Q&A Hero

Q: Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. A. more; lower B. more; higher C. less; lower D. equally; higher or lower

Q: ______________ is an important characteristic of the relationship between bond prices and yields. A. Convexity B. Concavity C. Complexity D. Linearity

Q: All else equal, bond price volatility is greater for __________. A. higher coupon rates B. lower coupon rates C. shorter maturity D. lower default risk

Q: As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer cannot be determined from the information given.

Q: A bond's price volatility _________ at _________ rate as maturity increases. A. increases; an increasing B. increases; a decreasing C. decreases; an increasing D. decreases; a decreasing

Q: A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a _________. A. contingent immunization B. dedication strategy C. duration analysis D. horizon analysis

Q: You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do? A. Short the Canon bond, and buy the Xerox bond. B. Buy the Canon bond, and short the Xerox bond. C. Short both the Canon bond and the Xerox bond. D. Buy both the Canon bond and the Xerox bond.

Q: Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. sometimes be lower than

Q: The duration of a perpetuity varies _______ with interest rates. A. directly B. inversely C. convexly D. randomly

Q: All other things equal, which of the following has the longest duration? A. A 21-year bond with a 10% coupon yielding 10% B. A 20-year bond with a 10% coupon yielding 11% C. A 21-year zero-coupon bond yielding 10% D. A 20-year zero-coupon bond yielding 11%

Q: A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments? A. 2 years B. 2.15 years C. 2.29 years D. 2.53 years

Q: All other things equal(YTM = 10%), which of the following has the shortest duration? A. A 30-year bond with a 10% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond

Q: All other things equal (YTM = 10%), which of the following has the longest duration? A. A 30-year bond with a 10% coupon B. A 20-year bond with a 9% coupon C. A 20-year bond with a 7% coupon D. A 10-year zero-coupon bond

Q: Floating-rate bonds have a __________ that is adjusted with current market interest rates. A. maturity date B. coupon payment date C. coupon rate D. dividend yield

Q: If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) A. capital gain; capital loss B. capital gain; capital gain C. capital loss; capital gain D. capital loss; capital loss

Q: A debenture is _________. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

Q: A mortgage bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

Q: A collateral trust bond is _______. A. secured by other securities held by the firm B. secured by equipment owned by the firm C. secured by property owned by the firm D. unsecured

Q: Sinking funds are commonly viewed as protecting the _______ of the bond. A. issuer B. underwriter C. holder D. dealer

Q: The invoice price of a bond is the ______. A. stated or flat price in a quote sheet plus accrued interest B. stated or flat price in a quote sheet minus accrued interest C. bid price D. average of the bid and ask price

Q: The ___________ is the document that defines the contract between the bond issuer and the bondholder. A. indenture B. covenant agreement C. trustee agreement D. collateral statement

Q: A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A. Increased B. Decreased C. Stayed the same D. The answer cannot be determined from the information given.

Q: The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%? A. 4.08% B. 4.5% C. 5.1% D. 5.6%

Q: If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A. 4.3% B. 4.5% C. 5.2% D. 5.5%

Q: An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A. 4.8% B. 4.85% C. 9.6% D. 9.7%

Q: You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______. A. $9.10 B. $4.25 C. $7.68 D. $5.20

Q: You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______. A. $0 B. $4.27 C. $9.38 D. $33.51

Q: You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___. A. .61% B. -5.39% C. 1.28% D. -3.25%

Q: You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A. 10.4% B. 9.57% C. 7.45% D. 8.78%

Q: The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1.14% B. 3.45% C. 4.59% D. 8.04%

Q: A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A. $4.81 B. $14.24 C. $25 D. $50

Q: If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,925 C. $9,934.37 D. $9,955.43

Q: A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A. $999.55 B. $1,002.01 C. $1,007.45 D. $1,012.13

Q: A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) A. $13.21 B. $12.57 C. $15.44 D. $16.32

Q: If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________. A. 102:10 B. 102:11 C. 102:12 D. 102:13

Q: If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________. A. $9,828.12 B. $9,809.38 C. $9,840.62 D. $9,813.42

Q: One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today? A. 2.07% B. 8.03% C. 9.01% D. 11.12%

Q: On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __. A. prefer the Wildwood bond to the Asbury bondB. prefer the Asbury bond to the Wildwood bondC. be indifferent between the Wildwood bond and the Asbury bondD. The answer cannot be determined from the information given.

Q: On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____. A. prefer the Wildwood bond to the Asbury bondB. prefer the Asbury bond to the Wildwood bondC. be indifferent between the Wildwood bond and the Asbury bondD. The answer cannot be determined from the information given.

Q: On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______. A. The price of the Wildwood bond would decline by more than the price of the Asbury bond.B. The price of the Wildwood bond would decline by less than the price of the Asbury bond.C. The price of the Wildwood bond would increase by more than the price of the Asbury bond.D. The price of the Wildwood bond would increase by less than the price of the Asbury bond.

Q: Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year? A. 5%B. 8.15%C. 7.15%D. 4%

Q: Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year? A. 5%B. 5.15%C. 8.15%D. 9%

Q: The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____. A. 4.8% B. 6.1% C. 7.7% D. 10.4%

Q: A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________. A. $581.97 B. $1,163.93 C. $2,327.87 D. $3,000

Q: A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A. I and II only B. I and III only C. II and III only D. I, II, and III

Q: Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97.22 B. $104.49 C. $364.08 D. $732.14

Q: Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________. A. marketability B. risk C. taxation D. call protection

Q: The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II, and III

Q: Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________. A. expected increases in inflation over time B. expected decreases in inflation over time C. the presence of a liquidity premium D. that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

Q: Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________. A. higher B. lower C. the same D. indeterminate

Q: A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call? A. 6.72% B. 9.17% C. 4.49% D. 8.98%

Q: You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate is equal to its yield to maturity D. its coupon rate is less than its conversion value

Q: Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 4 years from now should be _________. A. 16%B. 18%C. 20%D. 22%

Q: Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 3 years from now should be _________. A. 7%B. 8%C. 9%D. 10%

Q: A 1% decline in yield will have the least effect on the price of a bond with a _________. A. 10-year maturity, selling at 80 B. 10-year maturity, selling at 100 C. 20-year maturity, selling at 80 D. 20-year maturity, selling at 100

Q: Which of the following bonds would most likely sell at the lowest yield? A. A callable debenture B. A puttable mortgage bond C. A callable mortgage bond D. A puttable debenture

Q: Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 2 years from now should be _________. A. 7%B. 8%C. 9%D. 10%

Q: A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year? A. .72% B. 1.85% C. 2.58% D. 3.42%

Q: The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. A. nominal yield B. current yield C. yield to maturity D. yield to call

Q: $1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years from now should be _________. A. 9.55%B. 11.74%C. 14.89%D. 13.73%

Q: $1,000 par value zero-coupon bonds (ignore liquidity premiums) One year from now bond C should sell for ________ (to the nearest dollar). A. $857B. $842C. $835D. $821

Q: $1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about _________. A. 6%B. 7.5 %C. 9.02%D. 10.08%

Q: Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______. A. multiyear analysis B. horizon analysis C. maturity analysis D. reinvestment analysis

Q: You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________. A. 5% B. 5.5% C. 7.6% D. 8.9%

Q: Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity. A. lower than B. slightly higher than C. identical to D. twice as high as

Q: A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458.11 B. $641.11 C. $789.11 D. $1,100.11

Q: A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________. A. .4%; .3% B. .4%; .5% C. .5%; .5% D. .5%; .8%

Q: A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________. A. $1,140 B. $1,170 C. $1,180 D. $1,200

Q: A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________. A. $856.04 B. $891.86 C. $926.47 D. $1,000

Q: A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________. A. $1,000 B. $1,062.81 C. $1,081.82 D. $1,100.03

Q: A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________. A. 6% B. 6.58% C. 7.2% D. 8%

Q: A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________. A. 6% B. 6.49% C. 6.73% D. 7%

Q: A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________. A. 6% B. 7.23% C. 8.12% D. 9.45%

Q: A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________. A. 7.2% B. 8.8% C. 9.1% D. 9.6%

Q: A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________. A. $50 B. $190 C. $200 D. $240

Q: A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________. A. $1,000 B. $884 C. $933 D. $980

Q: Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. A. increase B. decrease C. not change D. change in an unpredictable manner

Q: In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. Zero-coupon bonds B. Coupon bonds selling at a discount C. Coupon bonds selling at a premium D. Floating-rate bonds

Q: Serial bonds are associated with _________. A. staggered maturity dates B. collateral C. coupon payment dates D. conversion features

Q: Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? A. Callable feature B. Convertible feature C. Subordination clause D. Sinking fund