Question 1

For a bond the present value model incorporates both the coupon receipts and the capital gain or loss.

Accepted Answer

A) True 
 B)False

Question 2

Assume that you purchase a 5-year $1,000 par value bond, with a 6% coupon, and a yield of 7%. Immediately after you purchase the bond, yields rise to 8% and remain at that level to maturity. Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.

Accepted Answer

A)  6.0% 
B)  7.11% 
C)  8.0% 
D)  15.25% 
E)  8.18% 
A)  6.0% 
B)  7.11% 
C)  8.0% 
D)  15.25% 
E)  8.18%

Question 3

The price-yield relationship for a bond will become more convex

Accepted Answer

A)  For a low coupon bond. 
B)  For a high coupon bond. 
C)  For a long maturity bond. 
D)  Choices b and c. 
E)  Choices a and c. 
A)  For a low coupon bond. 
B)  For a high coupon bond. 
C)  For a long maturity bond. 
D)  Choices b and c. 
E)  Choices a and c.

Question 4

Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation of that curve.

Accepted Answer

A) True 
 B)False

Question 5

Consider a bond with a 9% coupon and a current yield of 8 1/2%. What is this bond's price?

Accepted Answer

A)  $1058.82 
B)  $1009.00 
C)  $1085.00 
D)  $1062.44 
E)  $1077.96 
A)  $1058.82 
B)  $1009.00 
C)  $1085.00 
D)  $1062.44 
E)  $1077.96

Question 6

Consider a bond portfolio manager who expects interest rates to decline and has to choose between the following two bonds. Bond A: 10 years to maturity, 5% coupon, 5% yield to maturity
Bond B: 10 years to maturity, 3% coupon, 4% yield to maturity

Accepted Answer

A)  Bond A because it has a higher coupon rate. 
B)  Bond A because it has a higher yield to maturity. 
C)  Bond B because it has a lower coupon rate. 
D)  Bond A or Bond B because the maturities are the same. 
E)  None of the above. 
A)  Bond A because it has a higher coupon rate. 
B)  Bond A because it has a higher yield to maturity. 
C)  Bond B because it has a lower coupon rate. 
D)  Bond A or Bond B because the maturities are the same. 
E)  None of the above.

Question 7

The lower a bond's yield to maturity, the greater its duration.

Accepted Answer

A) True 
 B)False

Question 8

According to the segmented-market hypothesis a downward sloping 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 9

For a given change in yield bond price volatility is inversely related to coupon.

Accepted Answer

A) True 
 B)False

Question 10

Suppose you have an 10%, 20 year bond traded at $1,120. If it is callable in 5 years at $1,150, what is the bond's approximate yield to call? Interest is paid quarterly.

Accepted Answer

A)  7.78% 
B)  8.00% 
C)  9.40% 
D)  9.36% 
E)  9.72% 
A)  7.78% 
B)  8.00% 
C)  9.40% 
D)  9.36% 
E)  9.72%

Question 11

If the price before yields changed was $950, what is the resulting price?

Accepted Answer

A)  $922.64 
B)  $918.66 
C)  $1000.00 
D)  $968.50 
E)  $1012.45 
A)  $922.64 
B)  $918.66 
C)  $1000.00 
D)  $968.50 
E)  $1012.45

Question 12

The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted at a value

Accepted Answer

A)  Equal to or greater than par plus one year's interest. 
B)  Equal to par. 
C)  Equal to par less one year's interest. 
D)  Less than par. 
E)  Five percent over par. 
A)  Equal to or greater than par plus one year's interest. 
B)  Equal to par. 
C)  Equal to par less one year's interest. 
D)  Less than par. 
E)  Five percent over par.

Question 13

Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6% coupon and a yield to maturity of 8%. Interest is paid annually.

Accepted Answer

A)  6.44 years 
B)  5.25 years 
C)  4.44 years 
D)  2.50 years 
E)  None of the above 
A)  6.44 years 
B)  5.25 years 
C)  4.44 years 
D)  2.50 years 
E)  None of the above

Question 14

If the coupon payments are not reinvested during the life of the issue then the

Accepted Answer

A)  Promised yield is greater than the realized yield. 
B)  Promised yield is less than the realized yield. 
C)  Nominal yield declines. 
D)  Nominal yield is greater than the promised yield. 
E)  Current yield equals the yield to maturity. 
A)  Promised yield is greater than the realized yield. 
B)  Promised yield is less than the realized yield. 
C)  Nominal yield declines. 
D)  Nominal yield is greater than the promised yield. 
E)  Current yield equals the yield to maturity.

Question 15

All of the following are one of Malkiel's stated relationships between yield changes and bond prices except

Accepted Answer

A)  Bond prices move inversely to bond yields. 
B)  Longer-maturity bonds experience larger price changes than shorter-maturity bonds. 
C)  Bond price volatility increases at a diminishing rate as term to maturity increases. 
D)  Bond price movements resulting from equal absolute increases or decreases in yield are symmetrical. 
E)  Bond price volatility is inversely related to the coupon rate. 
A)  Bond prices move inversely to bond yields. 
B)  Longer-maturity bonds experience larger price changes than shorter-maturity bonds. 
C)  Bond price volatility increases at a diminishing rate as term to maturity increases. 
D)  Bond price movements resulting from equal absolute increases or decreases in yield are symmetrical. 
E)  Bond price volatility is inversely related to the coupon rate.

Question 16

Convexity is a desirable feature of bonds because.

Accepted Answer

A)  As interest rates decline, the price of a low convexity bond decreases at a decreasing rate. 
B)  As interest rates decline, the price of a high convexity bond decreases at an increasing rate. 
C)  As interest rates decline, the price of a low convexity bond increases at a decreasing rate. 
D)  As interest rates decline, the price of a high convexity bond increases at an increasing rate. 
E)  As interest rates decline, the price of a high convexity bond decreases at a decreasing rate. 
A)  As interest rates decline, the price of a low convexity bond decreases at a decreasing rate. 
B)  As interest rates decline, the price of a high convexity bond decreases at an increasing rate. 
C)  As interest rates decline, the price of a low convexity bond increases at a decreasing rate. 
D)  As interest rates decline, the price of a high convexity bond increases at an increasing rate. 
E)  As interest rates decline, the price of a high convexity bond decreases at a decreasing rate.

Question 17

According to the liquidity preference hypothesis yield curves generally slope upward because

Accepted Answer

A)  investors prefer short maturity obligations to long maturity obligations. 
B)  investors prefer long maturity obligations to short maturity obligations. 
C)  investors prefer less volatile long maturity obligations. 
D)  investors prefer more volatile short maturity obligations. 
E)  None of the above. 
A)  investors prefer short maturity obligations to long maturity obligations. 
B)  investors prefer long maturity obligations to short maturity obligations. 
C)  investors prefer less volatile long maturity obligations. 
D)  investors prefer more volatile short maturity obligations. 
E)  None of the above.

Question 18

Suppose the current 6 year spot rate is 8% and the current 5 year spot rate is 7%. What is the one year forward rate in five years?

Accepted Answer

A)  12.62% 
B)  11.58% 
C)  13.14% 
D)  14.65% 
E)  15.14% 
A)  12.62% 
B)  11.58% 
C)  13.14% 
D)  14.65% 
E)  15.14%

Question 19

Estimate the percentage price change for a 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

Exam 12: The Analysis and Valuation of Bonds

For a bond the present value model incorporates both the coupon receipts and the capital gain or loss.

Assume that you purchase a 5-year $1,000 par value bond, with a 6% coupon, and a yield of 7%. Immediately after you purchase the bond, yields rise to 8% and remain at that level to maturity. Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.

The price-yield relationship for a bond will become more convex

Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation of that curve.

Consider a bond with a 9% coupon and a current yield of 8 1/2%. What is this bond's price?

Consider a bond portfolio manager who expects interest rates to decline and has to choose between the following two bonds. Bond A: 10 years to maturity, 5% coupon, 5% yield to maturity Bond B: 10 years to maturity, 3% coupon, 4% yield to maturity

The lower a bond's yield to maturity, the greater its duration.

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

For a given change in yield bond price volatility is inversely related to coupon.

Suppose you have an 10%, 20 year bond traded at $1,120. If it is callable in 5 years at $1,150, what is the bond's approximate yield to call? Interest is paid quarterly.

If the price before yields changed was $950, what is the resulting price?

The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted at a value

Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6% coupon and a yield to maturity of 8%. Interest is paid annually.

If the coupon payments are not reinvested during the life of the issue then the

All of the following are one of Malkiel's stated relationships between yield changes and bond prices except

Convexity is a desirable feature of bonds because.

According to the liquidity preference hypothesis yield curves generally slope upward because

Suppose the current 6 year spot rate is 8% and the current 5 year spot rate is 7%. What is the one year forward rate in five years?

Estimate the percentage price change for a 5-year $1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.

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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