Question 1

Option adjusted duration can be calculated as

Accepted Answer

A)  Duration of noncallable bond - duration of call option on the bond. 
B)  Duration of noncallable bond + duration of call option on the bond. 
C)  Duration of callable bond - duration of call option on the bond. 
D)  Duration of callable bond + duration of call option on the bond. 
E)  None of the above. 
A)  Duration of noncallable bond - duration of call option on the bond. 
B)  Duration of noncallable bond + duration of call option on the bond. 
C)  Duration of callable bond - duration of call option on the bond. 
D)  Duration of callable bond + duration of call option on the bond. 
E)  None of the above.

Question 2

The price-yield curve is a concave curve representing the relationship of bond prices and yields.

Accepted Answer

A) True 
 B)False

Question 3

The promised yield to maturity calculation assumes that

Accepted Answer

A)  All coupon interest payments are reinvested at the current market interest rate for the bond. 
B)  All coupon interest payments are reinvested at the coupon interest rate for the bond. 
C)  All coupon interest payments are reinvested at short term money market interest rates. 
D)  All coupon interest payments are not reinvested. 
E)  None of the above 
A)  All coupon interest payments are reinvested at the current market interest rate for the bond. 
B)  All coupon interest payments are reinvested at the coupon interest rate for the bond. 
C)  All coupon interest payments are reinvested at short term money market interest rates. 
D)  All coupon interest payments are not reinvested. 
E)  None of the above

Question 4

The longer the time to maturity, the greater the percentage change in a bond's price.

Accepted Answer

A) True 
 B)False

Question 5

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 Macaulay 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 6

Assume that you purchase a 3-year $1,000 par value bond, with a 8% coupon, and a yield of 10%. After you purchase the bond, one- year interest rates are as follow, year 1 = 10%, year 2 = 8%, year 3 = 6% (these are the reinvestment rates). Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.

Accepted Answer

A)  8.37% 
B)  7.28% 
C)  9.76% 
D)  10.67% 
E)  14.0% 
A)  8.37% 
B)  7.28% 
C)  9.76% 
D)  10.67% 
E)  14.0%

Question 7

The term structure of interest rates is a static function that relates the

Accepted Answer

A)  Term to call and the yield to maturity. 
B)  Term to maturity and the yield to maturity. 
C)  Term to call and the yield to call. 
D)  Term to maturity and the coupon rate. 
E)  Term to maturity and the current yield. 
A)  Term to call and the yield to maturity. 
B)  Term to maturity and the yield to maturity. 
C)  Term to call and the yield to call. 
D)  Term to maturity and the coupon rate. 
E)  Term to maturity and the current yield.

Question 8

The internal rate of return is that discount rate that sets the present value of cash flows from an investment equal to its par value.

Accepted Answer

A) True 
 B)False

Question 9

According to the segmented-market hypothesis a rising yield curve indicates that

Accepted Answer

A)  demand for long term bonds has fallen and demand for short term bonds has fallen. 
B)  demand for long term bonds has risen and demand for short term bonds has fallen. 
C)  demand for long term bonds has fallen and demand for short term bonds has risen. 
D)  demand for long term bonds has risen and demand for short term bonds has risen. 
E)  None of the above. 
A)  demand for long term bonds has fallen and demand for short term bonds has fallen. 
B)  demand for long term bonds has risen and demand for short term bonds has fallen. 
C)  demand for long term bonds has fallen and demand for short term bonds has risen. 
D)  demand for long term bonds has risen and demand for short term bonds has risen. 
E)  None of the above.

Question 10

If you expected interest rates to fall, you would prefer to own bonds with

Accepted Answer

A)  short maturities and low coupons. 
B)  long maturities and high coupons. 
C)  long maturities and low coupons. 
D)  short maturities and high coupons. 
E)  none of the above. 
A)  short maturities and low coupons. 
B)  long maturities and high coupons. 
C)  long maturities and low coupons. 
D)  short maturities and high coupons. 
E)  none of the above.

Question 11

According to the expectations hypothesis, a rising yield curve indicates that investors demand for long maturity bonds is expected to rise.

Accepted Answer

A) True 
 B)False

Question 12

Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

Accepted Answer

A)  10.23% 
B)  18.45% 
C)  2.31% 
D)  17.77% 
E)  9.26% 
A)  10.23% 
B)  18.45% 
C)  2.31% 
D)  17.77% 
E)  9.26%

Question 13

Yield to maturity and current yield are equal when the bond is selling for exactly par value.

Accepted Answer

A) True 
 B)False

Question 14

A 15-year bond, purchased 5 years ago, has a $1,000 par value bond, a 10% coupon and a yield to maturity of 12%. Interest is paid annually. The bond's price is

Accepted Answer

A)  $864 
B)  $887 
C)  $1152 
D)  $1123 
E)  None of the above 
A)  $864 
B)  $887 
C)  $1152 
D)  $1123 
E)  None of the above

Question 15

There is an inverse relationship between duration and coupon.

Accepted Answer

A) True 
 B)False

Question 16

If the price before yields changed was $975, what is the resulting price?

Accepted Answer

A)  $937.46 
B)  $918.66 
C)  $965.55 
D)  $898.62 
E)  $1012.45 
A)  $937.46 
B)  $918.66 
C)  $965.55 
D)  $898.62 
E)  $1012.45

Question 17

Consider a bond with a current yield of 8% and a price of $1,250. What is this bond's coupon?

Accepted Answer

A)  8.0% 
B)  10.0% 
C)  11.0% 
D)  8.5% 
E)  9.6% 
A)  8.0% 
B)  10.0% 
C)  11.0% 
D)  8.5% 
E)  9.6%

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. Calculate the modified duration for the bond.

Accepted Answer

A)  4.19 years 
B)  4.36 years 
C)  8.72 years 
D)  8.38 years 
E)  9.52 years 
A)  4.19 years 
B)  4.36 years 
C)  8.72 years 
D)  8.38 years 
E)  9.52 years

Question 19

The annual interest paid on a bond relative to its prevailing market price is called its ____.

Accepted Answer

A)  Promised yield 
B)  Yield to maturity 
C)  Coupon rate 
D)  Effective yield 
E)  Current yield 
A)  Promised yield 
B)  Yield to maturity 
C)  Coupon rate 
D)  Effective yield 
E)  Current yield

Question 20

What measures the expected rate of return of a bond assuming that you sell it prior to its maturity?

Accepted Answer

A)  Yield to maturity 
B)  Current yield 
C)  Realized yield 
D)  Coupon rate 
E)  None of the above 
A)  Yield to maturity 
B)  Current yield 
C)  Realized yield 
D)  Coupon rate 
E)  None of the above

Exam 12: The Analysis and Valuation of Bonds

Option adjusted duration can be calculated as

The price-yield curve is a concave curve representing the relationship of bond prices and yields.

The promised yield to maturity calculation assumes that

The longer the time to maturity, the greater the percentage change in a bond's price.

The term structure of interest rates is a static function that relates the

The internal rate of return is that discount rate that sets the present value of cash flows from an investment equal to its par value.

According to the segmented-market hypothesis a rising yield curve indicates that

If you expected interest rates to fall, you would prefer to own bonds with

According to the expectations hypothesis, a rising yield curve indicates that investors demand for long maturity bonds is expected to rise.

Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

Yield to maturity and current yield are equal when the bond is selling for exactly par value.

A 15-year bond, purchased 5 years ago, has a $1,000 par value bond, a 10% coupon and a yield to maturity of 12%. Interest is paid annually. The bond's price is

There is an inverse relationship between duration and coupon.

If the price before yields changed was $975, what is the resulting price?

Consider a bond with a current yield of 8% and a price of $1,250. What is this bond's coupon?

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. Calculate the modified duration for the bond.

The annual interest paid on a bond relative to its prevailing market price is called its ____.

What measures the expected rate of return of a bond assuming that you sell it prior to its maturity?

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

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