Deck 11: Principles of Bond Valuation and Investment

Question 1

Current yield is always the best measure of a bond's yield.

Answer 1

False

Question 2

The price of a bond represents simply the future value of interest payments.

Answer 2

False

Question 3

The approximate yield to maturity method tends to understate the true yield for bonds trading at a discount.

Answer 3

True

Question 4

Short-term rates are more volatile than long-term rates.

Question 5

Inflationary expectations have the greatest impact on short-term rates.

Question 6

Historically,interest rates have been coincident indicators in the economy.

Question 7

A drop in interest rates causes proportionally greater gains than increases in rates will cause losses.

Question 8

Yield to maturity can be thought of as the internal rate of return of the bond.

Question 9

Inflationary expectations have no effect on bond prices.

Question 10

Current yield does not take the maturity date into consideration.

Question 11

The reinvestment assumption would have no effect on yield if the bond is held to maturity.

Question 12

Yield to maturity is equivalent to market rate of interest.

Question 13

The term structure of interest rates depicts the relationship between maturity and interest rates.

Question 14

A descending term structure reflects the view that rates will increase in the future.

Question 15

An ascending term structure reflects the view that rates will increase in the future.

Question 16

The price of a lower coupon rate bond is more sensitive to interest rate changes than higher coupon rate bonds.

Question 17

Current yield is the annual interest divided by the current price of the bond.

Question 18

A basis point is one-tenth of l%.

Question 19

If the market price of a bond is less than the call price,yield to call is a reasonable calculation for yield.

Question 20

Yield to maturity considers annual interest,difference between current price and maturity value,and years to maturity.

Question 21

Deep discount bonds are not prone to calls because they sell at low prices.

Question 22

Assuming interest rates are expected to fall,which of the following will most likely maximize price increase?

A)Commercial paper
B)U.S.Treasury bills
C)30-year corporate bonds
D)There is not enough information to tell

Question 23

Lower-quality bonds tend to be in high demand during a recession.

Question 24

When should an investor calculate both yield to maturity and yield to call?

A)Whenever there is a call provision
B)When the sum of the present values of the interest payments exceeds the call price
C)When the market price is greater than or equal to the call price
D)Whenever the funds can be reinvested
E)When interest rates increase above the coupon rate

Question 25

Which is not a theory related to the term structure of interest ratio?

A)Expectations hypothesis
B)Liquidity preference theory
C)Efficient market hypothesis
D)Market segmentation theory

Question 26

What effect,if any,will a decrease in interest rates have on bond values?

A)Bond values will increase
B)Bond values will decrease
C)Bond values may increase or decrease,depending on the maturity,quality,and coupon rate
D)None of the above

Question 27

Interest rate changes affect low-quality issues to a greater degree than high-quality issues.

Question 28

The value of a bond at any given time is the sum of:

A)the future interest payments and the par value.
B)the present value of future interest payments and the present value of the par value.
C)the future value of the interest payments and the future value of the par value.
D)the present value of future interest payments and the market value.
E)the present value of future interest payments and the future value of the par valuE.The price of a bond at any given time represents the present value of future interest payments plus the present value of the par value of the bond.

Question 29

If an investor needs to increase the quality of his portfolio during the low-confidence periods of a recession,he can enjoy usually high returns on lower-grade instruments relative to higher grades.

Question 30

The anticipated realized yield represents the return over the holding period.

Question 31

What will happen to the market value of a bond if interest rates increase?

A)The market value will decrease
B)The market value will increase
C)The market value will increase or decrease,depending on the general economic climate
D)The market value should remain level

Question 32

What formula measure would an investor use to calculate the yield on a 20-year bond with 10 years to maturity,if he or she only intends to hold the bond for 5 years?

A)Anticipated realized yield
B)Yield to call
C)Current yield
D)Yield to maturity
E)Any one of the above will measure the yield

Question 33

The expectations hypothesis is that any long-term rate is an average of the expectations of future short-term rate over the applicable time horizon.

Question 34

The total return an investor would receive from income plus capital appreciation,assuming a bond is held to maturity,is called the:

A)call premium.
B)current yield.
C)yield to maturity.
D)capital gains yield.
E)More than one of the above

Question 35

The term structure of interest rates refers to:

A)the relationships between interest rates and term to maturity.
B)the idea that any long-term rate is the average of expected future short-term rates.
C)a general expectation of higher future interest rates.
D)the idea that the terms of the bond may change as time to maturity changes.
E)More than one of the above are true

Question 36

Which of the following bond pricing rules is incorrect?

A)Bond prices and interest rates are inversely related
B)Prices of long-term bonds are less sensitive to changes in interest rates than short-term bonds
C)Bond price sensitivity increases at a decreasing rate as maturity increases
D)Bond prices are more sensitive to a decline in market yield to maturity

Question 37

The upward slope of the yield curve is caused by investors' recognition of the relative difficulty of converting long-term securities to cash.This is the:

A)expectations hypothesis.
B)liquidity preference theory.
C)market segmentation theory.
D)More than one of the above

Question 38

The Oxford Fixed Income Fund invests heavily in bonds.If the fund manager thinks that interest rates are going to fall,what changes should she make in her investment portfolio?

A)Increase investment in long-term bonds
B)Increase investment in short-term debt instruments
C)Increase investment in equity securities
D)Buy callable bonds
E)Buy real assets

Question 39

The market segmentation theory focuses on:

A)the impact of institutional investors on the yield curve.
B)the maturity preferences of banks and those of life insurance companies.
C)phases of the business cycle.
D)All of the above

Question 40

Deep discount bonds reflect questionable quality.

Question 41

As the economy recovers from a recession,what changes can be expected in the yield spread of corporate Baa bonds and U.S.government bonds?

A)The yield on Baa bonds will approach that of government securities
B)The yield spread between U.S.government bonds and BBB corporate bonds will stay the same
C)The yield spread will increase
D)Either A or B will occur

Question 42

The investor in deep-discount bonds generally accepts a lower yield because of:

A)the unique conversion feature associated with deep discount bonds.
B)the extremely low risk of a call.
C)the fact that the return represents pure interest income.
D)More than one of the above

Question 43

The impact of interest rate changes on bond prices can be magnified by:

A)investing in speculative high-risk high-yield bonds.
B)investing in higher-quality corporate bonds.
C)investing in short-term bonds.
D)More than one of the above

Question 44

When the bond investor believes interest rates are going to fall,the best strategy would be to:

A)take a bearish position in the market by selling long-term bonds.
B)take a bullish position in the market by buying long-term bonds.
C)move out of bonds completely.
D)keep his portfolio unchangeD.Lower interest rates bring higher bond prices and profits.Bond prices and interest rates are inversely related.

Question 45

Yield to maturity takes into account everything except:

A)annual interest received.
B)the difference between the current bond price and its maturity value.
C)the number of years to maturity.
D)the number of years since the bond's purchase.

Question 46

ABC Corp.issued a 12%,20-year coupon rate bond 5 years ago.Interest rates are now 8%.Based on semi-annual analysis and using the table below,what is the current price of the bond?

Question 47

a)What is the approximate yield to maturity of a 10% coupon rate,$1,000 par value bond which is currently priced at $1,200 with 11 years to maturity?
b)What would be the yield to call if the call can be made in 7 years at a price of $1,025?

Question 48

Short-term interest rates have _________ volatility in comparison to long-term interest rates.

A)Much less
B)More
C)Equal
D)Slightly less

Question 49

The most widely used theory to explain the term structure of interest rates is the:

A)liquidity preference theory.
B)market segmentation theory.
C)expectations hypothesis.
D)interest allocation theory.

Question 50

What is the approximate yield to maturity of an 8% coupon bond,with a par value of $1,000? The bond is currently selling for $920 and has five years to maturity.

Question 51

What would be the current yield of a 6% coupon bond priced at $950?

Question 52

A 15-year,7% coupon rate bond is selling for $771.82.What is the current yield of the bond?

A)22.8%
B)7.0%
C)9.1%
D)10.0%
E)30.7%

Question 53

A down-sloping yield curve indicates:

A)investors' anticipation of lower interest rates.
B)investors' anticipation of lower inflation.
C)that institutional investors are selling long-term bonds.
D)More than one of the above