Question 1

Describe the shape of the current yield curve.Would you consider that to be fairly typical?

Accepted Answer

This question can provide a good introdu

Question 2

When a financial calculator or spreadsheet program finds a bond's yield to maturity,it uses a trial-and-error process.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is correct concerning real interest rates?

Accepted Answer

A)  Real interest rates are constant. 
B)  Real interest rates must be positive. 
C)  Real interest rates must be less than nominal interest rates. 
D)  Real interest rates, if positive, indicate increased purchasing power. 
A)  Real interest rates are constant. 
B)  Real interest rates must be positive. 
C)  Real interest rates must be less than nominal interest rates. 
D)  Real interest rates, if positive, indicate increased purchasing power.

Question 4

An investor buys a 10-year,7% coupon bond for $1,050,holds it for 1 year,and then sells it for $1,040.What was the investor's rate of return?

Accepted Answer

A)  5.71% 
B)  6.00% 
C)  6.67% 
D)  7.00% 
A)  5.71% 
B)  6.00% 
C)  6.67% 
D)  7.00%

Question 5

Which of the following factors will change when interest rates change?

Accepted Answer

A)  The expected cash flows from a bond 
B)  The present value of a bond's payments 
C)  The coupon payment of a bond 
D)  The maturity value of a bond 
A)  The expected cash flows from a bond 
B)  The present value of a bond's payments 
C)  The coupon payment of a bond 
D)  The maturity value of a bond

Question 6

What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?

Accepted Answer

A)  The coupon rate increases to 10%. 
B)  The coupon rate remains at 9%. 
C)  The coupon rate remains at 8%. 
D)  The coupon rate decreases to 8%. 
A)  The coupon rate increases to 10%. 
B)  The coupon rate remains at 9%. 
C)  The coupon rate remains at 8%. 
D)  The coupon rate decreases to 8%.

Question 7

Which of the following presents the correct relationship? As the coupon rate of a bond increases,the bond's:

Accepted Answer

A)  face value increases. 
B)  current price decreases. 
C)  interest payments increase. 
D)  maturity date is extended. 
A)  face value increases. 
B)  current price decreases. 
C)  interest payments increase. 
D)  maturity date is extended.

Question 8

The present value of a bond is positively related with:

Accepted Answer

A)  a lower coupon payment. 
B)  greater perceived liquidity. 
C)  greater default risk. 
D)  higher interest rates. 
A)  a lower coupon payment. 
B)  greater perceived liquidity. 
C)  greater default risk. 
D)  higher interest rates.

Question 9

How does a bond dealer generate profits when trading bonds?

Accepted Answer

A)  By maintaining bid prices lower than ask prices 
B)  By maintaining bid prices higher than ask prices 
C)  By retaining the bond's next coupon payment 
D)  By lowering the bond's coupon rate 
A)  By maintaining bid prices lower than ask prices 
B)  By maintaining bid prices higher than ask prices 
C)  By retaining the bond's next coupon payment 
D)  By lowering the bond's coupon rate

Question 10

The current yield tends to understate a bond's total return when the bond sells for a discount because:

Accepted Answer

A)  increases in interest rates will increase the current yield. 
B)  the bond's price will increase each year. 
C)  current yields show only nominal returns. 
D)  the bond may have a higher face value. 
A)  increases in interest rates will increase the current yield. 
B)  the bond's price will increase each year. 
C)  current yields show only nominal returns. 
D)  the bond may have a higher face value.

Question 11

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and 5 years remaining until maturity,then sells the bond after 1 year for $1,085?

Accepted Answer

A)  6.82% 
B)  6.91% 
C)  7.64% 
D)  9.00% 
A)  6.82% 
B)  6.91% 
C)  7.64% 
D)  9.00%

Question 12

How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity,only to see market interest rates increase to 12% 1 year later? (Hint: How much would the price change from a year earlier?)

Accepted Answer

A)  $19.93 
B)  $20.00 
C)  $23.93 
D)  $25.66 
A)  $19.93 
B)  $20.00 
C)  $23.93 
D)  $25.66

Question 13

What causes bonds to sell for a premium compared to face value?

Accepted Answer

A)  The bonds have high ratings. 
B)  The bonds have a long period until maturity. 
C)  The bonds have a higher than market coupon rate. 
D)  The bonds are of speculative grade. 
A)  The bonds have high ratings. 
B)  The bonds have a long period until maturity. 
C)  The bonds have a higher than market coupon rate. 
D)  The bonds are of speculative grade.

Question 14

What is the current yield of a bond with a 6% coupon,4 years until maturity,and a price of $750?

Accepted Answer

A)  6.0% 
B)  8.0% 
C)  12.0% 
D)  14.7% 
A)  6.0% 
B)  8.0% 
C)  12.0% 
D)  14.7%

Question 15

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

Accepted Answer

A)  Increasing interest rates; bonds held to maturity 
B)  Decreasing interest rates; bonds held to maturity 
C)  Stable interest rates; bonds sold before maturity 
D)  Increasing interest rates; bonds sold before maturity 
A)  Increasing interest rates; bonds held to maturity 
B)  Decreasing interest rates; bonds held to maturity 
C)  Stable interest rates; bonds sold before maturity 
D)  Increasing interest rates; bonds sold before maturity

Question 16

Assume that a bond has been owned by four different investors during its 20-year history.Which of the following is not likely to have been shared by these different owners?

Accepted Answer

A)  Coupon rate 
B)  Cash flows 
C)  Par value 
D)  Yield to maturity 
A)  Coupon rate 
B)  Cash flows 
C)  Par value 
D)  Yield to maturity

Question 17

If an investor purchases a bond when its current yield is higher than the coupon rate,then the bond's price will be expected to:

Accepted Answer

A)  decline over time, reaching par value at maturity. 
B)  increase over time, reaching par value at maturity. 
C)  be less than the face value at maturity. 
D)  exceed the face value at maturity. 
A)  decline over time, reaching par value at maturity. 
B)  increase over time, reaching par value at maturity. 
C)  be less than the face value at maturity. 
D)  exceed the face value at maturity.

Question 18

Which of the following is fixed (e.g.,cannot change)for the life of a given bond?

Accepted Answer

A)  Current price 
B)  Current yield 
C)  Yield to maturity 
D)  Coupon rate 
A)  Current price 
B)  Current yield 
C)  Yield to maturity 
D)  Coupon rate

Question 19

Why do bonds exhibit interest rate risk?

Accepted Answer

Bond prices are subject to int

Question 20

If you purchase a 3-year,9% coupon bond for $950,how much could it be sold for 2 years later if interest rates have remained stable?

Accepted Answer

A)  $964.95 
B)  $981.56 
C)  $983.33 
D)  $1,000.00 
A)  $964.95 
B)  $981.56 
C)  $983.33 
D)  $1,000.00

Exam 6: Valuing Bonds

Describe the shape of the current yield curve.Would you consider that to be fairly typical?

When a financial calculator or spreadsheet program finds a bond's yield to maturity,it uses a trial-and-error process.

Which of the following is correct concerning real interest rates?

An investor buys a 10-year,7% coupon bond for $1,050,holds it for 1 year,and then sells it for $1,040.What was the investor's rate of return?

Which of the following factors will change when interest rates change?

What happens to the coupon rate of a bond that pays $80 annually in interest if interest rates change from 9% to 10%?

Which of the following presents the correct relationship? As the coupon rate of a bond increases,the bond's:

The present value of a bond is positively related with:

How does a bond dealer generate profits when trading bonds?

The current yield tends to understate a bond's total return when the bond sells for a discount because:

What is the total return to an investor who buys a bond for $1,100 when the bond has a 9% coupon rate and 5 years remaining until maturity,then sells the bond after 1 year for $1,085?

How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity,only to see market interest rates increase to 12% 1 year later? (Hint: How much would the price change from a year earlier?)

What causes bonds to sell for a premium compared to face value?

What is the current yield of a bond with a 6% coupon,4 years until maturity,and a price of $750?

Which of the following will reduce the yield to maturity from what the investor calculated at time of purchase?

Assume that a bond has been owned by four different investors during its 20-year history.Which of the following is not likely to have been shared by these different owners?

If an investor purchases a bond when its current yield is higher than the coupon rate,then the bond's price will be expected to:

Which of the following is fixed (e.g.,cannot change)for the life of a given bond?

Why do bonds exhibit interest rate risk?

If you purchase a 3-year,9% coupon bond for $950,how much could it be sold for 2 years later if interest rates have remained stable?

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