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CHAPTER 5
TRUE-FALSE QUESTIONS
the price of the bond and reinvestment risk will decrease the return on the coupons.
vary.
concern.
coupon rates.
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over their holding period.
change in interest rate.
MULTIPLE CHOICE QUESTIONS
a. Bond prices and interest rates move together.
b. Coupon rates are fixed at the time of issue.
c. Short-term securities have large price swings relative to long-term securities.
d. The higher the coupon, the lower the price of a bond.
a. The higher the coupon rate, the shorter the duration.
b. The yield on a bond is usually fixed.
c. A bond’s coupon rate is equal to its face value.
d. Most bonds pay interest annually.
a. $6,691
b. $16,036
c. $6,734
d. $5,386
amount would he have at the end of seven years?
a. $13,225
b. $13,159
c. $13,179
d. $13,325
What amount would she need to deposit now in a deposit account earning 6%,
compounded yearly, to accumulate her savings goal?
a. $4,200
b. $39,513
c. $39,088
d. $125,359
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similar bonds are yielding 11%, what is the price of the bond?
a. $1,000.00
b. $880.22
c. $906.93
d. $910.35
of $1,000. If market rates on newly issued similarly rated corporate bonds are now 7.5%,
what is the current market price of this bond?
a. $953.06
b. $1,000.00
c. $1,048.41
d. $936.42
years is currently yielding 7.6% in the market. What is the current price of the bond?
a. $1,027.08
b. $1,131.19
c. $1,028.48
d. $972.00
for $950, what is the expected yield to maturity on the bond?
a. 6.5%
b. 7.9%
c. 9.0%
d. 8.3%
years and sells for $1120. What is the yield to maturity?
a. 10.8%
b. 11.0%
c. 7.9%
d. 7.6%
a. a discount.
b. a premium.
c. par.
d. a variable rate.
a. has a yield equal to its coupon rate.
b. has a yield below its coupon rate.
c. has a yield above its coupon rate.
d. has no risk.
a. face value of the bond increases.
b. investor will sell the bond.
c. market value of the bond is increasing.
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d. market value of the bond is decreasing.
a. a bond’s price.
b. a bond’s contractual maturity.
c. the length of time it takes to get back the original investment.
d. bond price volatility.
a. will have greater price variability, given a change in interest rates, relative to bond
A.
b. will have a longer maturity than bond A.
c. will have a higher coupon rate than bond A.
d. will have less price variability, given a change in interest rates, relative to bond A.
a. 3 years.
b. 2.78 years.
c. 2.50 years.
d. 2 years.
a. less than two years.
b. more than two years.
c. 10%.
d. 2 years.
market rates are 8%?
a. 2.036
b. 1.934
c. 1.902
d. 1.856
a. decreases; coupon rate; market price.
b. decreases; duration; face value.
c. increases; duration; price variability.
d. increases; risk; coupon rate.
a. price.
b. coupon rate.
c. coupon amount.
d. face value.
price (assuming semiannual compounding) is
a. $974.21
b. $813.50
c. $927.50
d. $1,026.64
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a. price risk
b. reinvestment risk
c. credit risk
d. default risk
a. coupon payments.
b. reinvestment income.
c. changing coupon rate levels.
d. capital gains or losses.
a. the yield to maturity.
b. the changing market rates.
c. the coupon rate.
d. the treasury bond rate.
purchased for $800 and sold one year later for $850.
a. 9%
b. 11.25%
c. 14.5%
d. 17.5%
realized rate of return (annualized)?
a. 8%
b. 6.52%
c. 7.32%
d. 5.75%
$1,020 to $1,050.
a. $30.00
b. 5%
c. 3%
d. $50.00
a. Bonds vary directly with interest rates.
b. Bond volatility varies inversely with maturity.
c. Low coupon bonds have lower bond volatility than high coupon bonds.
d. Bond duration increases with maturity.
a. duration.
b. the extent that coupon rates vary with time.
c. the potential variability in the realized rate of return caused by changes in market
rates.
d. the potential variability in the bond maturity caused by changing discount rates.
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a. offset one another to a certain extent as interest rates change.
b. are two bond risks related to credit risk.
c. work together to magnify the price impact of a change in interest rate.
d. both have an effect on bond price.
a. high quality, 20 year Treasury bonds.
b. high quality coupon bonds with a duration of five years.
c. high quality coupon bonds maturing in five years.
d. high credit risk bonds maturing before five years.
a. Duration is the length of time necessary to pay back the investor‘s original
investment.
b. The duration of a bond is some time longer than the maturity of the bond.
c. Duration is the investment period necessary to offset price risk and reinvestment
risk.
d. A bond sold at the duration point will always be priced at $1,000.
a. more than $1,000
b. $1,000
c. less than $1,000
d. cannot ascertain
bond matures in 5 years? (Assume semiannual compounding).
a. $829.60
b. $1,000.00
c. $926.40
d. $1,040.80
bond for $1300 one year later. What is Tom’s realized annual rate of return?
a. 4.8%
b. 9.7%
c. 9.2%
d. More than 10%.
a. the guaranteed rate of return to an investor.
b. the same as the coupon rate.
c. the expected rate of return on the bond.
d. the realized rate of return on the bond.
a. not purchase coupon bonds.
b. select bonds whose maturity matches the investor‘s investment holding period.
c. select bonds whose duration matches the investor‘s investment holding period.
d. invest only in U.S. Treasury bonds.
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a. has eliminated price risk, but not reinvestment risk.
b. has eliminated just one part of interest rate risk.
c. cannot precisely predict the rate of return on the bond.
d. All of the above.
a. the variability of bond maturities.
b. the variability of bond coupon payments.
c. the variability of rates of return on reinvested coupons.
d. the variability of the market price on the bond.
a. positive
b. favorable
c. inverse
d. large
coupons of the same maturity.
a. higher; shorter; smaller
b. lower; longer; smaller
c. higher; longer; larger
d. higher; shorter; larger
year, the _________ the rate of return on a present sum.
a. lower, greater, lower
b. higher, fewer, higher
c. higher, greater, higher
d. lower, lower, higher
contract maturity date, investor’s return could still vary because of
a. default risk
b. price risk
c. liquidity risk
d. reinvestment risk.
a. default risk and reinvestment risk.
b. liquidity risk and reinvestment risk.
c. price risk and political risk.
d. price risk and reinvestment risk.
a. volatility of the security.
d. present value of the security cash flows.
c. duration of the security.
d. always greater than the maturity of the security.
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a. be associated with a decrease in interest rates.
b. always be matched by an increased demand for securities.
c. be associated with an increase in bond interest rates.
d. not affect interest rates, only security prices.
a. will be associated with an increase in interest rates.
b. will be associated with a decrease in interest rates.
c. will have no affect on interest rates.
d. will be matched with an increase in the supply of securities.
to investors is
a. face value
b. coupon rate
c. maturity
d. price
a. par value
b. yield
c. maturity
d. coupon
a. cannot exceed the instrument’s term to maturity
b. is a proxy for the instrument’s default risk
c. must exceed the instrument’s term to maturity
d. must be calculated before yield to maturity can be accurately determined
the required return is 3% and the bond pays interest annually?
a. $1060.44
b. $1062.81
c. $1065.45
d. $1072.99
A 10-year semiannual payment bond with a par value of $1,000 has a 7% coupon annual rate. Currently this
bond is a par bond in market. Use the above information to answer the following three questions.
a. 10.00 years
b. 8.392 years
c. 8.452 years
d. 7.355 years
This bond’s YTM drops by 1%. What is the new duration?
a. 10.00 years
b. 9.592 years
c. 7.461 years
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d. 6.352 years
ceteris paribus, the interest rate risk of this bond should
a. Increase
b. Decrease
c. Unchange
to maturity. What is the bond’s duration?
a. 5.00 years
b. 4.85 years
c. 4.76 years
d. 4.47 years
to maturity. What is the bond’s duration?
a. 4.85 years
b. 4.57 years
c. 4.46 years
d. 4.32 years
ESSAY QUESTIONS
1. Name and discuss the variables that determine the price or value of a fixed–rate coupon bond.
2. Name and discuss the factors that must be considered when calculating the realized rate of return on
a bond.
3. What are the relationships between bond price volatility and (a) bond maturity; (b) coupon rate?
4. Define and discuss interest rate risk. What are the two risk components of interest rate risk and
how do these interact with each other?
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5. What is bond duration and what are the implications of holding a bond to its duration versus
holding the bond to maturity?
6. Formosan Independence Co. issues a 9-year semiannual payment bond with a par value of $1,000 a
10% coupon annual rate. The bond’s credit rating is AA. Currently, this bond is a par bond in
market.
a. What is the duration of this par bond?
b. If Standard and Poors unexpectedly downgrades the U.S. government bond rating. The market
interest rates increase. This bond’s annual YTM increases by 2%. What is the impact on bond’s
interest rate risk? Please use duration to explain.