Question 1

If an investor buys a high coupon bond, and rates then fall, the investor has "locked up" that high yield as a realized yield.

Accepted Answer

A) True 
 B)False

Question 2

The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.

Accepted Answer

A)  Low, short 
B)  Low, long 
C)  High, short 
D)  High, long 
E)  Zero, very long 
A)  Low, short 
B)  Low, long 
C)  High, short 
D)  High, long 
E)  Zero, very long

Question 3

Calculate the modified duration for a 10-year, 12% bond with a yield to maturity of 10% and a Macaulay duration of 7.2 years.

Accepted Answer

A)  6.43 years 
B)  6.55 years 
C)  6.79 years 
D)  6.86 years 
E)  7.01 years 
A)  6.43 years 
B)  6.55 years 
C)  6.79 years 
D)  6.86 years 
E)  7.01 years

Question 4

Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years at $1,100, what is the bond's yield to call? Interest is paid semiannually.

Accepted Answer

A)  8% 
B)  9.0% 
C)  18.0% 
D)  9.4% 
E)  16.5% 
A)  8% 
B)  9.0% 
C)  18.0% 
D)  9.4% 
E)  16.5%

Question 5

Consider a bond with a duration of 8 years having a yield to maturity of 8% and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

Accepted Answer

A)  3.85% 
B)  3.45% 
C)  -4.02% 
D)  -3.45% 
E)  -3.85% 
A)  3.85% 
B)  3.45% 
C)  -4.02% 
D)  -3.45% 
E)  -3.85%

Question 6

According to the expectations hypothesis a rising yield curve indicates that investors expect

Accepted Answer

A)  future short term rates to fall 
B)  future short term rates to rise 
C)  future long term rates to rise 
D)  future long term rates to fall 
E)  None of the above. 
A)  future short term rates to fall 
B)  future short term rates to rise 
C)  future long term rates to rise 
D)  future long term rates to fall 
E)  None of the above.

Question 7

The term structure of interest rates is a dynamic function that relates the term to maturity to the yield to maturity of bonds.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit 12-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is 6% for these bonds.
-Refer to Exhibit 12-2. If interest rates increase 50 basis points, what will be the approximate price change for the Talmart bond?

Accepted Answer

A)  -17.0% 
B)  -1.7% 
C)  1.7% 
D)  1.8% 
E)  17.0% 
A)  -17.0% 
B)  -1.7% 
C)  1.7% 
D)  1.8% 
E)  17.0%

Question 9

The option adjusted duration will approach the duration to maturity, when

Accepted Answer

A)  Interest rates are significantly above the coupon rate because the option has very little chance of being called, and the call option will have very little value. 
B)  Interest rates are significantly below the coupon rate because the option has very little chance of being called, and the call option will have very little value. 
C)  Interest rates are significantly above the coupon rate because the option has a high chance of being called, and the call option will have significant value. 
D)  Interest rates are significantly below the coupon rate because the option has a high chance of being called, and the call option will have significant value. 
E)  None of the above. 
A)  Interest rates are significantly above the coupon rate because the option has very little chance of being called, and the call option will have very little value. 
B)  Interest rates are significantly below the coupon rate because the option has very little chance of being called, and the call option will have very little value. 
C)  Interest rates are significantly above the coupon rate because the option has a high chance of being called, and the call option will have significant value. 
D)  Interest rates are significantly below the coupon rate because the option has a high chance of being called, and the call option will have significant value. 
E)  None of the above.

Question 10

Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.

Accepted Answer

A) True 
 B)False

Question 11

The fundamental determinants of interest rates are the real risk free rate, inflation, and the risk premium.

Accepted Answer

A) True 
 B)False

Question 12

According to the segmented market hypothesis, yields for a particular maturity segment depend on supply and demand within the maturity segment.

Accepted Answer

A) True 
 B)False

Question 13

Exhibit 12-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is 6% for these bonds.
-Refer to Exhibit 12-2. What is the Modified duration of the Talmart corporate bonds?

Accepted Answer

A)  3.43 
B)  3.64 
C)  3.76 
D)  3.85 
E)  4.11 
A)  3.43 
B)  3.64 
C)  3.76 
D)  3.85 
E)  4.11

Question 14

The convexity of a bond is affected as follows:

Accepted Answer

A)  Positively with maturity. 
B)  Positively with yield. 
C)  Inversely with coupon. 
D)  Choices a and b. 
E)  Choices a and c. 
A)  Positively with maturity. 
B)  Positively with yield. 
C)  Inversely with coupon. 
D)  Choices a and b. 
E)  Choices a and c.

Question 15

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a ____ coupon and a ____ term to maturity.

Accepted Answer

A)  Low, short 
B)  Low, long 
C)  High, short 
D)  High, long 
E)  Zero, very long 
A)  Low, short 
B)  Low, long 
C)  High, short 
D)  High, long 
E)  Zero, very long

Question 16

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

Accepted Answer

A)  Expectations hypothesis 
B)  Liquidity preference hypothesis 
C)  Segmented market hypothesis 
D)  Preferred habitat hypothesis 
E)  Hedging pressure hypothesis 
A)  Expectations hypothesis 
B)  Liquidity preference hypothesis 
C)  Segmented market hypothesis 
D)  Preferred habitat hypothesis 
E)  Hedging pressure hypothesis

Question 17

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6% and a required rate of return of 8%.

Accepted Answer

A)  7.04 
B)  7.17 
C)  7.31 
D)  7.38 
E)  8.12 
A)  7.04 
B)  7.17 
C)  7.31 
D)  7.38 
E)  8.12

Question 18

Exhibit 12-1
THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)
A $1000 par value bond with 5 years to maturity and a 6% coupon has a yield to maturity of 8%. Interest is paid semiannually.
-Refer to Exhibit 12-1. Estimate the percentage price change for this 5-year $1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.

Accepted Answer

A)  2.1% 
B)  -2.1% 
C)  4.4% 
D)  -4.4% 
E)  None of the above 
A)  2.1% 
B)  -2.1% 
C)  4.4% 
D)  -4.4% 
E)  None of the above

Question 19

If the price before yields changed was $925, what is the resulting price?

Accepted Answer

A)  $865.22 
B)  $918.66 
C)  $889.11 
D)  $1000.00 
E)  $1012.45 
A)  $865.22 
B)  $918.66 
C)  $889.11 
D)  $1000.00 
E)  $1012.45

Question 20

There are four major factors accounting for the existence of yield differentials. Which of the following is not a factor?

Accepted Answer

A)  Segments 
B)  Sectors 
C)  Indentures 
D)  Coupons 
E)  Maturities 
A)  Segments 
B)  Sectors 
C)  Indentures 
D)  Coupons 
E)  Maturities

If an investor buys a high coupon bond, and rates then fall, the investor has "locked up" that high yield as a realized yield.

The importance of the reinvestment assumption increases with a coupon and a term to maturity.

Calculate the modified duration for a 10-year, 12% bond with a yield to maturity of 10% and a Macaulay duration of 7.2 years.

Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years at $1,100, what is the bond's yield to call? Interest is paid semiannually.

Consider a bond with a duration of 8 years having a yield to maturity of 8% and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

According to the expectations hypothesis a rising yield curve indicates that investors expect

The term structure of interest rates is a dynamic function that relates the term to maturity to the yield to maturity of bonds.

The option adjusted duration will approach the duration to maturity, when

Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.

The fundamental determinants of interest rates are the real risk free rate, inflation, and the risk premium.

According to the segmented market hypothesis, yields for a particular maturity segment depend on supply and demand within the maturity segment.

The convexity of a bond is affected as follows:

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a coupon and a term to maturity.

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6% and a required rate of return of 8%.

If the price before yields changed was $925, what is the resulting price?

There are four major factors accounting for the existence of yield differentials. Which of the following is not a factor?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

Exam 12: The Analysis and Valuation of Bonds

If an investor buys a high coupon bond, and rates then fall, the investor has "locked up" that high yield as a realized yield.

The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to maturity.

Calculate the modified duration for a 10-year, 12% bond with a yield to maturity of 10% and a Macaulay duration of 7.2 years.

Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years at $1,100, what is the bond's yield to call? Interest is paid semiannually.

Consider a bond with a duration of 8 years having a yield to maturity of 8% and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

According to the expectations hypothesis a rising yield curve indicates that investors expect

The term structure of interest rates is a dynamic function that relates the term to maturity to the yield to maturity of bonds.

The option adjusted duration will approach the duration to maturity, when

Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.

The fundamental determinants of interest rates are the real risk free rate, inflation, and the risk premium.

According to the segmented market hypothesis, yields for a particular maturity segment depend on supply and demand within the maturity segment.

The convexity of a bond is affected as follows:

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a ____ coupon and a ____ term to maturity.

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6% and a required rate of return of 8%.

If the price before yields changed was $925, what is the resulting price?

There are four major factors accounting for the existence of yield differentials. Which of the following is not a factor?

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Bond Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters

The importance of the reinvestment assumption increases with a coupon and a term to maturity.

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a coupon and a term to maturity.