Question 1

A 10-year maturity coupon bond has a six-year duration. An equivalent 20-year bond with the same coupon has a duration

Accepted Answer

A) equal to 12 years. 
B) less than six years. 
C) less than 12 years. 
D) equal to six years. 
E) greater than 20 years. 
A) equal to 12 years. 
B) less than six years. 
C) less than 12 years. 
D) equal to six years. 
E) greater than 20 years.

Question 2

An investor owned a 9 percent annual payment coupon bond for six years that was originally purchased at a 9 percent required return. She did not reinvest any coupons (she kept the money under her mattress). She redeemed the bond at par. What was her annual realized rate of return? What if she did reinvest the coupons but only earned 5 percent on each coupon? Why are your answers not equal to 9 percent?

Accepted Answer

You can't use the bond price formula in

Question 3

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

Accepted Answer

A) N. 
B) 0. 
C) sum of the years/N. 
D) N!/N2. 
E) None of these choices are correct. 
A) N. 
B) 0. 
C) sum of the years/N. 
D) N!/N2. 
E) None of these choices are correct.

Question 4

A 15-year,7 percent coupon annual payment corporate bond has a PV of $1,055.62. However,you pay $1,024.32 for the bond. By how many basis points is your E(r)different from your r?

Accepted Answer

r = 6.41% 1,055.62 = 70 × [PVIFA15 yr,r]

Question 5

The basic principle of valuation states that the value of any asset is

Accepted Answer

A) the present value of all future cash flows generated by the asset. 
B) the sum of all future cash flows generated by the asset. 
C) the present value of next year's cash flow only. 
D) the degree of cash flow riskiness is not a relevant factor in valuation. 
E) None of these choices are correct. 
A) the present value of all future cash flows generated by the asset. 
B) the sum of all future cash flows generated by the asset. 
C) the present value of next year's cash flow only. 
D) the degree of cash flow riskiness is not a relevant factor in valuation. 
E) None of these choices are correct.

Question 6

A fairly priced bond with a coupon less than the expected return must sell at a discount from par.

Accepted Answer

A) True 
 B)False

Question 7

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

Accepted Answer

A) $0.00 
B) Overpriced by $14.18 
C) Underpriced by $14.18 
D) Overpriced by $9.32 
E) Underpriced by $9.32 
A) $0.00 
B) Overpriced by $14.18 
C) Underpriced by $14.18 
D) Overpriced by $9.32 
E) Underpriced by $9.32

Question 8

A stock you are evaluating is expected to experience supernormal growth in dividends of 12 percent over the next three years. Following this period,dividends are expected to grow at a constant rate of 4 percent. The stock paid a dividend of $1.50 last year and the required rate of return on the stock is 11 percent. Calculate the stock's fair present value.

Accepted Answer

A) $16.24 
B) $21.56 
C) $24.25 
D) $27.46 
E) None of these choices are correct. 
A) $16.24 
B) $21.56 
C) $24.25 
D) $27.46 
E) None of these choices are correct.

Question 9

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

Accepted Answer

A) greater than its PV. 
B) less than par. 
C) less than its E(r). 
D) less than its PV. 
E) $1,000.00. 
A) greater than its PV. 
B) less than par. 
C) less than its E(r). 
D) less than its PV. 
E) $1,000.00.

Question 10

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

Accepted Answer

A) The bond was purchased at a premium to par. 
B) The coupon rate was 8 percent. 
C) The required return was greater than 6 percent. 
D) The coupons were reinvested at a higher rate than expected. 
E) The bond must have been a zero coupon bond. 
A) The bond was purchased at a premium to par. 
B) The coupon rate was 8 percent. 
C) The required return was greater than 6 percent. 
D) The coupons were reinvested at a higher rate than expected. 
E) The bond must have been a zero coupon bond.

Question 11

The coupon rate represents the most accurate measure of the bondholder's required return.

Accepted Answer

A) True 
 B)False

Question 12

You would want to purchase a security if P ________ PV or E(r)________ r.

Accepted Answer

A) ≥; ≤ 
B) ≥; ≥ 
C) ≤; ≥ 
D) ≤; ≤ 
A) ≥; ≤ 
B) ≥; ≥ 
C) ≤; ≥ 
D) ≤; ≤

Question 13

At equilibrium a security's required rate of return will be less than its expected rate of return.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following bond terms are generally positively related to bond price volatility?
I. Coupon rate
II. Maturity
III. YTM
IV. Payment frequency

Accepted Answer

A) II and IV only 
B) I and III only 
C) II and III only 
D) II only 
E) II,III,and IV only 
A) II and IV only 
B) I and III only 
C) II and III only 
D) II only 
E) II,III,and IV only

Question 15

You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?

Accepted Answer

A) 8.89 percent 
B) 8.51 percent 
C) 5.84 percent 
D) 4.44 percent 
E) 2.96 percent 
A) 8.89 percent 
B) 8.51 percent 
C) 5.84 percent 
D) 4.44 percent 
E) 2.96 percent

Question 16

You are evaluating a company's stock. The stock just paid a dividend of $1.75. Dividends are expected to grow at a constant rate of 5 for long time into the future. The required rate of return (Rs)on the stock is 12 percent. What is the fair present value?

Accepted Answer

A) $26.25 
B) $22.50 
C) $35.26 
D) $50.25 
E) None of these choices are correct. 
A) $26.25 
B) $22.50 
C) $35.26 
D) $50.25 
E) None of these choices are correct.

Question 17

A corporate bond returns 12 percent of its cost (in PV terms)in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

Accepted Answer

A) 3.68 years 
B) 2.50 years 
C) 4.00 years 
D) 3.75 years 
E) 3.32 years 
A) 3.68 years 
B) 2.50 years 
C) 4.00 years 
D) 3.75 years 
E) 3.32 years

Question 18

A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r)?

Accepted Answer

A) 8.00 percent 
B) 10.21 percent 
C) 9.98 percent 
D) 9.03 percent 
E) 3.53 percent 
A) 8.00 percent 
B) 10.21 percent 
C) 9.98 percent 
D) 9.03 percent 
E) 3.53 percent

Question 19

A decrease in interest rates will

Accepted Answer

A) decrease the bond's PV. 
B) increase the bond's duration. 
C) lower the bond's coupon rate. 
D) change the bond's payment frequency. 
E) not affect the bond's duration. 
A) decrease the bond's PV. 
B) increase the bond's duration. 
C) lower the bond's coupon rate. 
D) change the bond's payment frequency. 
E) not affect the bond's duration.

Question 20

A bond with an 11 percent coupon and a 9 percent required return will sell at a premium to par.

Accepted Answer

A) True 
 B)False

Exam 3: Interest Rates and Security Valuation

A 10-year maturity coupon bond has a six-year duration. An equivalent 20-year bond with the same coupon has a duration

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

A 15-year,7 percent coupon annual payment corporate bond has a PV of $1,055.62. However,you pay $1,024.32 for the bond. By how many basis points is your E(r)different from your r?

The basic principle of valuation states that the value of any asset is

A fairly priced bond with a coupon less than the expected return must sell at a discount from par.

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

The coupon rate represents the most accurate measure of the bondholder's required return.

You would want to purchase a security if P ________ PV or E(r)________ r.

At equilibrium a security's required rate of return will be less than its expected rate of return.

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency

You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?

You are evaluating a company's stock. The stock just paid a dividend of $1.75. Dividends are expected to grow at a constant rate of 5 for long time into the future. The required rate of return (Rs)on the stock is 12 percent. What is the fair present value?

A corporate bond returns 12 percent of its cost (in PV terms)in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r)?

A decrease in interest rates will

A bond with an 11 percent coupon and a 9 percent required return will sell at a premium to par.

Introduction

Determinants of Interest Rates

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

You would want to purchase a security if P PV or E(r) r.