Question 1

He 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. D

Question 2

The prices of short-term bonds are commonly ____ those of long-term bonds.

Accepted Answer

A)  more volatile than 
B)  equally volatile as 
C)  less volatile than 
D)  A and C occur with about equal frequency 
A)  more volatile than 
B)  equally volatile as 
C)  less volatile than 
D)  A and C occur with about equal frequency C

Question 3

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

Accepted Answer

A) True 
 B)False  False

Question 4

An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.

Accepted Answer

A) True 
 B)False

Question 5

The value of ____-risk securities will be relatively ____.

Accepted Answer

A)  high; high 
B)  high; low 
C)  low; low 
D)  none of the above 
A)  high; high 
B)  high; low 
C)  low; low 
D)  none of the above

Question 6

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

Accepted Answer

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

Question 7

A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Stephanie would like to purchase a bond that has a par value of $1,000, pays $100 at the end of each year in coupon payments, and has three years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 12 percent, how much will Stephanie pay for the bond?

Accepted Answer

A)  $1,000.00 
B)  $951.97 
C)  $856.80 
D)  none of the above 
A)  $1,000.00 
B)  $951.97 
C)  $856.80 
D)  none of the above

Question 10

The process by which higher credit risk in one country is transmitted to another country is known as

Accepted Answer

A)  credit epidemic. 
B)  credit expansion. 
C)  credit contagion. 
D)  none of the above 
A)  credit epidemic. 
B)  credit expansion. 
C)  credit contagion. 
D)  none of the above

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

Which of the following formulas best describes the value of a bond?

Accepted Answer

A)   
B)   
C)   
D)   
E)  none of the above 
A)   
B)   
C)   
D)   
E)  none of the above

Question 13

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 the above (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 the above (The size of the coupon payment does not affect the sensitivity of bond prices to interest rate movements.)

Question 14

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)  B and C 
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)  B and C

Question 15

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 16

Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is

Accepted Answer

A)  1.90 years. 
B)  1.50 years. 
C)  1.92 years. 
D)  none of the above 
A)  1.90 years. 
B)  1.50 years. 
C)  1.92 years. 
D)  none of the above

Question 17

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)  B and C 
E)  none of the above 
A)  equals; equals 
B)  exceeds; is less than 
C)  is less than; is greater than 
D)  B and C 
E)  none of the above

Question 18

____ 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 the above 
A)  increase; upward 
B)  increase; downward 
C)  decrease; downward 
D)  none of the above

Question 19

If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value.

Accepted Answer

A) True 
 B)False

Question 20

A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for

Accepted Answer

A)  $1,000.00. 
B)  $1,081.11. 
C)  $798.70. 
D)  $880.22. 
E)  none of the above. 
A)  $1,000.00. 
B)  $1,081.11. 
C)  $798.70. 
D)  $880.22. 
E)  none of the above.

Exam 8: Bond Valuation and Risk

He appropriate discount rate for valuing any bond is the

The prices of short-term bonds are commonly ____ those of long-term bonds.

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

An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.

The value of ____-risk securities will be relatively ____.

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

A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.

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

The process by which higher credit risk in one country is transmitted to another country is known as

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

Which of the following formulas best describes the value of a bond?

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

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

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.

Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is

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

____ in the expected level of inflation results in ____ pressure on bond prices.

If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value.

A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for

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 Operations

Pension Fund Operations

Filters

The value of -risk securities will be relatively .

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

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

When financial institutions expect interest rates to , they may .

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

in the expected level of inflation results in pressure on bond prices.