Question 1

The ___________ the coupon and the ______________ the maturity; the __________ the duration of a bond,ceteris paribus.

Accepted Answer

A) larger; longer; longer 
B) larger; longer; shorter 
C) smaller; shorter; longer 
D) smaller; shorter; shorter 
E) None of the options presented

Question 2

How does an increase in interest rates affect a security's duration?

Accepted Answer

The answer of How does an increase in interest rates...

Question 3

The interest rate used to find the present value of a financial security is the

Accepted Answer

A) expected rate of return. 
B) required rate of return. 
C) realized rate of return. 
D) realized yield to maturity. 
E) current yield.

Question 4

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.

Question 5

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

Accepted Answer

The answer of Is the realized rate of return related...

Question 6

The duration of a 180-day T-Bill is (in years)

Accepted Answer

A) 0.493. 
B) 0.246. 
C) 1. 
D) 0. 
E) indeterminatE.180/365

Question 7

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 percent 
B) 8.51 percent 
C) 5.84 percent 
D) 4.44 percent 
E) 2.96 percent

Question 8

A corporate bond returns 12 percent of its cost (in PV terms)in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

Accepted Answer

A) 3.68 years 
B) 2.50 years 
C) 4.00 years 
D) 3.75 years 
E) 3.32 years

Question 9

A six-year maturity bond has a five-year duration. Over the next year maturity will decline by one year and duration will decline by

Accepted Answer

A) less than one year. 
B) more than one year. 
C) one year. 
D) N years. 
E) N/(N-1)years.

Question 10

At equilibrium,a security's required rate of return will be less than its expected rate of return.

Accepted Answer

A) True 
 B)False

Question 11

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

Accepted Answer

A) The bond was purchased at a premium to par. 
B) The coupon rate was 8 percent. 
C) The required return was greater than 6 percent. 
D) The coupons were reinvested at a higher rate than expected. 
E) The bond must have been a zero coupon bond.

Question 12

If interest rates increase,the value of a fixed income contract decreases and vice versa.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

An investor is considering purchasing a Treasury bond with a 16-year maturity,a 6 percent coupon and a 7 percent required rate of return. The bond pays interest semiannually.
a. What is the bond's modified duration?
b. If annual promised yields decrease 30 basis points immediately after the purchase,what is the predicted price change in dollars based on the bond's duration?

Accepted Answer

The answer of An investor is considering purchasing a Treasury...

Question 16

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

Accepted Answer

A) N. 
B) 0. 
C) sum of the years/N. 
D) N!/N2. 
E) none of the options.

Question 17

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

You would want to purchase a security if P ____________ PV or E(r) ____________ r.

Accepted Answer

A) ≥; ≤ 
B) ≥; ≥ 
C) ≤; ≥ 
D) ≤; ≤

Question 20

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

Exam 3: Interest Rates and Security Valuation

The _ the coupon and the the maturity; the __ the duration of a bond,ceteris paribus.

How does an increase in interest rates affect a security's duration?

The interest rate used to find the present value of a financial security is the

Duration is

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

The duration of a 180-day T-Bill is (in years)

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?

A corporate bond returns 12 percent of its cost (in PV terms) in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

A six-year maturity bond has a five-year duration. Over the next year maturity will decline by one year and duration will decline by

At equilibrium,a security's required rate of return will be less than its expected rate of return.

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

If interest rates increase,the value of a fixed income contract decreases and vice versa.

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

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

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

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

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

You would want to purchase a security if P PV or E(r) r.

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