Question 1

Which of the following are common methods of assessing the sensitivity of bonds to a change in the required rate of return on bonds?

Accepted Answer

A) duration and convexity 
B) bond yield elasticity and durability 
C) bond price elasticity and return sensitivity analysis 
D) bond price elasticity and duration 
A) duration and convexity 
B) bond yield elasticity and durability 
C) bond price elasticity and return sensitivity analysis 
D) bond price elasticity and duration

Question 2

If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ pressure on bond prices and ____ pressure on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

Accepted Answer

A) downward; downward 
B) downward; upward 
C) upward; upward 
D) upward; downward 
A) downward; downward 
B) downward; upward 
C) upward; upward 
D) upward; downward

Question 3

An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.

Accepted Answer

A) weak; decrease 
B) strong; increase 
C) weak; increase 
D) strong; decrease 
E) weak; increase AND strong; decrease 
A) weak; decrease 
B) strong; increase 
C) weak; increase 
D) strong; decrease 
E) weak; increase AND strong; decrease

Question 4

A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.

Accepted Answer

A) 1.33 
B) 1.27 
C) 3.24 
D) 1.31 
E) None of these are correct. 
A) 1.33 
B) 1.27 
C) 3.24 
D) 1.31 
E) None of these are correct.

Question 5

Which of the following is NOT a factor affecting the market price of a foreign bond held by a U.S. investor?

Accepted Answer

A) foreign interest rate movements 
B) credit risk 
C) exchange rate fluctuations 
D) All of these are factors affecting the market price of a foreign bond. 
A) foreign interest rate movements 
B) credit risk 
C) exchange rate fluctuations 
D) All of these are factors affecting the market price of a foreign bond.

Question 6

If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.

Accepted Answer

A) underestimate; underestimate 
B) overestimate; overestimate 
C) underestimate; overestimate 
D) overestimate; underestimate 
A) underestimate; underestimate 
B) overestimate; overestimate 
C) underestimate; overestimate 
D) overestimate; underestimate

Question 7

Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.

Accepted Answer

A) True 
 B)False

Question 8

Other things held constant, bond prices should increase when inflationary expectations rise.

Accepted Answer

A) True 
 B)False

Question 9

If the U.S. government announces that it will borrow an additional $400 billion, this announcement will normally cause bond traders to expect ​

Accepted Answer

A) higher interest rates in the future, and they will buy bonds now. 
B) higher interest rates in the future, and they will sell bonds now. 
C) stable interest rates in the future, and they will buy bonds now. 
D) lower interest rates in the future, and they will buy bonds now. 
E) lower interest rates in the future, and they will sell bonds now. 
A) higher interest rates in the future, and they will buy bonds now. 
B) higher interest rates in the future, and they will sell bonds now. 
C) stable interest rates in the future, and they will buy bonds now. 
D) lower interest rates in the future, and they will buy bonds now. 
E) lower interest rates in the future, and they will sell bonds now.

Question 10

The market price of a bond is partly determined by the timing of the payments made to bondholders.

Accepted Answer

A) True 
 B)False

Question 11

International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.

Accepted Answer

A) True 
 B)False

Question 12

The actual relationship reflecting the response of a bond's price to a change in bond yields is

Accepted Answer

A) concave. 
B) convex. 
C) linear. 
D) quadratic. 
A) concave. 
B) convex. 
C) linear. 
D) quadratic.

Question 13

The appropriate price of a bond is simply the sum of the cash flows to be received.

Accepted Answer

A) True 
 B)False

Question 14

A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds make annual payments. The bonds mature in four years. The bank wants to sell them in two years and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years? ​

Accepted Answer

A) $24,113,418 
B) $24,667,230 
C) $25,000,000 
D) $25,891,632 
A) $24,113,418 
B) $24,667,230 
C) $25,000,000 
D) $25,891,632

Question 15

If the coupon rate equals the required rate of return, the price of the bond

Accepted Answer

A) should be above its par value. 
B) should be below its par value. 
C) should be equal to its par value. 
D) is negligible. 
A) should be above its par value. 
B) should be below its par value. 
C) should be equal to its par value. 
D) is negligible.

Question 16

The credit risk premium tends to be larger for bonds that have longer terms to maturity.

Accepted Answer

A) True 
 B)False

Question 17

Any announcement that signals stronger than expected economic growth tends to increase bond prices. ​

Accepted Answer

A) True 
 B)False

Question 18

From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.

Accepted Answer

A) high yield; appreciates 
B) high yield; remains stable 
C) low yield; appreciates 
D) low yield; depreciates 
A) high yield; appreciates 
B) high yield; remains stable 
C) low yield; appreciates 
D) low yield; depreciates

Question 19

If the coupon rate ____ the required rate of return, the price of a bond ____ par value.

Accepted Answer

A) equals; equals 
B) exceeds; is less than 
C) is less than; is greater than 
D) exceeds; is less than AND is less than; is greater than 
E) None of these are correct. 
A) equals; equals 
B) exceeds; is less than 
C) is less than; is greater than 
D) exceeds; is less than AND is less than; is greater than 
E) None of these are correct.

Exam 8: Bond Valuation and Risk

Which of the following are common methods of assessing the sensitivity of bonds to a change in the required rate of return on bonds?

If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ pressure on bond prices and ____ pressure on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.

A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.

Which of the following is NOT a factor affecting the market price of a foreign bond held by a U.S. investor?

If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.

Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.

Other things held constant, bond prices should increase when inflationary expectations rise.

If the U.S. government announces that it will borrow an additional $400 billion, this announcement will normally cause bond traders to expect ​

The market price of a bond is partly determined by the timing of the payments made to bondholders.

International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.

The actual relationship reflecting the response of a bond's price to a change in bond yields is

The appropriate price of a bond is simply the sum of the cash flows to be received.

If the coupon rate equals the required rate of return, the price of the bond

The credit risk premium tends to be larger for bonds that have longer terms to maturity.

Any announcement that signals stronger than expected economic growth tends to increase bond prices. ​

From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.

If the coupon rate ____ the required rate of return, the price of a bond ____ par value.

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

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Management

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Pension Fund Operations

Filters

If the Treasury issues an unusually large amount of bonds in the primary market, it places pressure on bond prices and pressure on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

An economic announcement signaling economic growth in the future will probably cause bond prices to .

If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to the price decline associated with an increase in rates and the price increase associated with a decrease in rates.

If the U.S. government announces that it will borrow an additional $400 billion, this announcement will normally cause bond traders to expect

Any announcement that signals stronger than expected economic growth tends to increase bond prices.

From the perspective of investing institutions, the most attractive foreign bonds offer a and are denominated in a currency that over the investment horizon.

If the coupon rate the required rate of return, the price of a bond par value.