Question 1

Both stocks and bonds are valued by summing the discounted future flows of interest (or dividends) and the repayment of principal (or sale of the stock).

Accepted Answer

A) True 
 B)False  True

Question 2

Walter purchased an Intel bond with a 6% coupon rate and a 15-year maturity for $970. After holding the bond for 5 years, the bond now has a 7% YTM. What return would Walter earn if he sold the bond? Assume the coupon payments are reinvested at the calculated return.

Accepted Answer

Find Selling Price: FV=1,000; N=20; I=3.5%; PMT=30; Compute PV = 928.938
FV=928.938; PV=-970; N=10; PMT=30; Compute I = 2.7187 x 2 = 5.437%

Question 3

If a bond has a coupon rate that is greater than the bond's YTM, the bond:

Accepted Answer

A)  will sell at a premium. 
B)  will sell at par. 
C)  will sell at a discount. 
D)  will not be called. 
A)  will sell at a premium. 
B)  will sell at par. 
C)  will sell at a discount. 
D)  will not be called. A

Question 4

Based on which of the following term structure theories are forward rates most useful?

Accepted Answer

A)  Expectations theory 
B)  Liquidity preference theory 
C)  Preferred habitat theory 
D)  Market segmentation theory 
A)  Expectations theory 
B)  Liquidity preference theory 
C)  Preferred habitat theory 
D)  Market segmentation theory

Question 5

The yield-to-maturity calculation assumes that coupon payments are reinvested at the:

Accepted Answer

A)  coupon rate on the bond. 
B)  bond's current yield. 
C)  bond's yield to maturity. 
D)  forward interest rate. 
A)  coupon rate on the bond. 
B)  bond's current yield. 
C)  bond's yield to maturity. 
D)  forward interest rate.

Question 6

Which of the following statements is most accurate? The real risk-free rate of interest is:

Accepted Answer

A)  the rate quoted for the shortest-term federal government securities. 
B)  the rate quoted for the longest-term federal government securities. 
C)  the rate on federal government securities adjusted to remove the effects of inflation. 
D)  the rate on federal government securities adjusted to remove the effects of taxes. 
A)  the rate quoted for the shortest-term federal government securities. 
B)  the rate quoted for the longest-term federal government securities. 
C)  the rate on federal government securities adjusted to remove the effects of inflation. 
D)  the rate on federal government securities adjusted to remove the effects of taxes.

Question 7

If the yield curve has a steep upward slope, investors expect:

Accepted Answer

A)  interest rates to increase and inflation rates to decrease. 
B)  interest rates to decrease and inflation rates to increase. 
C)  interest rates to increase and inflation rates to increase. 
D)  interest rates to decrease and inflation rates to decrease. 
A)  interest rates to increase and inflation rates to decrease. 
B)  interest rates to decrease and inflation rates to increase. 
C)  interest rates to increase and inflation rates to increase. 
D)  interest rates to decrease and inflation rates to decrease.

Question 8

What is meant by "yield to maturity"? It is measured as the:

Accepted Answer

A)  coupon payment divided by the face value of the bond. 
B)  coupon payment divided by the current price of the bond. 
C)  rate that equates the bond's current price with the PV of its expected future cash flows. 
D)  rate that equates the bond's face value with the PV of its expected future cash flows. 
A)  coupon payment divided by the face value of the bond. 
B)  coupon payment divided by the current price of the bond. 
C)  rate that equates the bond's current price with the PV of its expected future cash flows. 
D)  rate that equates the bond's face value with the PV of its expected future cash flows.

Question 9

Sam holds a $1 million bond portfolio with an average maturity of 9 years, whereas Walt holds a $1 million bond portfolio with an average maturity of 3 years. If interest rates increase substantially, Sam's portfolio will experience the:

Accepted Answer

A)  larger decline in value of the two portfolios. 
B)  larger increase in value of the two portfolios. 
C)  smaller decline in value of the two portfolios. 
D)  smaller increase in value of the two portfolios. 
A)  larger decline in value of the two portfolios. 
B)  larger increase in value of the two portfolios. 
C)  smaller decline in value of the two portfolios. 
D)  smaller increase in value of the two portfolios.

Question 10

As interest rates increase, long bonds decrease in price more slowly than short bonds.

Accepted Answer

A) True 
 B)False

Question 11

Bond traders use the term "basis point" to mean one percentage point in interest rate.

Accepted Answer

A) True 
 B)False

Question 12

To achieve the maximum price impact from an estimated interest rate decrease, a bond buyer should purchase bonds with relatively:

Accepted Answer

A)  high coupon rates and long maturities. 
B)  high coupon rates and short maturities. 
C)  low coupon rates and long maturities. 
D)  low coupon rates and short maturities. 
A)  high coupon rates and long maturities. 
B)  high coupon rates and short maturities. 
C)  low coupon rates and long maturities. 
D)  low coupon rates and short maturities.

Question 13

What is the difference between yield-to-maturity (YTM) and realized compound yield (RCY)?

Accepted Answer

A)  They are actually the same concept. 
B)  YTM is the actual return, whereas, RCY is the expected return. 
C)  RCY is the actual return, whereas, YTM is the expected return. 
D)  YTM considers only coupon payments, whereas, RCY includes all a bond's cash flows. 
A)  They are actually the same concept. 
B)  YTM is the actual return, whereas, RCY is the expected return. 
C)  RCY is the actual return, whereas, YTM is the expected return. 
D)  YTM considers only coupon payments, whereas, RCY includes all a bond's cash flows.

Question 14

Six years ago, Carl purchased an 8% coupon bond that had 10 years to maturity for $1,150. Since the bond purchase, the required return on the bond has remained constant. If Carl sells the bond now, the price he receives for the bond will be:

Accepted Answer

A)  $1,150. 
B)  between $1,000 and $1,150. 
C)  higher than $1,150. 
D)  less than $1,000. 
A)  $1,150. 
B)  between $1,000 and $1,150. 
C)  higher than $1,150. 
D)  less than $1,000.

Question 15

An investor has three sources of dollar returns from a bond investment. Which of the following is not included among the three sources?

Accepted Answer

A)  The semi-annual coupon payments 
B)  The interest earned on reinvesting the coupon payments 
C)  The principal paid at maturity 
D)  The interest earned on reinvesting the last coupon and the principal 
A)  The semi-annual coupon payments 
B)  The interest earned on reinvesting the coupon payments 
C)  The principal paid at maturity 
D)  The interest earned on reinvesting the last coupon and the principal

Question 16

Acme Inc.'s pension fund plans to purchase 10-year, zero-coupon bonds. The fund plans to purchase $50 million worth of bonds. If the required return on the bonds is 7.4%, how many bonds will the fund purchase?

Accepted Answer

FV=1,000; N=20; I=3.

Question 17

Assume a bond has a YTM of 8% and its YTM increases by 2 basis points. What is the new YTM on the bond?

Accepted Answer

A)  8.002% 
B)  8.020% 
C)  8.200% 
D)  10.000% 
A)  8.002% 
B)  8.020% 
C)  8.200% 
D)  10.000%

Question 18

Find the price for a Bisco bond that has a coupon rate of 7%, 12 years to maturity and a required yield of 6.4%.

Accepted Answer

FV=1,000; N=24; PMT=

Question 19

The vast majority of corporate bonds pay floating rates on a quarterly basis.

Accepted Answer

A) True 
 B)False

Question 20

A financial crisis or an accounting scandal can just as easily cause yield spreads to widen as weak earnings at a company.

Accepted Answer

A) True 
 B)False

Exam 17: Bond Yields and Prices

Both stocks and bonds are valued by summing the discounted future flows of interest (or dividends) and the repayment of principal (or sale of the stock).

Walter purchased an Intel bond with a 6% coupon rate and a 15-year maturity for $970. After holding the bond for 5 years, the bond now has a 7% YTM. What return would Walter earn if he sold the bond? Assume the coupon payments are reinvested at the calculated return.

If a bond has a coupon rate that is greater than the bond's YTM, the bond:

Based on which of the following term structure theories are forward rates most useful?

The yield-to-maturity calculation assumes that coupon payments are reinvested at the:

Which of the following statements is most accurate? The real risk-free rate of interest is:

If the yield curve has a steep upward slope, investors expect:

What is meant by "yield to maturity"? It is measured as the:

Sam holds a $1 million bond portfolio with an average maturity of 9 years, whereas Walt holds a $1 million bond portfolio with an average maturity of 3 years. If interest rates increase substantially, Sam's portfolio will experience the:

As interest rates increase, long bonds decrease in price more slowly than short bonds.

Bond traders use the term "basis point" to mean one percentage point in interest rate.

To achieve the maximum price impact from an estimated interest rate decrease, a bond buyer should purchase bonds with relatively:

What is the difference between yield-to-maturity (YTM) and realized compound yield (RCY)?

Six years ago, Carl purchased an 8% coupon bond that had 10 years to maturity for $1,150. Since the bond purchase, the required return on the bond has remained constant. If Carl sells the bond now, the price he receives for the bond will be:

An investor has three sources of dollar returns from a bond investment. Which of the following is not included among the three sources?

Acme Inc.'s pension fund plans to purchase 10-year, zero-coupon bonds. The fund plans to purchase $50 million worth of bonds. If the required return on the bonds is 7.4%, how many bonds will the fund purchase?

Assume a bond has a YTM of 8% and its YTM increases by 2 basis points. What is the new YTM on the bond?

Find the price for a Bisco bond that has a coupon rate of 7%, 12 years to maturity and a required yield of 6.4%.

The vast majority of corporate bonds pay floating rates on a quarterly basis.

A financial crisis or an accounting scandal can just as easily cause yield spreads to widen as weak earnings at a company.

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