Investment Analysis and Portfolio Management 9th Edition TestBank Chapter 18

Unlock access to all the studying documents.

View Full Document

CHAPTER 18—THE ANALYSIS AND VALUATION OF BONDS TRUE/FALSE

Question: For a bond the present value model incorporates both the coupon receipts and

the capital gain or loss. Answer:

Question: The major problem facing a bond analyst is the ability to forecast the basic

interest rate level since yield spreads are generally inconsequential. Answer:

Question: Yield to maturity and current yield are equal when the bond is selling for exactly

par value. Answer:

Question: An interest rate is the price of loanable funds. Answer:

Question: The internal rate of return is that discount rate that sets the present value of cash

flows from an investment equal to its par value. Answer:

Question: If an investor buys a high coupon bond, and rates then fall, the investor has

“locked up” that high yield as a realized yield. Answer:

Question: The three major theories explaining the term structure of interest rates are the

expectations hypothesis, the liquidity differential hypothesis, and the segmented quality

hypothesis. Answer:

Question: The expectations hypothesis is also known as both the institutional theory and

the hedging pressure theory. Answer:

Question: Bond price volatility varies directly with the term to maturity and directly with

the coupon. Answer:

Question: The longer the time to maturity, the greater the percentage change in a bonds

price. Answer:

Question: There is an inverse relationship between duration and coupon. Answer:

Question: The lower a bonds yield to maturity, the greater its duration. Answer:

Question: Because you expect market interest rates to decline during the next four months,

if you were offered two bonds with equal duration, you would select the one with the

higher measure of convexity. Answer:

Question: The fundamental determinants of interest rates are the real risk free rate,

inflation, and the risk premium. Answer:

Question: According to the expectations hypothesis, a rising yield curve indicates that

investors demand for long maturity bonds is expected to rise. Answer:

Question: According to the segmented market hypothesis, yields for a particular maturity

segment depend on supply and demand within the maturity segment. Answer:

Question: For a given change in yield bond price volatility is inversely related to term to

maturity. Answer:

Question: For a given change in yield bond price volatility is inversely related to coupon.

Answer:

Question: For a given change in yield bond price volatility is directly related to duration.

Answer:

Question: Convexity is a measure of how much a bonds price-yield curve deviates from

the linear approximation of that curve. Answer:

Question: The price-yield curve is a concave curve representing the relationship of bond

prices and yields. Answer:

Question: The realized yield measures the expected rate of return of a bond that you expect

to sell prior to its maturity. Answer:

Question: The term structure of interest rates is a dynamic function that relates the term to

maturity to the yield to maturity of bonds. Answer:

Question: The annual interest paid on a bond relative to its prevailing market price is

called its ____.

Answer:

Question: If the holding period is equal to the term to maturity for a corporate bond the

rate of discount represents the

Answer:

Question: The nominal yield of a bond is the

Answer:

Question: If the coupon payments are not reinvested during the life of the issue then the

Answer:

Question: The importance of the reinvestment assumption increases with a ____ coupon

and a ____ term to maturity.

Answer:

Question: The best way for an investor to “lock in” to high interest rates would be to

purchase a bond that has a ____ coupon and a ____ term to maturity.

Answer:

Question: The yield to call is a more conservative yield measure whenever the price of a

callable bond is quoted at a value

Answer:

Question: Which of the following is not a major risk premium component for bond

investors?

Answer:

Question: The term structure of interest rates is a static function that relates the

Answer:

Question: There are four major factors accounting for the existence of yield differentials.

Which of the following is not a factor?

Answer:

Question: The convexity of a bond is affected as follows:

Answer:

Question: Which of the following statements is true?

Answer:

Question: If you expected interest rates to fall, you would prefer to own bonds with

Answer:

Question: If you expected interest rates to fall, you would prefer to own bonds with

Answer:

Question: If you expected interest rates to rise, you would prefer to own bonds with

Answer:

Question: According to the liquidity preference hypothesis yield curves generally slope

upward because

Answer:

Question: According to the segmented-market hypothesis a downward sloping yield curve

indicates that

Answer:

Question: According to the segmented-market hypothesis a rising yield curve indicates that

Answer:

Question: According to the expectations hypothesis a rising yield curve indicates that

investors expect

Answer:

Question: The price-yield relationship for a bond will become more convex

Answer:

Question: Convexity is a desirable feature of bonds because.

Answer:

Question: The position of a bondholder that is long a callable bond is equal to being

Answer:

Question: Option adjusted duration can be calculated as

Answer:

Question: The option adjusted duration will approach the duration to maturity, when

Answer:

Question: The promised yield to maturity calculation assumes that

Answer:

Question: If the coupon payments are not reinvested during the life of the issue then the

Answer:

Question: Consider a bond portfolio manager who expects interest rates to decline and has

to choose between the following two bonds. Bond A: 10 years to maturity, 5% coupon, 5%

yield to maturity Bond B: 10 years to maturity, 3% coupon, 4% yield to maturity

Answer:

Question: ____ measures the expected rate of return of a bond assuming that you sell it

prior to its maturity.

Answer:

Question: The yield to call is a more conservative yield measure whenever the price of a

callable bond is quoted at a value

Answer:

Question: Which of the following is not a risk premium component of bonds?

Answer:

Question: Which term-structure hypothesis suggests that any long-term interest rate simply

represents the geometric mean of current and future on-year interest rates expected to

prevail over the maturity of the issue?

Answer:

Question: Which of the four major yield spreads defines the difference in yields between

pure government agency bonds and corporate bonds?

Answer:

Question: All of the following are one of Malkiels stated relationships between yield

changes and bond prices except

Answer:

Question: Which duration is computed by discounting flows using the yield to maturity of

the bond?

Answer:

Question: Consider a 12%, 15 year bond that pays interest semiannually, and its current

price is $675. What is the promised yield to maturity?

Answer:

Question: Consider a 15%, 20 year bond that pays interest annually, and its current price is

$850. What is the promised yield to maturity?

Answer:

Question: Consider a 10%, 15 year bond that pays interest annually quarterly, and its

current price is $1060. What is the promised yield to maturity?

Answer:

Question: Consider a zero coupon bond that has a current price of $436.19 and matures in

10 years. What is its yield to maturity?

Answer:

Question: What is the current price of a zero coupon bond with a 6% yield to maturity that

matures in 15 years?

Answer:

Question: What is the current price of a zero coupon bond with a 7% yield to maturity that

matures in 20 years?

Answer:

Question: Consider a bond with a 9% coupon and a current yield of 8 1/2%. What is this

bonds price?

Answer:

Question: Consider a bond with a current yield of 8% and a price of $1,250. What is this

bonds coupon?

Answer:

Question: Consider a bond with a price of $944.44 and a coupon of 8 1/2%. What is the

current yield?

Answer:

Question: Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years

at $1,100, what is the bonds yield to call? Interest is paid semiannually.

Answer:

Question: Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years

at $1050, what is the bonds yield to call? Interest is paid annually.

Answer:

Question: Suppose you have an 10%, 20 year bond traded at $1,120. If it is callable in 5

years at $1,150, what is the bonds approximate yield to call? Interest is paid quarterly.

Answer:

Question: Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if

the yield to maturity is 10 percent and interest is paid semiannually.

Answer:

Question: Calculate the modified duration for a 10-year, 12 percent bond with a yield to

maturity of 10 percent and a Macaulay duration of 7.2 years.

Answer:

Question: A 12-year, 8 percent bond with a YTM of 12 percent has a Macaulay duration of

9.5 years. If interest rates decline by 50 basis points, what will be the percent change in

price for this bond?

Answer:

Question: Consider a bond with a duration of 6 years having a yield to maturity of 8% and

interest rates are expected to rise by 50 basis points. What is the percentage change in the

price of the bond?

Answer:

Question: If the price before yields changed was $950, what is the resulting price?

Answer:

Question: Consider a bond with a duration of 7 years having a yield to maturity of 7% and

interest rates are expected to rise by 50 basis points. What is the percentage change in the

price of the bond?

Answer:

Question: If the price before yields changed was $925, what is the resulting price?

Answer:

Question: Consider a bond with a duration of 8 years having a yield to maturity of 8% and

interest rates are expected to rise by 50 basis points. What is the percentage change in the

price of the bond?

Answer:

Question: If the price before yields changed was $975, what is the resulting price?

Answer:

Question: Suppose the current 6 year spot rate is 8% and the current 5 year spot rate is 7%.

What is the one year forward rate in five years?

Answer:

Question: Suppose the current 6 year rate is 9% and the current 5 year rate is 7%. What is

the one year forward rate for five years?

Answer:

Question: Suppose the current 7 year rate is 8% and the current 6 year rate is 6%. What is

the one year forward rate for six years?

Answer:

Question: Assume that you purchase a 3-year $1,000 par value bond, with a 8% coupon,

and a yield of 10%. After you purchase the bond, one- year interest rates are as follow,

year 1 = 10%, year 2 = 8%, year 3 = 6% (these are the reinvestment rates). Calculate the

realized horizon yield if you hold the bond to maturity. Interest is paid annually.

Answer:

Question: Assume that you purchase a 10-year $1,000 par value bond, with a 12% coupon,

and a yield of 9%. Immediately after you purchase the bond, yields fall to 8% and remain

at that level to maturity. Calculate the realized horizon yield, if you hold the bond for 5

years and then sell. Interest is paid annually.

Answer:

Question: Assume that you purchase a 5-year $1,000 par value bond, with a 6% coupon,

and a yield of 7%. Immediately after you purchase the bond, yields rise to 8% and remain

at that level to maturity. Calculate the realized horizon yield if you hold the bond to

maturity. Interest is paid annually.

Answer:

Question: Estimate the percentage price change for a 5-year $1,000 par value bond, with a

6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.

Answer:

Question: Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6%

coupon and a yield to maturity of 8%. Interest is paid annually.

Answer:

Question: A 15-year bond has a $1,000 par value bond, a 4% coupon and a yield to

maturity of 3.3%. Interest is paid annually. The bonds current yield is

Answer:

Question: A 5-year bond has a $1,000 par value bond, a 12% coupon and a yield to

maturity of 8%. Interest is paid semiannually. The bonds price is

Answer:

Question: A 15-year bond, purchased 5 years ago, has a $1,000 par value bond, a 10

percent coupon and a yield to maturity of 12%. Interest is paid annually. The bonds price is

Answer:

Question: Refer to Exhibit 18-1. Calculate the current price of the bond.

Answer:

Question: Refer to Exhibit 18-1. Calculate the Macaulay duration for the bond.

Answer:

Question: Refer to Exhibit 18-1. Calculate the modified duration for the bond.

Answer:

Question: Refer to Exhibit 18-1. Estimate the percentage price change for this 5-year

$1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is

paid semiannually.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Talmart

Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a

7% coupon rate. Interest is paid annually and the required rate of return is 6 percent for

these bonds. NARREND Question: Refer to Exhibit 18-2. What is the price of the Talmart

corporate bonds?

Answer:

Question: Refer to Exhibit 18-2. What is the Macaulay duration of the Talmart corporate

bonds?

Answer:

Question: Refer to Exhibit 18-2. What is the Modified duration of the Talmart corporate

bonds?

Answer:

Question: Refer to Exhibit 18-2. If interest rates increase 50 basis points, what will be the

approximate price change for the Talmart bond?

Answer:

Question: Zappo Corporation just issued $1,000 face value bonds that will mature in 20

years and have a 7% coupon rate. Interest is paid semi-annually and the required rate of

return is 9 percent for these bonds. The bonds have a 5 year call provision that will pay a

call premium of $1,050 if they are called in. What is the price of the Zappo Corporation

bond?

Answer:

Question: Calculate the modified duration of a bond that has a Macaulay duration of 7.6

and the bond pays interest semi-annually with a coupon rate of 6% and a required rate of

return of 8%.

Answer: