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11
22) Market segmentation theory explains the typical upward sloping shape of yield curves as a
function of
A) normally greater demand for long-term bonds than for short-term notes.
B) normally greater demand for short term notes than for long-term bonds.
C) expectations that inflation will be higher in the future than it is now.
D) the greater liquidity of short-term notes as compared to long-term bonds.
influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
23) At any given time, the yield curve is affected by
I. lender preferences.
II. inflationary expectations.
III. liquidity preferences.
IV. short- and long-term supply and demand conditions.
A) I and IV only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV
influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12
24) Which of the following theories is consistent with yield curves sloping upward most of the
time?
I. market segmentation theory
II. expectations theory
III. liquidity preference theory
IV. theory of evolution
A) I and III only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV
influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
25) If the yield curve begins to rise sharply, it is usually an indication that
A) stocks are offering low returns as the economy enters a recession.
B) inflation rates have peaked and are about to decline.
C) bond prices are expected to increase.
D) inflation is starting to increase, or is expected to do so in the near future.
influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
26) Evidence indicates that the theory of interest rates with the most predictive power is
A) market segmentation theory.
B) expectations theory.
C) liquidity preference theory.
D) a combination of expectations, market expectations and liquidity preference.
influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
13
27) If inflation is expected to increase significantly, cautious bondholders should
A) expect interest rates to rise.
B) expect a flat yield curve for the intermediate-term.
C) buy long-term bonds today.
D) move to the short-end of the yield curve.
influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
28) Liquidity preference theory suggests that when bond investors move from short-term
securities to long term securities
A) they are expecting short-term rates to fall.
B) they are expecting long-term rates to rise.
C) they believe that they can earn a higher rate of return over the long term by buying bonds
with longer maturities than they could by buying a series of short-term investments.
D) they want to be protected from the risk of falling bond prices in the future.
influence investment choices
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 2
29) Explain how a yield curve is constructed and what its shape reveals about interest rates.
influence investment choices
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 2
14
Copyright © 2017 Pearson Education, Inc.
11.3 Learning Goal 3
1) If a bond's yield to maturity is lower than its coupon rate, the bond will sell at a discount.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
2) A bond's discount or premium will tend to increase as the bond approaches its maturity date.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
3) The price of a bond is equal to the present value of the bond's future cash flows.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
4) As a bond approaches its maturity date, its price necessarily approaches par value.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
5) The longer the time to maturity, the less sensitive a bond's price will be to changes in interest
rates.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15
6) A significant portion of a coupon bond's total return is derived from the reinvestment of the
interest payments.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
7) A bond has a coupon rate of 6%, matures in 6 years, and currently sells for $1,000 (par
value). Therefore the yield to maturity is also 6%.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
8) The yield to maturity on a zero coupon, $1,000 par value bond which will mature in 10 years
is 5%. The price of the bond is $500.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
9) The price of a bond with an 6% coupon rate paid semi-annually, a par value of $1,000, and
fifteen years to maturity is the present value of
A) 15 payments of $30 at 6 month intervals plus $1,000 received at the end of the fifteenth
year.
B) 15 payments of $60 at 6 month intervals plus $1,000 received at the end of the fifteenth
year.
C) 30 payments of $30 at 6 month intervals plus $1,000 received at the end of the fifteenth
year.
D) 30 payments of $60 at 1 year intervals plus $1,000 received at the end of the 30th year.
prices change
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 3
16
10) To the nearest dollar, what is the current price of a 9%, $1,000 annual coupon bond that has
eighteen years to maturity and a yield to maturity of 7.01%?
A) $1,200
B) $1,000
C) $826
D) $701
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
11) What is the coupon rate of an annual bond that has a yield to maturity of 8.5%, a current
price of $942.32, a par value of $1,000 and matures in thirteen years?
A) 7.67%
B) 7.75%
C) 8.33%
D) 8.50%
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
12) What is the current price of a $1,000, 6% coupon bond that pays interest semi-annually if
the bond matures in ten years and has a yield-to-maturity of 7.1325%?
A) $567
B) $920
C) $1,030
D) $1,080
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
17
13) What is the yield-to-maturity of a $1,000, 7% semi-annual coupon bond that matures in 2
years and currently sells for $997.07?
A) 6.87%
B) 7.04%
C) 7.16%
D) 7.31%
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
14) Which of the following are needed to determine the appropriate value of a bond?
I. required rate of return
II. time to maturity
III. frequency of interest payments
IV. coupon rate
A) II and III only
B) III and IV only
C) II, III and IV only
D) I, II, III and IV
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
15) A $1,000 par value, 12-year annual bond carries a coupon rate of 7%. If the current yield of
this bond is 7.995%, its market price to the nearest dollar is
A) $876.
B) $925.
C) $1,075.
D) $1,125.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 3
18
16) Jordan bought a 4% semi-annual coupon bond with 25 years to maturity at par value of
$1,000. If the required rate of return (yield to maturity )of this bond increases to 4.25%, by
how much does the value of the bond change?
A) minus $38.04
B) plus $39.28
C) minus $38.27
D) The value does not change if Jordan intends to hold the bond to maturity.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 3
11.4 Learning Goal 4
1) The current yield for a bond with a par value of $1,000, an annual interest payment of $55
and a market price of $1,100 is 5%.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
2) Generally speaking, short-term bonds have lower yields than long-term bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
3) A basis point is 1/10 of 1%.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
19
4) Bond yields are set by the bond issuer.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
5) The required return defines the yield at which a bond should be trading and serves as the
discount rate in the bond valuation process.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
6) A bond's yield to maturity is equal to the internal rate of return of its cash flows.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
7) A bond's current yield is equal to the interest payment divided by par value.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
8) The actual return earned on a bond is highly dependent upon the reinvestment rate of the
coupons.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
20
9) Yield-to-call assumes a bond is called on the last possible date.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
10) The greater of the yield-to-call or the yield-to-maturity is used as the appropriate indicator
of value.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
11) Yield to call is a useful measure for bonds selling at a premium, but not for bonds selling at
a discount.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
12) Which one of the following statements is correct concerning bond investors?
A) Aggressive investors want to lock in high interest rates.
B) Aggressive investors purchase bonds when they believe interest rates will rise.
C) Conservative investors seek capital gains.
D) Conservative investors buy bonds when interest rates are high.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
