Question 1

To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?

Accepted Answer

A)  The annualized coupon should be split in half. 
B)  The annual discount rate should be divided by 2. 
C)  The number of annual periods should be doubled. 
D)  The par value should be split in half. 
E)  All of the above adjustments have to be made. 
A)  The annualized coupon should be split in half. 
B)  The annual discount rate should be divided by 2. 
C)  The number of annual periods should be doubled. 
D)  The par value should be split in half. 
E)  All of the above adjustments have to be made.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for thisbondis

Accepted Answer

A)  0.77. 
B)  -0.77. 
C)  -0.90. 
D)  -1.06. 
E)  none of the above. 
A)  0.77. 
B)  -0.77. 
C)  -0.90. 
D)  -1.06. 
E)  none of the above.

Question 4

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 5

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 6

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 the above 
A)  matching 
B)  laddered 
C)  barbell 
D)  interest rate 
E)  none of the above

Question 7

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 8

Assume that the price of a $1,000 zero-coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

Accepted Answer

A)  -.980 
B)  0.98 
C)  -.494 
D)  0.494 
E)  none of the above 
A)  -.980 
B)  0.98 
C)  -.494 
D)  0.494 
E)  none of the above

Question 9

Which of the following is most likely to cause a decrease in bond prices?

Accepted Answer

A)  a decrease in money supply growth and an increase in the demand for loanable funds 
B)  a forecast of decreasing oil prices 
C)  a forecast of a stronger dollar 
D)  an increase in money supply growth and no change in the demand for loanable funds 
A)  a decrease in money supply growth and an increase in the demand for loanable funds 
B)  a forecast of decreasing oil prices 
C)  a forecast of a stronger dollar 
D)  an increase in money supply growth and no change in the demand for loanable funds

Question 10

The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.

Accepted Answer

A)  slightly; rises 
B)  very; rises 
C)  very; declines 
D)  slightly; declines 
A)  slightly; rises 
B)  very; rises 
C)  very; declines 
D)  slightly; declines

Question 11

If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of theiractions.

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 12

A zero-coupon bond makes no coupon payments.

Accepted Answer

A) True 
 B)False

Question 13

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 the above 
A)  1.33 
B)  1.27 
C)  3.24 
D)  1.31 
E)  none of the above

Question 14

Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Hurricane intends to sell the bonds in two years and expects investors' required rate of return on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?

Accepted Answer

A)  $9.33 million 
B)  $11.00 million 
C)  $10.64 million 
D)  $9.82 million 
E)  none of the above 
A)  $9.33 million 
B)  $11.00 million 
C)  $10.64 million 
D)  $9.82 million 
E)  none of the above

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 the above 
A)  $1,063.40 
B)  $1,000 
C)  $939.25 
D)  none of the above

Question 17

Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualizedyield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?

Accepted Answer

A)  $1,000.00 
B)  $1,147.20 
C)  $856.80 
D)  none of the above 
A)  $1,000.00 
B)  $1,147.20 
C)  $856.80 
D)  none of the above

Question 18

As interest rates increase, prices of short-term bonds will decline by a greater degree than prices of long-term bonds.

Accepted Answer

A) True 
 B)False

Question 19

When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds.

Accepted Answer

A)  higher; lower 
B)  higher; higher 
C)  lower; higher 
D)  lower; lower 
A)  higher; lower 
B)  higher; higher 
C)  lower; higher 
D)  lower; lower

Question 20

If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.

Accepted Answer

A) True 
 B)False

Exam 8: Bond Valuation and Risk

To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?

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

Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for thisbondis

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

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

Assume that the price of a $1,000 zero-coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

Which of the following is most likely to cause a decrease in bond prices?

The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.

If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of theiractions.

A zero-coupon bond makes no coupon payments.

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.

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

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?

Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualizedyield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?

As interest rates increase, prices of short-term bonds will decline by a greater degree than prices of long-term bonds.

When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds.

If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.

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 market value of long-term bonds is sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds .

If bond portfolio managers expect interest rates to increase in the future, they would likely their holdings of bonds now, which could cause the prices of bonds to as a result of theiractions.

When holding other factors constant, increased borrowing by the Treasury can result in a _ required return and therefore _ prices on existing bonds.