21
13) If you are an income-oriented investor and you feel that interest rates are relatively high
and will decline in the future, you should purchase
A) zero-coupon, long-term bonds.
B) long-term, non-callable bonds.
C) short-term, zero-coupon bonds.
D) long-term, freely callable bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
14) Five years ago Brookfield Industries issued 30 year bonds with a 4% coupon rate callable at
par after 5 years. Inflation has increased and the yield on bonds similar to Brookfield’s is now
6%. Given these facts,
A) Brookfield is almost certain to call the bonds.
B) the yield to call on the Brookfield bonds is now 6%.
C) Brookfield is not likely to call the bonds any time soon.
D) the price of the bonds will remain close to par because of their call value.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
15) A bond is most likely to be called
A) when investors must reinvest at lower rates.
B) when the bond sells at a large discount.
C) when market yields are close to coupon rates.
D) when investors can reinvest at higher rates.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
22
16) Wayward.com $1,000 par value bonds have a 4.6% coupon paid semi-annually. They will
mature in 6 years and 6 months and are currently selling at $1,015. The yield to maturity for
these bonds is
A) 2.17%.
B) 4.33%.
C) 4.45%.
D) 4.00%.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
17) Which one of the following statements is true about a $1,000, 6% annual coupon bond that
is selling for $1,012?
A) The current yield is less than 6%.
B) The current yield is 6%.
C) The yield-to-maturity is greater than 6%.
D) The yield-to-maturity is 6%.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
18) Dylan purchased 20 GIA Inc. bonds in 2008 when the yield to maturity was 12.5%.
Because of falling interest rates she had to reinvest the coupon payments at 8%, 6%, 4% and
finally, 3%. The internal rate of return on her investment will be
A) greater than the coupon rate but less than the original yield to maturity.
B) less than the original yield to maturity.
C) greater than the original yield to maturity.
D) the reinvestment rate has no effect on the internal rate of return.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23
19) Yield to call on a bond with a coupon rate of 8% paid semi-annually, 10 years to maturity, a
par value of $1,000 and a selling price of $1,071, callable after 5 years at $1,010 is
A) 3.5%.
B) 6.49%.
C) 7.0%.
D) 8.16%.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
20) The current yield on a bond is most similar to
A) the discount rate on a Treasury Bill.
B) the effective annual rate on a certificate of deposit.
C) the dividend yield on a stock.
D) the internal rate of return if the bond is held to maturity.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
21) The actual return on a bond is dependent upon which of the following?
I. the coupon rate
II. the reinvested interest rate
III. any changes in par value
IV. any changes in market price
A) I, II and III only
B) II, III and IV only
C) I, III and IV only
D) I, II and IV only
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
24
22) The reinvestment rate assumption is more important
I. the longer the time to maturity.
II. the shorter the time to maturity.
III. the higher the coupon rate.
IV. the lower the coupon rate.
A) I and III
B) I and IV
C) II and III
D) II and IV
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23) Yield-to-call is
A) commonly used for bonds with deferred-call provisions.
B) calculated using the time to call and the par value of the bond.
C) based solely on the call premium and ignores interest payments.
D) always less than the yield-to-maturity.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
24) Hunter bought a bond with an 8% coupon rate for $1,100 and sold it one year later for
$1,150. His holding period return was
A) 11.8%.
B) 11.3%.
C) 13.0%.
D) 7.27%.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
25
25) Nathan bought a zero coupon bond in 2003 for $485.19. In 2013 he redeemed it for
$1,000. His internal rate of return on this investment was
A) 206.1%.
B) 20.6%.
C) 7.5%.
D) 0.00%.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
26) The yield-to-maturity (YTM) approach fails to consider which of the following risks?
I. reinvestment risk
II. price or market risk
A) I only
B) II only
C) Both I and II
D) Neither I nor II
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
27) Explain the differences between yield-to-maturity and yield-to-call.
Answer: The yield-to-maturity is based on holding a bond until it matures at which time the
face value is paid. The yield-to-call is based on holding a bond until the first date at which the
bond is freely callable at which time the call price will be paid. This price could be equal to the
face value or it could include a call premium.
Learning Outcome: F-06 Compare and contrast different types of bonds and explain why bond
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
26
Copyright © 2017 Pearson Education, Inc.
11.5 Learning Goal 5
1) Bond duration refers to the remaining life of a bond.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
2) A bond’s yield to maturity computation assumes that all interest payments are reinvested at
the same rate and also that the bond is held to maturity.
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
3) The duration of a bond portfolio is the weighted average of the durations of the individual
bonds included in the portfolio.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
4) With exception of zero coupon bonds, a bond’s duration is always shorter than its time to
maturity.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
5) When yield swings are relatively small, a bond’s duration is a viable predictor of its price
volatility.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
27
6) A bond portfolio manager believes that interest rates are about to increase. Given this belief,
the manager should buy long duration bonds and sell short duration bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
7) When the weighted-average duration of an investor’s bond portfolio is exactly equal to the
investor’s desired investment horizon, then the bond portfolio is said to be immunized.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
8) As applied to bonds, duration refers to
A) the average maturity of a diversified portfolio of corporate bonds.
B) the point in the life of a bond when its price risk exactly offsets its reinvestment risk.
C) the average price and annual reinvestment rate of return for a bond.
D) the point in the life of a bond when its yield-to-maturity equals its expected yield.
prices change
AACSB: 3 Analytical thinking
Question Status: Revised
Learning Goal: Learning Goal 5
9) Based on the concept of bond duration, which one of the following statements is correct?
A) Lower coupons result in shorter durations.
B) Longer maturities mean shorter durations.
C) Higher yields (YTMs) lead to longer durations.
D) Longer durations mean greater volatility.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
28
10) Which one of the following bonds would have a duration that exactly matches its time to
maturity?
A) discount bond
B) premium bond
C) zero-coupon bond
D) U.S. Treasury bond
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
11) Bond convexity refers the property of bonds that causes prices
A) to rise and fall in a way that exactly offsets changes in yield to maturity.
B) rise and fall in a linear manner as yields change.
C) rise at a decreasing rate when yields fall.
D) rise at an increasing rate when yields fall.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
12) Which of the following risks can be essentially eliminated by immunizing a bond portfolio?
I. default risk
II. price risk
III. reinvestment risk
IV. liquidity risk
A) I, II and III only
B) II and III 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 5