Question 1

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

Accepted Answer

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

Question 2

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 current price of the bond.

Accepted Answer

A)  $1579.46 
B)  $918.89 
C)  $789.29 
D)  $1000 
E)  $743.29 
A)  $1579.46 
B)  $918.89 
C)  $789.29 
D)  $1000 
E)  $743.29

Question 3

The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.

Accepted Answer

A) True 
 B)False

Question 4

A 12-year, 8% bond with a YTM of 12% has a Macaulay duration of 9.5 years. If interest rates decline by 50 basis points, what will be the percentage change in price for this bond?

Accepted Answer

A)  +4.48% 
B)  +4.61% 
C)  +8.48% 
D)  +8.96% 
E)  +17.92% 
A)  +4.48% 
B)  +4.61% 
C)  +8.48% 
D)  +8.96% 
E)  +17.92%

Question 5

Which duration is computed by discounting flows using the yield to maturity of the bond?

Accepted Answer

A)  Effective 
B)  Macaulay Duration 
C)  Modified Duration 
D)  Present Value Duration 
E)  Cash Flow Duration 
A)  Effective 
B)  Macaulay Duration 
C)  Modified Duration 
D)  Present Value Duration 
E)  Cash Flow Duration

Question 6

Suppose the current 7 year rate is 8% and the current 6 year rate is 6%. What is the one year forward rate for six years?

Accepted Answer

A)  16.33% 
B)  18.22% 
C)  20.82% 
D)  14.65% 
E)  15.14% 
A)  16.33% 
B)  18.22% 
C)  20.82% 
D)  14.65% 
E)  15.14%

Question 7

For a given change in yield bond price volatility is directly related to duration.

Accepted Answer

A) True 
 B)False

Question 8

The position of a bondholder that is long a callable bond is equal to being

Accepted Answer

A)  Long a noncallable bond + long a call option on the bond. 
B)  Long a noncallable bond + short a call option on the bond. 
C)  Short a noncallable bond + long a call option on the bond. 
D)  Short a noncallable bond + short a call option on the bond. 
E)  None of the above. 
A)  Long a noncallable bond + long a call option on the bond. 
B)  Long a noncallable bond + short a call option on the bond. 
C)  Short a noncallable bond + long a call option on the bond. 
D)  Short a noncallable bond + short a call option on the bond. 
E)  None of the above.

Question 9

Bond price volatility varies directly with the term to maturity and directly with the coupon.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is not a risk premium component of bonds?

Accepted Answer

A)  Bond quality 
B)  Term to maturity of the bond 
C)  Indenture provisions 
D)  Foreign bond risk 
E)  All of the above are risk premium components of bonds. 
A)  Bond quality 
B)  Term to maturity of the bond 
C)  Indenture provisions 
D)  Foreign bond risk 
E)  All of the above are risk premium components of bonds.

Question 11

A 5-year bond has a $1,000 par value bond, a 12% coupon and a yield to maturity of 8%. Interest is paid semiannually. The bond's price is

Accepted Answer

A)  $864.65 
B)  $1081.78 
C)  $852.80 
D)  $1162.22 
E)  None of the above 
A)  $864.65 
B)  $1081.78 
C)  $852.80 
D)  $1162.22 
E)  None of the above

Question 12

If the holding period is equal to the term to maturity for a corporate bond the rate of discount represents the

Accepted Answer

A)  Coupon yield. 
B)  Effective yield. 
C)  Yield to call. 
D)  Yield to maturity. 
E)  Reinvestment rate. 
A)  Coupon yield. 
B)  Effective yield. 
C)  Yield to call. 
D)  Yield to maturity. 
E)  Reinvestment rate.

Question 13

Which of the following statements is true?

Accepted Answer

A)  An inverse relationship exists between coupon and convexity. 
B)  A direct relationship exists between maturity and convexity. 
C)  An inverse relationship exists between yield and convexity. 
D)  Choices a and c 
E)  All of the above statements are true. 
A)  An inverse relationship exists between coupon and convexity. 
B)  A direct relationship exists between maturity and convexity. 
C)  An inverse relationship exists between yield and convexity. 
D)  Choices a and c 
E)  All of the above statements are true.

Question 14

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 price of the Talmart corporate bonds?

Accepted Answer

A)  $965.63 
B)  $966.13 
C)  $1,034.65 
D)  $1,135.10 
E)  $1,051.97 
A)  $965.63 
B)  $966.13 
C)  $1,034.65 
D)  $1,135.10 
E)  $1,051.97

Question 15

Suppose the current 6 year rate is 9% and the current 5 year rate is 7%. What is the one year forward rate for five years?

Accepted Answer

A)  19.57% 
B)  18.62% 
C)  15.80% 
D)  14.65% 
E)  12.67% 
A)  19.57% 
B)  18.62% 
C)  15.80% 
D)  14.65% 
E)  12.67%

Question 16

The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.

Accepted Answer

A) True 
 B)False

Question 17

Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.

Accepted Answer

A)  15% 
B)  16.5% 
C)  7.65% 
D)  8.52% 
E)  9.64% 
A)  15% 
B)  16.5% 
C)  7.65% 
D)  8.52% 
E)  9.64%

Question 18

Consider a bond with a price of $944.44 and a coupon of 8 1/2%. What is the current yield?

Accepted Answer

A)  9.4% 
B)  6.8% 
C)  8.6% 
D)  9.0% 
E)  11.0% 
A)  9.4% 
B)  6.8% 
C)  8.6% 
D)  9.0% 
E)  11.0%

Question 19

The major problem facing a bond analyst is the ability to forecast the basic interest rate level since yield spreads are generally inconsequential.

Accepted Answer

A) True 
 B)False

Question 20

Consider a 12%, 15 year bond that pays interest semiannually, and its current price is $675. What is the promised yield to maturity?

Accepted Answer

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

Exam 12: The Analysis and Valuation of Bonds

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

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 current price of the bond.

The three major theories explaining the term structure of interest rates are the expectations hypothesis, the liquidity differential hypothesis, and the segmented quality hypothesis.

A 12-year, 8% bond with a YTM of 12% has a Macaulay duration of 9.5 years. If interest rates decline by 50 basis points, what will be the percentage change in price for this bond?

Which duration is computed by discounting flows using the yield to maturity of the bond?

Suppose the current 7 year rate is 8% and the current 6 year rate is 6%. What is the one year forward rate for six years?

For a given change in yield bond price volatility is directly related to duration.

The position of a bondholder that is long a callable bond is equal to being

Bond price volatility varies directly with the term to maturity and directly with the coupon.

Which of the following is not a risk premium component of bonds?

A 5-year bond has a $1,000 par value bond, a 12% coupon and a yield to maturity of 8%. Interest is paid semiannually. The bond's price is

If the holding period is equal to the term to maturity for a corporate bond the rate of discount represents the

Which of the following statements is true?

Suppose the current 6 year rate is 9% and the current 5 year rate is 7%. What is the one year forward rate for five years?

The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.

Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.

Consider a bond with a price of $944.44 and a coupon of 8 1/2%. What is the current yield?

The major problem facing a bond analyst is the ability to forecast the basic interest rate level since yield spreads are generally inconsequential.

Consider a 12%, 15 year bond that pays interest semiannually, and its current price is $675. What is the promised yield to 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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