Deck 6: Bond Prices and Interest Rate Risk

Question 1

Bonds have greater price risk if their terms to maturity are shorter.

Answer 1

False

Question 2

The calculation of the yield to maturity on a bond requires knowing the current market interest rates.

Answer 2

False

Question 3

The promised yield is the return earned on a bond given the cash flows actually received by the investor and assuming that the coupon payments are reinvested at that promised rate.

Answer 3

False

Question 4

If its coupon rate equals the market interest rate,a bond sells at a discount.

Question 5

A zero-coupon bond allows to get rid of the reinvestment risk.

Question 6

The risk of interest rate changes causing the market price of a bond to rise or fall,and resulting in capital gains or losses for investors,is known as reinvestment risk.

Question 7

Bond price volatility is the percentage change in bond price for a given change in bond maturity.

Question 8

If a bond does not pay the full value of coupons during the holding period,its realized yield is calculated using lower coupons than the ones stipulated in the bond contract.

Question 9

For most bonds,the coupon rate,the par value and the term to maturity are fixed over the life of the bond contract.

Question 10

Bonds with lower coupon rates have a longer duration than similar bonds with high coupon rates.

Question 11

The amount $5,000 invested at 6%,compounded quarterly,will be worth after 5 years:

A)$6,691
B)$16,036
C)$6,734
D)$5,386

Question 12

The higher the coupon rate,the smaller the bond price change in reaction to a change in market interest rates.

Question 13

When interest rates go up,bond prices go up and vice versa.

Question 14

A bond sells at a discount when the market rate of interest is above the bond's fixed coupon rate.

Question 15

The realised return on a bond at the end of the holding period is based on predictions made from interest rate forecasts.

Question 16

The price of a bond is the present value of future payments discounted at the coupon rate.

Question 17

The realised yield on a bond is influenced by the market interest rate at the time of the resale of the bond before maturity date.

Question 18

Price risk is of no concern to the investor if the bond is held to maturity.

Question 19

The duration of a coupon bond is shorter than its term to maturity.

Question 20

Bond theorems apply to all fixed-income securities.

Question 21

If John borrowed $30 000 from his mother at a rate of 5% p.a.compounded quarterly for 5 years,what is the dollar value of the interest on the loan?

A)$ 8 461.12
B)$38 461.12
C)$ 7 500.00
D)$ 8 288.45
Feedback; ????=30,0001+0.054
The interest is the future value of the loan minus the initial amount that was borrowed.

Question 22

The yield to maturity measure assumes that the coupon payments are reinvested at

A)the yield to maturity.
B)the market interest rate.
C)the coupon rate.
D)the Treasury bond rate.

Question 23

Calculate the realised yield on a $1,000 face value,9 per cent coupon bond (with annual payments of coupons)purchased for $800 and sold one year later for $850 (after a payment of coupon).

A)9%
B)11.25%
C)14.5%
D)17.5%

Question 24

Premium bonds sell at a price:

A)equal to their future value.
B)below their face value.
C)above their face value.
D)above their future value.

Question 25

Which of the following statements is NOT correct? Premium bonds:

A)make a capital loss when held to maturity.
B)sell above their face value.
C)are priced above their par value.
D)are subject to price risk when held to maturity.

Question 26

$1000 face value bond has an 8% coupon,with coupons paid and compounded annually,and a 4-year maturity.With similar bonds yielding 11%,what is the current market price of the bond?

A)$1,099.36
B)$880.22
C)$906.93
D)$910.35

Question 27

Which of the following statements is correct?

A)The higher the coupon rate,the higher the bond's yield to maturity.
B)The yield to maturity on a bond is fixed for the life of the bond.
C)A bond's yield to maturity is always equal to its coupon rate.
D)Premium bonds have a yield to maturity higher than their coupon rate.

Question 28

A corporate bond,paying $65 interest at the end of each year for 6 years,has a face value 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

Question 29

A $1,000 par,8% Treasury bond maturing in three years compounded semiannually is priced to yield 7%.What is its current market price?

A)$974.21
B)$813.50
C)$927.50
D)$1,026.64

Question 30

A $1000 bond with a coupon rate of 10%,interest paid semiannually,matures in eight years and sells for $1122.80.What is its yield to maturity?

A)10.8%
B)11.0%
C)7.9%
D)7.6%

Question 31

The price of a bond with a $100 face value,5% coupon rate paid annually and 2 years to maturity at the interest rate p.a.6% is:

A)$109.34
B)$93.72
C)$93.45
D)$98.17

Question 32

What is the present value of $10 000 to be received in 5 years from now if the annual discount rate is 10% and the compounding frequency is annual?

A)$5000.00
B)$16105.10
C)$6666.67
D)$6209.21

Question 33

Par bonds sell at a price equal to:

A)future value.
B)face value.
C)real value.
D)coupon value.

Question 34

The present value PV of a bond with a $1000 face value,5% coupon rate paid annually and 2 years to maturity at the interest rate p.a.6% is

A)$981.67
B)$937.17
C)$934.50
D)$1093.40

Question 35

A $1000 bond with a coupon rate of 7% (paid annually)matures in eight years.The bond is now selling for $948.08.What is its yield to maturity?

A)6.5%
B)7.9%
C)9.0%
D)8.3%

Question 36

Which of the following statements is NOT correct?

A)Bond prices and interest rates move in opposite directions.
B)Coupon rates are fixed for the life of the bond.
C)A bond's price is equal to the present value of its future cashflows.
D)The coupon rate affects a bond price through the discounting factor.

Question 37

John deposits $10,000 in a savings deposit account paying 4%,compounded monthly.What amount will he have at the end of seven years?

A)$13,225
B)$13,159
C)$13,179
D)$13,325

Question 38

If you invest $20 000 today for five years at 8% pa compounded quarterly how much will you have at the end of five years?

A)$28 000.00
B)$22 081.62
C)$29 718.95
D)$29 680.55

Question 39

A $1000 bond with an 8.2% coupon rate,coupons paid semiannually,and maturing in six 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

Question 40

Which of the following statements is NOT correct? Discount bonds:

A)make a capital gain when held to maturity.
B)sell below their face value.
C)have a price equal to their face value.
D)are subject to price risk when sold before maturity.

Question 41

Price risk and reinvestment risk:

A)relate to interest rate risk.
B)relate to credit risk.
C)work together to magnify the price impact of a change in interest rate.
D)have both an effect on bond price.

Question 42

Which of the following risks does NOT affect zero coupon bonds?

A)Price risk
B)Reinvestment risk
C)Credit risk
D)Default risk

Question 43

A 3-year zero coupon bond with a 12 per cent yield has a duration of:

A)3 years.
B)2.78 years.
C)2.50 years.
D)2 years.

Question 44

Which of the following statements is NOT correct? The calculation of a bond's realised yield requires knowing:

A)the purchase price of the bond at the beginning of the investment period.
B)the forecast of the future level of interest rate prevailing at the end of the investment period.
C)the selling price of the bond at the end of the investment period.
D)the actual coupon payments during the investment period.

Question 45

If market interest rates fall after a bond is issued:

A)the face value of the bond increases.
B)the present value of the bond decreases.
C)the market value of the bond increases.
D)the coupons of the bond decrease.

Question 46

7% coupon bond with a $1000 face value and coupons paid semiannually is purchased at par and sells 2 years later for $990 after a coupon payment.What is its realised yield (annualised)?

A)8%
B)6.52%
C)7.32%
D)5.75%

Question 47

Price risk and reinvestment risk partly offset each other because when interest rates decline:

A)the bond records a capital gain but the gain is partly offset by lower coupon reinvestment income.
B)the bond suffers a capital loss but the loss is partly offset by higher coupon reinvestment income.
C)the bond records a capital gain but the gain is partly offset by higher coupon reinvestment income.
D)the bond suffers a capital loss but the loss is partly offset by lower coupon reinvestment income.

Question 48

The bond's yield to maturity is

A)the guaranteed yield.
B)the expected yield.
C)the promised yield.
D)the realised yield on the bond.

Question 49

Which of the following statements is NOT correct? If there are two future payments made at different dates,the calculation of a bond's yield to maturity:

A)cannot be done manually.
B)must be done by trial and error.
C)requires several iterations.
D)cannot be done algebraically.

Question 50

What is time value of money?

Question 51

Duration is a measure of:

A)a bond's yield sensitivity.
B)a bond's term to maturity.
C)the length of time it takes to get back the original investment.
D)the bond price sensitivity to a change in interest rate.

Question 52

Explain how price risk and reinvestment risk impact bond prices.

Question 53

When market interest rates increase,existing bonds:

A)are more likely to default on coupons.
B)pay higher coupons.
C)have a higher income generated by coupons.
D)record capital gains.

Question 54

Which of the following statements is NOT correct? The calculation of a bond's expected yield over an investment period requires knowing:

A)the purchase price of the bond at the beginning of the investment period.
B)the expected future level of interest rate prevailing at the end of the investment period.
C)the actual selling price of the bond at the end of the investment period.
D)the expected coupon payments during the investment period.

Question 55

A $1000 2-year 10% coupon bond is priced at $1000 in the market.The coupons are paid annually.The duration is:

A)less than two years.
B)more than two years.
C)10%.
D)2 years.

Question 56

Which of the following statements is NOT correct? Interest rate risk on bonds can take the form of:

A)price risk.
B)default risk.
C)reinvestment risk.
D)capital risk.

Question 57

What is the percentage change in price of a $1,000 face value 8% coupon bond whose price has varied from $1,020 to $1,050?

A)$30.00
B)2.9%
C)2.94%
D)$50.00

Question 58

One way of eliminating both price risk and reinvestment risk is to structure a bond investment so that the duration of the bond or the bond portfolio equals:

A)the holding period.
B)the maturity period.
C)the duration period.
D)price of the bond.

Question 59

Which of the following is NOT an assumption made for the calculation of the yield to maturity of a bond?

A)The bond is held to maturity.
B)The coupons are reinvested at the yield to maturity.
C)The coupons and face value are paid as stipulated in the contract.
D)The bond is purchased at par.

Question 60

Bond A has a duration of 5.6 while bond B has a duration of 6.0.Bond B:

A)would record a greater price variation,given a change in interest rates,relative to bond A.
B)has a longer term to maturity than bond A.
C)has a shorter term to maturity than bond A.
D)would record a lower price variation,given a change in interest rates,relative to bond A.

Question 61

Explain why bond prices and yields vary inversely.

Question 62

Explain what is bond duration? What is the difference between holding a bond to duration versus holding the bond to maturity?

Question 63

Explain the two types of contractual cash flows in bond.