-year 9% bond is trading at par of $5,000. If you buy the bond expecting to hold it to maturity and believe you can reinvest the $225 semi-annual coupon payments at a 3.5% semi-annual rate through maturity. The total return on this investment is _____ annually.

A) 3.50%
B) 4.50%
C) 7.00%
D) 8.80%
E) 9.00%

Question 41

Why might a security be worth more if its cash flows are "stripped "?

Question 42

Why is knowing a bond's duration useful?

Question 43

The greater the compounding frequency, the higher the present value, everything else the same.

Question 44

Discuss why the effective annual rate will never be less than the simple interest rate.

Question 45

What are some of the problems with the discount yield?

Question 46

Assuming all other factors are held constant, discuss how changes in each of the following impact a bond's duration.
-Maturity
-Coupon Rate
-Market Rate

Question 47

The duration of any security with interim cash flows will be less than the security's maturity.

Question 48

Using a 360-day year results in higher returns than using a 365-day year.

Question 49

There is an inverse relationship between a bond's duration and its price volatility.