Question 1

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

Accepted Answer

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

Question 2

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% B

Question 3

The three most prominent theories proposed to explain the term structure of interest rates are: __________________,__________________,and __________________.

Accepted Answer

expectations theory,liquidity preference theory,and preferred habitat theory

Question 4

In finding a bond's value,the rate used to discount the bond's future cash flows is:

Accepted Answer

A) the bond's required rate of return. 
B) the firm's weighted average cost of capital. 
C) the firm's after-tax cost of debt. 
D) the bond's coupon rate 
A) the bond's required rate of return. 
B) the firm's weighted average cost of capital. 
C) the firm's after-tax cost of debt. 
D) the bond's coupon rate

Question 5

Assume an investor is considering purchasing an 8 percent semiannual bond with 8 years remaining to maturity when market rates are 6%.The bond's value is closest to:

Accepted Answer

A) $502. 
B) $798. 
C) $1,000. 
D) $1,126. 
A) $502. 
B) $798. 
C) $1,000. 
D) $1,126.

Question 6

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 7

Relative to interest rates,bond prices have:

Accepted Answer

A) an inverse and linear relationship. 
B) a direct and linear relationship. 
C) an inverse and convex relationship. 
D) an inverse and concave relationship. 
A) an inverse and linear relationship. 
B) a direct and linear relationship. 
C) an inverse and convex relationship. 
D) an inverse and concave relationship.

Question 8

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 9

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 10

Assume an investor buys an 8 percent,semi-annual,10-year bond at par.He sells it two years later after market interest rates have decreased to 6 percent.The investor's capital gain is closest to:

Accepted Answer

A) $41. 
B) $124. 
C) $126. 
D) $149. 
A) $41. 
B) $124. 
C) $126. 
D) $149.

Question 11

What is meant by the real risk-free rate of interest?It is the:

Accepted Answer

A) opportunity cost of foregoing consumption. 
B) rate actually used in the market,not in textbooks. 
C) rate quoted on long-term Treasury bonds. 
D) the nominal risk-free interest rate,multiplied by 1 minus the marginal tax rate. 
A) opportunity cost of foregoing consumption. 
B) rate actually used in the market,not in textbooks. 
C) rate quoted on long-term Treasury bonds. 
D) the nominal risk-free interest rate,multiplied by 1 minus the marginal tax rate.

Question 12

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 13

Relative to a decrease in interest rates,an increase in interest rates of the same size will produce:

Accepted Answer

A) a larger percentage change in a bond's price. 
B) a smaller percentage change in a bond's price. 
C) the same sized change in a bond's price. 
D) no change in the bond's price since its coupon rate is fixed. 
A) a larger percentage change in a bond's price. 
B) a smaller percentage change in a bond's price. 
C) the same sized change in a bond's price. 
D) no change in the bond's price since its coupon rate is fixed.

Question 14

The term structure of interest rates denotes the relationship between _____________ and _________________ for a specific category of bonds at a particular point in time.

Accepted Answer

market yie

Question 15

Which of the following is included in the "realized compound yield"?

Accepted Answer

A) The bond coupon payments,only. 
B) The bond coupon and principal payments,only. 
C) The bond principal payment,only. 
D) The bond coupon and principal payments and the reinvestment income. 
A) The bond coupon payments,only. 
B) The bond coupon and principal payments,only. 
C) The bond principal payment,only. 
D) The bond coupon and principal payments and the reinvestment income.

Question 16

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 17

Reinvestment risk represents the possibility that future payments cannot be reinvested at the assumed rate.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following bonds will be most sensitive to changes in market interest rates?

Accepted Answer

A) A bond with an 8 percent semiannual coupon and 8 years to maturity 
B) A bond with a 6 percent semiannual coupon and 8 years to maturity 
C) A bond with an 8 percent semiannual coupon and 6 years to maturity 
D) A bond with a 6 percent semiannual coupon and 6 years to maturity 
A) A bond with an 8 percent semiannual coupon and 8 years to maturity 
B) A bond with a 6 percent semiannual coupon and 8 years to maturity 
C) A bond with an 8 percent semiannual coupon and 6 years to maturity 
D) A bond with a 6 percent semiannual coupon and 6 years to maturity

Question 19

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 20

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

Accepted Answer

A) True 
 B)False

Exam 17: Bond Yields

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

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

The three most prominent theories proposed to explain the term structure of interest rates are: __________________,__________________,and __________________.

In finding a bond's value,the rate used to discount the bond's future cash flows is:

Assume an investor is considering purchasing an 8 percent semiannual bond with 8 years remaining to maturity when market rates are 6%.The bond's value is closest to:

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:

Relative to interest rates,bond prices have:

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

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

Assume an investor buys an 8 percent,semi-annual,10-year bond at par.He sells it two years later after market interest rates have decreased to 6 percent.The investor's capital gain is closest to:

What is meant by the real risk-free rate of interest?It is the:

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

Relative to a decrease in interest rates,an increase in interest rates of the same size will produce:

The term structure of interest rates denotes the relationship between _____________ and _________________ for a specific category of bonds at a particular point in time.

Which of the following is included in the "realized compound yield"?

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

Reinvestment risk represents the possibility that future payments cannot be reinvested at the assumed rate.

Which of the following bonds will be most sensitive to changes in market interest rates?

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:

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

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The three most prominent theories proposed to explain the term structure of interest rates are: ,,and __.

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