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Investments & Securities
Q:
Davis Industrial bonds have a current market price of $990 and a 6 percent coupon. The bonds pay interest semi-annually on March 1 and September 1. Assume today is January 1. How many months of accrued interest are included in the dirty price of these bonds?
A. zero
B. two
C. three
D. four
E. five
Q:
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.
Q:
A bond has a current yield that is equal to the yield-to-maturity. Given this, which one of the following must also be true?
A. The bond must pay annual interest.
B. The maturity value must be greater than the bond price.
C. The bond can have any maturity date.
D. The coupon rate must exceed the current yield.
E. The price must exceed the par value.
Q:
Assuming there is no default risk, both a premium bond and a discount bond must share which one of the following characteristics?
A. market price less than a par value bond
B. yield-to-maturity less than the coupon rate
C. maturity value equal to a par value bond
D. current yield equal to that of a par value bond
E. coupon rate exceeding the yield-to-maturity
Q:
Which one of the following statements applies to a par value bond?
A. The current yield is less than the coupon rate.
B. The yield-to-maturity equals the risk-free, or Treasury bill, rate.
C. The par value exceeds the market price.
D. The current yield, coupon rate, and yield-to-maturity are equal.
E. The dirty price equals the clean price.
Q:
Which one of the following statements is correct concerning discount bonds?A. The current yield is less than the yield to maturity.B. The bonds will be redeemed at maturity for less than face value.C. The coupon rate is greater than the current yield.D. The clean price is greater than the dirty price.E. Only zero-coupon bonds sell at a discount.
Q:
Which one of the following statements is correct concerning premium bonds?A. The premium increases when interest rates increase.B. The coupon rate is less than the current yield.C. As the time to maturity decreases, the premium increases.D. The yield to maturity is less than the coupon rate.E. The par value exceeds the face value.
Q:
Which one of the following will occur if a bond's discount rate is lowered?
A. market price will increase
B. coupon payment amount will decrease
C. current yield will increase
D. call premium will increase
E. coupon rate will decrease
Q:
Which one of the following will decrease the current yield of a bond?
A. increase in the face value
B. change from semi-annual to annual coupon payments
C. decrease in the call premium
D. decrease in the coupon rate
E. decrease in the bond price
Q:
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
Q:
A basic bond that has a face value of $1,000 and pays regular semiannual coupon payments is referred to as which one of the following?
A. pure discount bond
B. premium bond
C. inflation bond
D. straight bond
E. conversion bond
Q:
Periodically rebalancing a portfolio so that the duration continues to match the target date is called:
A. risk assessment.
B. duration testing.
C. dedication matching.
D. portfolio matching.
E. dynamic immunization.
Q:
Price risk is the risk that:A. coupon payments will be reinvested at a rate that is less than the bond's yield-to-maturity.B. the bond principal will not be paid in full or on time.C. the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates.D. market prices increase due to market interest rate changes making bonds more expensive to purchase.E. the yield-to-maturity will be less than the inflation risk causing the real rate of return to be negative.
Q:
Which one of the following involves creating a portfolio in a manner which minimizes the uncertainty of the portfolio's maturity target date value?
A. duration
B. reinvestment
C. immunization
D. modification
E. call protection
Q:
Which one of the following risks is associated with investing a coupon payment at a rate that is lower than the bond's yield-to-maturity?
A. reinvestment rate risk
B. current rate risk
C. payment risk
D. current yield risk
E. maturity risk
Q:
A dedicated portfolio is a bond portfolio created to:
A. maximize current interest income.
B. provide an increasing steady stream of income.
C. maximize the return given declining interest rates.
D. fund a future cash outlay.
E. avoid taxation.
Q:
The yield value of a 32nd is the change needed in which one of the following to cause a bond's price to change by 1/32nd?
A. current yield
B. yield to maturity
C. coupon rate
D. call premium
E. call date
Q:
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
Q:
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
Q:
The rate of return an investor actually earns from owning a bond is called which one of the following?
A. market return
B. realized yield
C. annualized coupon yield
D. maturity yield
E. call yield
Q:
Which one of the following is the risk that market interest rates may increase causing the price of a bond to decline?
A. inflation risk
B. reinvestment risk
C. yield risk
D. interest rate risk
E. default risk
Q:
The yield that a bond will earn given that it is bought back by the issuer at the earliest possible date is the:
A. market yield.
B. current yield.
C. yield to maturity.
D. yield to put.
E. yield to call.
Q:
An issuer has a bond outstanding that matures in 18 years. Which one of the following prevents the issuer from buying back that bond today?
A. make-whole provision
B. call protection period
C. newly issued provision
D. put provision
E. call premium
Q:
Which one of the following prices is equal to the present value of a bond's future cash flows and is paid when a bond is redeemed prior to maturity?
A. call protected
B. face value
C. make-whole call
D. tender-offer
E. deferred
Q:
Which one of the following does an issuer pay to redeem a bond prior to maturity?
A. par value
B. face value
C. put price
D. call price
E. discounted price
Q:
A callable bond:
A. can be paid off early at either the issuer's or the bondholder's request.
B. can be redeemed early if the bondholder so requests.
C. can have its maturity date extended by the issuer.
D. can be redeemed by the issuer prior to maturity.
E. is a bond that pays a variable interest payment.
Q:
The dirty price of a bond is the:
A. invoice price.
B. quoted price.
C. issue price.
D. average of the bid and asked prices.
E. dealer purchase price.
Q:
The price of a bond, net of accrued interest, is referred to as the bond's:A. dirty price.B. par value.C. clean price.D. maturity value.E. discount value.
Q:
A discount bond:
A. pays a variable coupon payment.
B. has a market price in excess of face value.
C. has a duration that is less than that required by an investor.
D. has a par value that is less than $1,000.
E. has a face value that exceeds the market value.
Q:
A premium bond is defined as a bond that:A. has a duration that is less than 1.0.B. has a face value that exceeds its market value.C. is callable at a price which exceeds the face value.D. has a market price that exceeds par value.E. is selling for less than face value.
Q:
The yield to maturity is the:
A. discount rate that equates a bond's price with the present value of the bond's future cash flows.
B. rate you will earn if your bond is called on the earliest possible date.
C. rate computed by dividing the annual interest by the par value.
D. rate used to compute the amount of each interest payment.
E. rate computed as the annual interest divided by the market value.
Q:
What is the annual interest divided by the market price of a bond called?
A. coupon rate
B. effective annual yield
C. current yield
D. yield to maturity
E. yield to market
Q:
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
Q:
Identify and describe four of the six components of nominal interest rates as supported by modern term structure theory.
Q:
Write a short paragraph comparing a bank discount rate to a bond equivalent rate.
Q:
Identify and describe five interest rates that directly apply to the money market.
Q:
The following premiums apply to a 6-month bond: interest rate risk premium = 0.22 percent; real rate = 3.50 percent; default premium = 0.12 percent; inflation premium = 1.45 percent. What is the expected difference in nominal interest rates between a 6-month risky security and a 6-month, default-free security?A. 0.12 percentB. 0.34 percentC. 0.37 percentD. 1.57 percentE. 1.60 percent
Q:
The following premiums apply to a 8-month bond: interest rate risk premium = 0.32 percent; liquidity premium = 0.44 percent; default premium = 1.23 percent; inflation premium = 3.12 percent; real rate = 3.20 percent. What is the expected nominal interest rate on a 8-month risky security given these values?
A. 5.85 percent
B. 6.45 percent
C. 7.55 percent
D. 8.31 percent
E. 9.30 percent
Q:
The following premiums apply to a 3-month bond: interest rate risk premium = 0.2 percent; real return = 1.9 percent; default premium = 0.8 percent; inflation premium = 1.4 percent. What is the expected nominal interest rate on a default-free security that has 3 months to maturity?
A. 1.9 percent
B. 2.0 percent
C. 2.1 percent
D. 3.3 percent
E. 3.6 percent
Q:
A two-year STRIPS sells at an interest rate of 3.84 percent and a three-year STRIPS sells at a rate of 3.97 percent. What is the implied one year interest rate two years from now? Assume the rates are effective annual rates.
A. 4.23 percent
B. 4.36 percent
C. 4.41 percent
D. 4.45 percent
E. 4.50 percent
Q:
A one-year STRIPS sells at an interest rate of 3.54 percent and a two-year STRIPS sells at an interest rate of 3.49 percent. What is the implied one year forward rate? Assume the rates are effective annual rates.
A. 3.44 percent
B. 3.50 percent
C. 3.54 percent
D. 3.57 percent
E. 3.60 percent
Q:
What is the one year interest rate one year from now if the current one-year interest rate is 2.55 percent and the two-year interest rate is 3.15 percent? Assume the rates are effective annual rates.
A. 3.62 percent
B. 3.67 percent
C. 3.71 percent
D. 3.75 percent
E. 3.88 percent
Q:
The one-year interest rate is 4.80 percent and the two-year interest rate is 5.13 percent. What is the one year interest rate one year from now? Assume the rates are effective annual rates.
A. 5.02 percent
B. 5.23 percent
C. 5.46 percent
D. 5.51 percent
E. 5.74 percent
Q:
You want to earn a real rate of return of 3.64 percent at a time when the inflation rate is 2.84 percent. What is the approximate nominal rate which you must earn?
A. 6.48 percent
B. 6.66 percent
C. 6.68 percent
D. 6.74 percent
E. 6.81 percent
Q:
A bond has a nominal rate of return of 5.87 percent and the inflation rate is 4.13 percent. What is the approximate real rate?
A. 1.62 percent
B. 1.70 percent
C. 1.74 percent
D. 1.83 percent
E. 1.88 percent
Q:
A $20,000 face value STRIPS is currently quoted at 38.642 and has 8 years to maturity. What is the yield-to-maturity?A. 6.26 percentB. 6.30 percentC. 12.25 percentD. 12.65 percentE. 12.83 percent
Q:
A $5,000 face value STRIPS matures in 7 years and is currently quoted at a price of 64.238. What is the yield-to-maturity?A. 3.21 percentB. 3.38 percentC. 4.87 percentD. 6.42 percentE. 6.76 percent
Q:
A $50,000 face value STRIPS matures in 12 years and has a yield to maturity of 6.50 percent. What is the current dollar price of this security?A. $21,199.68B. $23,206.44C. $25,038.18D. $26,141.41E. $28,809.18
Q:
What is the current value of a $5,000 face value STRIPS with 6 years to maturity and a yield to maturity of 8.1 percent?A. $2,998.09B. $3,009.16C. $3,105.02D. $3,128.10E. $3,133.40
Q:
A $50,000 face value STRIPS is quoted at 94.300. What is the dollar price?
A. $47,067.50
B. $47,150.00
C. $47,215.00
D. $47,277.78
E. $47,350.00
Q:
A 90-day Treasury bill has a bank discount yield of 4.2 percent. What is the effective annual rate?A. 4.22 percentB. 4.25 percentC. 4.28 percentD. 4.32 percentE. 4.37 percent
Q:
A Treasury bill has 40 days left to maturity. The bank discount yield on the bill is 3.75 percent. What is the effective annual rate?A. 3.55 percentB. 3.66 percentC. 3.77 percentD. 3.88 percentE. 3.99 percent
Q:
A Treasury bill matures in 81 days and has a bond equivalent yield of 2.79 percent. What is the effective annual rate?A. 2.79 percentB. 2.82 percentC. 2.85 percentD. 2.88 percentE. 2.91 percent
Q:
A Treasury bill matures in 68 days and has a bond equivalent yield of 4.05 percent. What is the effective annual rate?A. 4.12 percentB. 4.14 percentC. 4.15 percentD. 4.17 percentE. 4.18 percent
Q:
Your credit card has an annual percentage rate of 18.9 percent and compounds interest daily. What is the effective annual rate?A. 19.47 percentB. 19.58 percentC. 19.82 percentD. 19.94 percentE. 20.80 percent
Q:
A Treasury bill has a face value of $75,000, an asked yield of 3.05 percent, and matures in 35 days. What is the price of this bill?A. $74,687.14B. $74,777.60C. $74,819.80D. $74,868.00E. $74,878.42
Q:
A Treasury bill has a face value of $100,000, a price of $99,797.12, and matures in 35 days. What is the asked yield?A. 1.98 percentB. 2.12 percentC. 2.28 percentD. 3.67 percentE. 3.74 percent
Q:
A Treasury bill has a face value of $250,000, an asked yield of 2.02 percent, and matures in 32 days. What is the price of this bill?A. $249,397.19B. $249,408.08C. $249,511.11D. $249,670.22E. $249,717.08
Q:
What is the bond equivalent yield on a 30-day Treasury bill that has a bank discount yield of 2.01 percent?A. 1.97 percentB. 1.99 percentC. 2.02 percentD. 2.04 percentE. 2.07 percent
Q:
A Treasury bill is quoted at a bank discount yield of 1.21 percent and has 15 days to maturity. What is the bond equivalent yield given that this is a leap year?A. 1.16 percentB. 1.18 percentC. 1.20 percentD. 1.22 percentE. 1.23 percent
Q:
A Treasury bill has 21 days to maturity and a bank discount yield of 1.89 percent. What is the bond equivalent yield?A. 1.89 percentB. 1.90 percentC. 1.92 percentD. 1.94 percentE. 1.96 percent
Q:
A $40,000 face value bond matures in 64 days and has a bank discount yield of 4.5 percent. What is the current value of the bond?A. $39,392.19B. $39,473.14C. $39,486.47D. $39,575.39E. $39,680.00
Q:
A $5,000 face value bond is quoted at a bank discount yield of 2.8 percent. What is the current value of the bond if it matures in 36 days?A. $4,972B. $4,978C. $4,982D. $4,986E. $4,991
Q:
A bond has a face value of $30,000 and matures in 62 days. What is the bank discount yield if the bond is currently selling for $29,750?A. 4.67 percentB. 4.84 percentC. 5.48 percentD. 5.78 percentE. 6.03 percent
Q:
A $1,000 face value, 120-day bond is quoted at a bank discount yield of 3.38 percent. What is the current bond price?A. $957.60B. $960.09C. $974.18D. $982.02E. $988.73
Q:
An investment will make one payment of $22,500 nine years from now. What is the current value of this investment if the nominal rate of return is 4.8 percent?A. $11,980.86B. $12,124.29C. $12,390.08D. $13,515.46E. $14,754.72
Q:
You invest $3,600 today at a nominal annual rate of 5.5 percent. This investment will pay one payment five years from now. What will be the amount of that payment?A. $2,754.48B. $2,906.16C. $4,705.06D. $4,818.09E. $5,018.62
Q:
You want to purchase a security that will pay you $1,000 seven years from now. If you want to earn an annual nominal rate of 6.5 percent, how much should you pay for this investment today?A. $627.41B. $630.17C. $641.41D. $643.51E. $662.01
Q:
Modern term structure theory supports the contention that the term structure of interest rates will:A. be upward sloping.B. be downward sloping.C. be upward sloping in the short-term and relatively flat in the long-term.D. be constant over time.E. change over time.
Q:
Which of the following comprise the nominal interest rate on default-free securities according to the modern view of the term structure of interest rates?
I. liquidity premium
II. real rate
III. interest rate risk premium
IV. inflation premium
A. I and II only
B. II and III only
C. III and IV only
D. II, III, and IV only
E. I, II, III, and IV
Q:
Which one of the following statements concerning the modern fixed-income market is correct?
A. Pension funds generally have a preference for short maturities.
B. Current maturity preference theory states that both borrowers and lenders prefer short maturities.
C. Market segmentation theory does little to explain the modern fixed-income market.
D. The major borrower in the modern market borrows primarily on a long-term basis.
E. Institutional investors tend to invest in only one maturity range.
Q:
Based solely on the maturity preference theory, long-term interest rates:
A. should equal short-term rates.
B. are unrelated to short-term rates.
C. may be higher than or lower than short-term rates.
D. should be lower than short-term rates.
E. should be higher than short-term rates.
Q:
Which of the following statements are true?
I. Lenders have a preference for shorter maturities.
II. Lenders have a preference for longer maturities.
III. Borrowers have a preference for shorter maturities.
IV. Borrowers have a preference for longer maturities.
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only
Q:
According to the expectations theory and the Fisher hypothesis, a downward-sloping term structure is indicative of which of the following based on market expectations?
I. nominal interest rates are expected to increase
II. nominal interest rates are expected to decline
III. inflation rates are expected to increase
IV. inflation rates are expected to decrease
A. I only
B. II only
C. IV only
D. I and III only
E. II and IV only
Q:
The variable f1,1 as used in the expectations theory is interpreted as the forward rate for one year:
A. based on the prior one-year rate.
B. at 1 percent.
C. based on a 1 percent increase from the current rate.
D. commencing in one year.
E. based on a 1 percent probability of occurrence.
Q:
Based on expectations theory, the term structure of interest rates will be _____ anytime investors believe that interest rates will be higher in the future than they are today.
A. volatile
B. flat
C. downward sloping
D. upward sloping
E. vertical
Q:
Inflation-indexed Treasury securities:
I. adjust the principal amount on an annual basis.
II. are default-free.
III. offer a positive real rate of return.
IV. have a variable coupon rate.
A. II and III only
B. III and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV
Q:
Which one of the following debt instruments guarantees investors a positive real rate of return?
A. zero-coupon bond
B. default-free, pure-discount bond
C. T-bill
D. TIPS
E. T-bond
Q:
Which one of the following statements is correct?
A. All real interest rates will be positive as long as the inflation rate is positive.
B. Real rates must exceed inflation rates.
C. Short-term interest rates are affected by future inflation expectations.
D. Treasury bill returns tend to vary in direct relation to inflation rates.
E. The Fisher hypothesis advocates that real interest rates follow inflation rates.
Q:
The approximate nominal interest rate is computed as the real rate:A. minus the risk-free rate.B. minus the inflation rate.C. plus the risk-free rate.D. plus the inflation rate.E. divided by the inflation rate.