Question 1

Zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years and a required rate of return of 9 percent. What is the current price?

Accepted Answer

A) $363,212 
B) $385,500 
C) $422,400 
D) $424,100 
E) $525,400 
A) $363,212 
B) $385,500 
C) $422,400 
D) $424,100 
E) $525,400 C

Question 2

The prices of bonds with ____ are most sensitive to interest rate movements.

Accepted Answer

A) high coupon payments 
B) zero coupon payments 
C) small coupon payments 
D) None of these are correct because the size of the coupon payment does not affect the sensitivity of bond prices to interest rate movements. 
A) high coupon payments 
B) zero coupon payments 
C) small coupon payments 
D) None of these are correct because the size of the coupon payment does not affect the sensitivity of bond prices to interest rate movements. B

Question 3

Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)

Accepted Answer

A) reduced Treasury borrowing along with anticipation that money supply growth will decrease 
B) reduced Treasury borrowing along with anticipation that money supply growth will increase 
C) an anticipated drop in money supply growth along with increasing Treasury borrowing 
D) higher levels of Treasury borrowing and corporate borrowing 
A) reduced Treasury borrowing along with anticipation that money supply growth will decrease 
B) reduced Treasury borrowing along with anticipation that money supply growth will increase 
C) an anticipated drop in money supply growth along with increasing Treasury borrowing 
D) higher levels of Treasury borrowing and corporate borrowing B

Question 4

With a(n)____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.

Accepted Answer

A) matching 
B) laddered 
C) barbell 
D) interest rate 
E) None of these are correct. 
A) matching 
B) laddered 
C) barbell 
D) interest rate 
E) None of these are correct.

Question 5

In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.

Accepted Answer

A) True 
 B)False

Question 6

The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.

Accepted Answer

A) True 
 B)False

Question 7

The prices of ____-coupon bonds and bonds with ____ maturities are most sensitive to changes in the required rate of return.

Accepted Answer

A) low; short 
B) low; long 
C) high; short 
D) high; long 
A) low; short 
B) low; long 
C) high; short 
D) high; long

Question 8

A(n)____ in the expected level of inflation results in ____ pressure on bond prices.

Accepted Answer

A) increase; upward 
B) increase; downward 
C) decrease; downward 
D) None of these are correct. 
A) increase; upward 
B) increase; downward 
C) decrease; downward 
D) None of these are correct.

Question 9

A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?

Accepted Answer

A) 13 percent 
B) 12 percent 
C) 11 percent 
D) 10 percent 
A) 13 percent 
B) 12 percent 
C) 11 percent 
D) 10 percent

Question 10

The ____________ was established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.

Accepted Answer

A) Financial Risk Assessment Commission 
B) Financial Markets Protection Agency 
C) Financial Stability Oversight Council 
D) Federal Bureau of Financial Markets 
A) Financial Risk Assessment Commission 
B) Financial Markets Protection Agency 
C) Financial Stability Oversight Council 
D) Federal Bureau of Financial Markets

Question 11

Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?

Accepted Answer

A) $1,063.40 
B) $1,000 
C) $939.25 
D) None of these are correct. 
A) $1,063.40 
B) $1,000 
C) $939.25 
D) None of these are correct.

Question 12

A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

Accepted Answer

A) $1,069.31 
B) $1,000.00 
C) $971.20 
D) $927.66 
E) None of these are correct. 
A) $1,069.31 
B) $1,000.00 
C) $971.20 
D) $927.66 
E) None of these are correct.

Question 13

The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit. ​

Accepted Answer

A) True 
 B)False

Question 14

Using a(n)____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

Accepted Answer

A) matching 
B) laddered 
C) barbell 
D) interest rate 
E) None of these are correct. 
A) matching 
B) laddered 
C) barbell 
D) interest rate 
E) None of these are correct.

Question 15

If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.

Accepted Answer

A) high-coupon bonds; more favorably affected by declining interest rates 
B) zero- or low-coupon bonds; more favorably affected by declining interest rates 
C) zero- or low-coupon bonds; more favorably affected by rising interest rates 
D) high-coupon bonds; completely insulated from rising interest rates 
A) high-coupon bonds; more favorably affected by declining interest rates 
B) zero- or low-coupon bonds; more favorably affected by declining interest rates 
C) zero- or low-coupon bonds; more favorably affected by rising interest rates 
D) high-coupon bonds; completely insulated from rising interest rates

Question 16

If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; decrease 
D) decrease; increase 
A) increase; increase 
B) increase; decrease 
C) decrease; decrease 
D) decrease; increase

Question 17

When financial institutions expect interest rates to ____, they may ____.

Accepted Answer

A) increase; sell bonds and buy short-term securities 
B) increase; sell short-term securities and buy bonds 
C) decrease; sell bonds and buy short-term securities 
D) increase; sell short-term securities and buy bonds AND decrease; sell bonds and buy short-term securities 
A) increase; sell bonds and buy short-term securities 
B) increase; sell short-term securities and buy bonds 
C) decrease; sell bonds and buy short-term securities 
D) increase; sell short-term securities and buy bonds AND decrease; sell bonds and buy short-term securities

Question 18

The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is ​

Accepted Answer

A) - 0.36. 
B) - 0.44. 
C) - 0.55. 
D) - 0.67. 
E) 0.67. 
A) - 0.36. 
B) - 0.44. 
C) - 0.55. 
D) - 0.67. 
E) 0.67.

Question 19

The appropriate discount rate for valuing any bond is the

Accepted Answer

A) bond's coupon rate. 
B) bond's coupon rate adjusted for the expected inflation rate over the life of the bond. 
C) Treasury bill rate with an adjustment to include a risk premium if one exists. 
D) yield that could be earned on alternative investments with similar risk and maturity. 
A) bond's coupon rate. 
B) bond's coupon rate adjusted for the expected inflation rate over the life of the bond. 
C) Treasury bill rate with an adjustment to include a risk premium if one exists. 
D) yield that could be earned on alternative investments with similar risk and maturity.

Question 20

For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the ​

Accepted Answer

A) greater is the premium on the price. 
B) greater is the discount on the price. 
C) smaller is the premium on the price. 
D) smaller is the discount on the price. 
A) greater is the premium on the price. 
B) greater is the discount on the price. 
C) smaller is the premium on the price. 
D) smaller is the discount on the price.

Exam 8: Bond Valuation and Risk

Zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years and a required rate of return of 9 percent. What is the current price?

The prices of bonds with ____ are most sensitive to interest rate movements.

Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)

With a(n)____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.

In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.

The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.

The prices of ____-coupon bonds and bonds with ____ maturities are most sensitive to changes in the required rate of return.

A(n)____ in the expected level of inflation results in ____ pressure on bond prices.

A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?

The ____________ was established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.

Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?

A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit. ​

Using a(n)____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.

If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

When financial institutions expect interest rates to ____, they may ____.

The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is ​

The appropriate discount rate for valuing any bond is the

For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the ​

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

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Commercial Bank Operations

Bank Regulation

Bank Management

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Finance Company Operations

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Securities Operations

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Filters

The prices of -coupon bonds and bonds with maturities are most sensitive to changes in the required rate of return.

A(n) in the expected level of inflation results in pressure on bond prices.

The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.

If a financial institution's bond portfolio contains a relatively large portion of , it will be .

If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to and prices of existing bonds to .

When financial institutions expect interest rates to , they may .

The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is

For a bond of a given par value, the higher the investor's required rate of return is above the coupon rate, the