problems - finance

8/12/2019 problems - finance

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Chapter 17

BOND YIELDS AND PRICES

Multiple Choice Questions

Bon Yiels

1. One percentage point of a bond yield represents:

a. 1 basis pointb. 10 basis pointsc. 100 basis pointsd. 1000 basis points

2. Subtracting the inflation rate from the market interest rate results in anapproximate:

a. inflation-adjusted rate of interestb. real risk-free rate of interestc. real risky rate of interestd. inflation-adjusted yield

. !or risk-free securities" the nominal interest rate is a function of:

a. actual and expected inflation ratesb. expected inflation rate and expected returnc. real rate of interest and expected inflation rated. market rate of return and real rate of interest

#. $nder the !isher hypothesis" if a one point increase in the inflation rate isanticipated:

a. nominal rates on short-term securities %ould rise by one point.b. nominal rates on short-term securities %ould fall by one point.c. nominal rates on short-term securities %ould fall by less than one point.d. nominal rates on short-term securities %ould rise by less than one point.

&. 'hich of the follo%ing regarding the current yield on a bond isnottrue(

a. )he current yield is superior to the coupon rate because it uses marketprice instead of face *alue.

b. )he current yield is reported daily in The Wall Street Journal.c. )he current yield does not account for difference bet%een purchase price

and redemption *alue.d. )he current yield sho%s the bond+s expected rate of return if held to

maturity.

,hapter ightond /ields and rices

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. )he yield to maturity consists solely of interest income if:

a. the bond is a ero coupon bond.b. the bond %as purchased at par.c. the bond %as purchased abo*e par.d. the bond %as purchased belo% par.

3. 4n order to ha*e a yield to maturity greater than the coupon rate" the bondmust be:

a. selling at a discount.b. selling at par.c. selling at a premium.d. a ero coupon bond.

5. )ypically" a yield to call calculation %ill use:

a. market interest rates rate than the coupon rate.

b. current market price rather than the maturity *alue.c. the end of the deferred call period rather than remaining years on the term.d. all of the abo*e %ill be used.

6. 'hen interest rates rise"

a. bond prices rise.b. bond prices fall.c. prices of ne%ly issued bonds are lo%ered.d. interest rates of existing bonds are raised.

10. 4f a bond is callable" this means:

a. the issuer may change the coupon rate.b. the in*estor may con*ert the bond into stock.c. the issuer may redeem the bond early.d. the in*estor may cash in the bond at any time.

11. )he /)7 calculation assumes:

a. rein*estment of interest is at the coupon rate.b. no rein*estment of interest.

c. rein*estment of interest is at /)7 rate.d. rein*estment of interest is at the risk-free rate.

12. )he face *alue of most bonds is:

a. 8100b. 8&00c. 81000


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d. 810"000

1. )he !isher hypothesis is an approximation of the

a. risk-free interest rate.b. real risk-free interest rate.c. inflation rate.d. risk premium.

1#. onds %ith deferred call featuresa. can be retired at any time prior to maturity on condition that the issuer

gi*es notice.b. can only be retired after a specified period follo%ing the date of issue.

c. can be retired at any time" but the issuer %ill ha*e to pay an additional premium..

d. generally ha*e no call premium.

1&. 'hen calculating the yield-to-call on a bond" the stream of interest

payments is 9999999999 and the par *alue is replaced by the 9999999999.

a. lengthened to the call period . . . call price.b. shortened to the call period . . . call price.c. not used in the calculation . . . current market price.d. shortened to the call period . . . current market price.

1. n increase in rein*estment rate risk

a. is caused by an increase in interest rates.b. leads to a decline in coupon rates.

c. results from a decline in interest rates.d. results from an increase in inflation.

13. )he yield-to-call is like the yield-to-maturity except for the

a. coupon payments and maturity *alue.b. number of periods to maturity and maturity *alue.c. number of periods to maturity and inflation premium.d. coupon rate and coupon payments.

15. )he yield to maturity is 5 percent. 4f the yield increases by &0 basis

points" the ne% yield is :

a. 5.00& percent.b. 5.0&0 percent.c. 5.&00 percent.d. 1.000 percent.

16. bond is selling at a discount if the:


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a. yield-to-maturity is greater than the coupon rate.b. yield-to-maturity is less than the coupon rate.c. market price is greater than the par *alue.d. yield-to-call is less than the coupon rate.

20. )he real rate of interest is almost al%ays:

a. the opportunity cost of foregoing consumption. b. greater than the nominal rate of interest. c. e;ual to the nominal rate of interest.

d. easily affected by risk factors.

21. )he 9999999999 e;uates the present *alue of the total future dollarsexpected to be a*ailable at the end of a specific time period" gi*en certainassumptions" to the price of the bond.

a. horion returnb. promised return

c. expected returnd. coupon return

22. !ind the price of a 10 percent coupon bond %ith three years to maturity ifthe yield to maturity is no% 12 percent. $se semiannual discounting.

a. 8116.30 Solution: $se percent and periodsb. 86&0.5& rice < &0=#.613> ? 1000=0.30&>c. 86&2.20 < 6&0.5&d. 8666.50

2. )he /)7 for a ero-coupon bond %ith 10 years to maturity and selling for8#&0 is

a. 6.00 percent. Solution: /)7 < @7ABC1B2n- 1b. 5.1& percent. < @1000B#&0C1B20D 1c. 2.22 percent. < 0.0#3 per half year d. #.03 percent. /)7 < 0.0#3=2> < 0.051&

2#. 4f bond in*estors do not rein*est the coupons recei*ed during the life ofthe bond" then the

a. E,/ %ill be less than the /)7. b. E,/ %ill exceed the /)7. c. nominal yield %ill be greater than the /)7.

d. current yield %ill e;ual the /)7.

2&. Eein*estment rate risk increases %ith a 99999999 coupon rate and a99999999 term to maturity.


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a. lo% . . . shortb. lo% . . . long

c. high . . . longd. ero . . . short

2. 'hich of the follo%ing statements regarding the realied compound yield=E,/> is true(

a. )he E/, %ill al%ays be higher than the /)7.b. )he E/, %ill al%ays be lo%er than the /)7.c. )he E/, does not assume coupons are rein*ested at the /)7.d. )he E/, assumes price is belo% par.

Bon Prices

23. 'hich of the follo%ing statements regarding changes in bond pricesrelati*e to changes in market yields is true(

a. Short-term bond prices %ill increase more than long-term bond prices if

market yields increase.b. Short-term bond prices %ill increase less than long-term bond prices if

market yields decrease.c. Short-term bond prices %ill increase more than long-term bond prices if

market yields decrease.d. Short-term bond prices %ill remain constant and long-term bond prices

%ill increase if market yields decrease.

25. 'hich of the follo%ing bonds %ould you expect to ha*e the greatest price*olatility(

a. 10F" 10 year bondb. 10F" & year bondc. &F" 10 year bondd. &F" & year bond

26. 'hich of the follo%ing statements about the risk premium affectingmarket interest rates is !GS( )he risk premium

a. is often referred to as the yield differential. b. is the compensation re;uired for the risk in*ol*ed. c. can be ero.

d. is not associated %ith the issuerHs o%n particular situation.

Bon Price Chan!es

0. ll other factors constant" the -------------- of a bond" the shorter theduration.

a. longer the term


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b. higher the coupon ratec. higher the risk d. higher the rating

1. Iuration can be used to:

a. minimie default risk b. minimie rein*estment risk.

c. minimie interest rate risk.d. maximie return.

2. )he duration of a ero coupon bond:

a. is less than its term.b. is e;ual to its term.c. is greater than its term.d. is impossible to determine.

. Iuration is based upon:

a. future *alue concepts.b. compound interest.c. present *alue concepts.d. the !isher hypothesis.

#. 'hich of the follo%ing statements about bond prices is !GS(

a. ond price *olatility and time to maturity are directly related.b. decrease in yields raises prices more than an increase in yields lo%ers

prices.

c. ond price fluctuations and bond coupons are directly related. d. ond prices mo*e in*ersely to bond yields.

&. 7aturity constant" increases in interest rates 999 bond prices byproportionately 99 amounts than decreases in rates 999 bond prices.

a. increase . . . smaller . . . increaseb. decrease . . . smaller . . . increasec. decrease . . . larger . . . increased. increase . . . larger . . . decrease

. ,on*exity is important in bond analysis because

a. the price-yield relationship is imprecise. b. the relationship bet%een bond maturity and interest rate changes is

con*ex. c. the relationship bet%een bond price changes and duration is an

approximation.d. bonds ha*e a con*ex relationship %ith duration.


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3. ,on*exity is largest for bonds %ith 999999999 coupons" 99999999maturities" and 99999999 yields to maturity.

a. lo% . . . long . . . lo%b. high . . . long . . . lo%c. lo% . . . short . . . lo%

d. high . . . short . . . high

5. 'hich of the follo%ing bond relationships is JO) in*erse(

a. ,oupon and durationb. Iuration and yield to maturityc. 4nterest rate changes and bond pricesd. Iuration and maturity

6. Iuration tells us the

a. actual price *olatility from a bond.

b. stated life of a bond. c. %eighted a*erage maturity of a bond. d. true rate of return to be earned on a bond.

#0. !or all bonds paying coupons" duration is

a. less than maturity.b. greater than maturity.

c. about e;ual to maturity. d. not related to maturity.

#1. 'ith regard to duration" choose the 4J,OEE,) statement.

a. Iuration expands %ith time to maturity but at a decreasing rate.b. /ield to maturity is directly related to duration.c. ,oupon is in*ersely related to duration.d. Iuration is a measure of bond price sensiti*ity to interest rate mo*ements.

"rue#$alse Questions

Bon Yiels

1. )reasury bonds are typically used a proxy for the short-term riskless rate.

2. )he real risk-free rate of interest is the rate that must be offered topersuade indi*iduals to in*est rather than sa*e.

. 4f the current yield is abo*e the coupon rate" the bond is selling at apremium.


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#. 4f t%o bonds ha*e the same coupon rate and the same term" they %ill ha*ethe same intrinsic *alue.

&. )he horion return is the bond return to be earned based on assumptionsabout rein*estment rates.

Bon Prices

. 4n bond *aluation" the appropriate discount rate is the re;uired yield.

3. )he higher the discount rate used in bond *aluation" the lo%er the bond+sintrinsic *alue.

Bon Price Chan!es

5. Iuration measures the %eighted a*erage maturity of a noncallable bond+scash flo%s on a present *alue basis.

6. Iuration expands %ith time to maturity at an increasing rate.

10. )he term used to describe the degree to %hich duration changes as theyield to maturity changes is linearity.


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