Question 1

For many years, real rates of interest tended to fluctuate more wildly than nominal rates of interest.

Accepted Answer

A) True 
 B)False  False

Question 2

Which of the following bonds has the longest duration?

Accepted Answer

A) 5-year coupon bond 
B) 5-year, zero-coupon bond 
C) 10-year coupon bond 
D) 10-year, zero-coupon bond 
A) 5-year coupon bond 
B) 5-year, zero-coupon bond 
C) 10-year coupon bond 
D) 10-year, zero-coupon bond D

Question 3

A United States Treasury "strip" is a zero-coupon bond.

Accepted Answer

A) True 
 B)False  True

Question 4

Consider the impact of inflation risk on the term structure of interest rates. If investors become more wary of inflation, one would expect to observe a steeper, more upwards sloping, term structure of interest rates.

Accepted Answer

A) True 
 B)False

Question 5

Which bond is more sensitive to an interest rate change of 0.75 percent?
Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000.
Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000.

Accepted Answer

A) Bond A 
B) Bond B 
C) Both are equally sensitive. 
D) Cannot be determined 
A) Bond A 
B) Bond B 
C) Both are equally sensitive. 
D) Cannot be determined

Question 6

Short-term and long-term interest rates always move in parallel.

Accepted Answer

A) True 
 B)False

Question 7

If a bond's volatility is 5.0 percent and its yield to maturity changes by 0.5 percent (points), then the price of the bond

Accepted Answer

A) changes by 5.0 percent. 
B) changes by 2.5 percent. 
C) changes by 7.5 percent. 
D) will not change. 
A) changes by 5.0 percent. 
B) changes by 2.5 percent. 
C) changes by 7.5 percent. 
D) will not change.

Question 8

A three-year bond with 10 percent coupon rate and $1,000 face value yields 8 percent. Assuming annual coupon payments, calculate the price of the bond.

Accepted Answer

A) $857.96 
B) $951.96 
C) $1,000.00 
D) $1,051.54 
A) $857.96 
B) $951.96 
C) $1,000.00 
D) $1,051.54

Question 9

A four-year bond has an 8 percent coupon rate and a face value of $1,000. If the current price of the bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest payments).

Accepted Answer

A) 8 percent 
B) 10 percent 
C) 12 percent 
D) 6 percent 
A) 8 percent 
B) 10 percent 
C) 12 percent 
D) 6 percent

Question 10

The duration of a zero-coupon bond is the same as its maturity.

Accepted Answer

A) True 
 B)False

Question 11

The yield to maturity on a bond is really its internal rate of return.

Accepted Answer

A) True 
 B)False

Question 12

If the nominal interest rate per year is 10 percent and the inflation rate is 4 percent, what is the real rate of interest?

Accepted Answer

A) 10.0 percent 
B) 4.1 percent 
C) 5.8 percent 
D) 14.0 percent 
A) 10.0 percent 
B) 4.1 percent 
C) 5.8 percent 
D) 14.0 percent

Question 13

A three-year bond has an 8.0 percent coupon rate and a $1,000 face value. If the yield to maturity on the bond is 10 percent, calculate the price of the bond assuming that the bond makes semiannual coupon payments.

Accepted Answer

A) $857.96 
B) $949.24 
C) $1,057.54 
D) $1,000.00 
A) $857.96 
B) $949.24 
C) $1,057.54 
D) $1,000.00

Question 14

The spread of junk bond yields, over that of United States Treasuries, is generally lower than the spread of investment-grade bonds.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements about the relationship between interest rates and bond prices is true?

Accepted Answer

A) There is an inverse relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both). 
B) There is an inverse relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both). 
C) There is a direct relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both). 
D) There is a direct relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both). 
A) There is an inverse relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both). 
B) There is an inverse relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both). 
C) There is a direct relationship between bond prices and interest rates, and the price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both). 
D) There is a direct relationship between bond prices and interest rates, and the price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).

Question 16

Inflation-indexed bonds were almost unknown in the United States before 1997.

Accepted Answer

A) True 
 B)False

Question 17

The interest rate represented by "r2" is the

Accepted Answer

A) spot rate on a one-year investment. 
B) spot rate on a two-year investment. 
C) expected spot rate two years from today. 
D) expected spot rate one year from today. 
A) spot rate on a one-year investment. 
B) spot rate on a two-year investment. 
C) expected spot rate two years from today. 
D) expected spot rate one year from today.

Question 18

What are TIPs? Briefly explain.

Accepted Answer

TIPs (Treasury inflation-protected secur

Question 19

A bond with duration of 5.7 years has a yield to maturity of 9 percent. The bond's volatility (modified duration)is

Accepted Answer

A) 1.9 percent. 
B) 5.2 percent. 
C) 5.7 percent. 
D) 9.0 percent. 
A) 1.9 percent. 
B) 5.2 percent. 
C) 5.7 percent. 
D) 9.0 percent.

Question 20

(1 + rnominal)= (1 + rreal)(1 + inflation rate).

Accepted Answer

A) True 
 B)False

Exam 3: Valuing Bonds

For many years, real rates of interest tended to fluctuate more wildly than nominal rates of interest.

Which of the following bonds has the longest duration?

A United States Treasury "strip" is a zero-coupon bond.

Consider the impact of inflation risk on the term structure of interest rates. If investors become more wary of inflation, one would expect to observe a steeper, more upwards sloping, term structure of interest rates.

Which bond is more sensitive to an interest rate change of 0.75 percent? Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000. Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000.

Short-term and long-term interest rates always move in parallel.

If a bond's volatility is 5.0 percent and its yield to maturity changes by 0.5 percent (points), then the price of the bond

A three-year bond with 10 percent coupon rate and $1,000 face value yields 8 percent. Assuming annual coupon payments, calculate the price of the bond.

A four-year bond has an 8 percent coupon rate and a face value of $1,000. If the current price of the bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest payments).

The duration of a zero-coupon bond is the same as its maturity.

The yield to maturity on a bond is really its internal rate of return.

If the nominal interest rate per year is 10 percent and the inflation rate is 4 percent, what is the real rate of interest?

A three-year bond has an 8.0 percent coupon rate and a $1,000 face value. If the yield to maturity on the bond is 10 percent, calculate the price of the bond assuming that the bond makes semiannual coupon payments.

The spread of junk bond yields, over that of United States Treasuries, is generally lower than the spread of investment-grade bonds.

Which of the following statements about the relationship between interest rates and bond prices is true?

Inflation-indexed bonds were almost unknown in the United States before 1997.

The interest rate represented by "r2" is the

What are TIPs? Briefly explain.

A bond with duration of 5.7 years has a yield to maturity of 9 percent. The bond's volatility (modified duration)is

(1 + rnominal)= (1 + rreal)(1 + inflation rate).

Introduction to Corporate Finance

How to Calculate Present Values

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters

The interest rate represented by "r₂" is the

(1 + r_nominal)= (1 + r_real)(1 + inflation rate).