TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 18
VALUATION OF DEBT CONTRACTS
AND THEIR PRICE VOLATILITY CHARACTERISTICS
MULTIPLE CHOICE
1. The rate earned on federal government debt instruments is usually characterized as the:
[E]
2. When the entire principal can be repaid at the maturity date, the debt contract is said to
have a:
[M]
3. Debt contracts with no periodic interest payments made to owners during the life of the
contract are called:
[E]
4. The price of a debt instrument must equal the sum of the:
108
5. The yield to maturity is the discount rate that makes the present value of the cash flows of
a bond equal to its:
[M]
6. If interest rates in the economy increase because of Fed policy, the price of a bond will:
[M]
7. The value of a bond depends on:
[E]
8. Which of the following statements is most correct?
[M]
9. If the Treasury rates does not change, but the yield spread between Treasury and non-
Treasury securities changes, the price of a non-Treasury security will:
10. If the market price of a bond is less than the par value, then the coupon rate is:
[M]
11. The yield to maturity takes into account:
[M]
12. A bond investor will realize the yield to maturity at the time of purchase only if:
[M]
13. If a bond will have to be sold at a loss, it is said to have:
[M]
14. The relationship between price and yield for any option-free bond is:
15. Which of the following statements is false?
16. A measure of price volatility that relates to coupon and maturity is:
[M]
17. Which of the following statements about duration is most correct?
[D]
18. Dollar duration of a bond measures the:
[E]
19. The convexity measure of a security refers to:
20. For all option-free bonds, the approximate percentage price change that is not explained
by duration will have a:
TRUE/FALSE
1. If the par value relation is equal to one, the bonds sell at par.
[E]
2. The cash flow from a bond consists of periodic coupon interest payments and the
repayment of the principal at maturity.
[E]
[M]
4. The prices of all option-free bonds move in the same direction of the change in yields.
[M]
5. Effective convexity gives recognition that the cash flows of a bond do change when
yields change.
ESSAY QUESTIONS
1. Explain the difference between reinvestment risk and interest rate risk.
Key Issues:
2. Discuss the factors that cause the price of a bond to change.
Key Issues:
3. Explain why the price/yield relationship of an option-free bond is convex.
Key Issues: