978-0134083308 Chapter 11 Part 2

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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.

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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

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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

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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.

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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.

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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.

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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.

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29) Explain how a yield curve is constructed and what its shape reveals about interest rates.

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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.

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2) A bond’s discount or premium will tend to increase as the bond approaches its maturity date.

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3) The price of a bond is equal to the present value of the bond’s future cash flows.

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4) As a bond approaches its maturity date, its price necessarily approaches par value.

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5) The longer the time to maturity, the less sensitive a bond’s price will be to changes in interest

rates.

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6) A significant portion of a coupon bond’s total return is derived from the reinvestment of the

interest payments.

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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%.

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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.

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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.

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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

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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%

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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

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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%

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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

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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.

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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.

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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%.

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2) Generally speaking, short-term bonds have lower yields than long-term bonds.

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3) A basis point is 1/10 of 1%.

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4) Bond yields are set by the bond issuer.

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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.

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6) A bond’s yield to maturity is equal to the internal rate of return of its cash flows.

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7) A bond’s current yield is equal to the interest payment divided by par value.

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8) The actual return earned on a bond is highly dependent upon the reinvestment rate of the

coupons.

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9) Yield-to-call assumes a bond is called on the last possible date.

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10) The greater of the yield-to-call or the yield-to-maturity is used as the appropriate indicator

of value.

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11) Yield to call is a useful measure for bonds selling at a premium, but not for bonds selling at

a discount.

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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.

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