Deck 5: Bond Prices and Interest Rate Risk

Question 1

In a short-term bond price risk is not a problem, but reinvestment risk is a considerable concern.

Answer 1

False

Question 2

Duration is a measure of interest rate volatility.

Answer 2

False

Question 3

If market interest rates have increased since a bond was purchased, price risk will increase the price of the bond and reinvestment risk will decrease the return on the coupons.

Answer 3

False

Question 4

The realized yield may be influenced by coupon reinvestment rates.

Question 5

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

Question 6

Yield to maturity assumes reinvestment of coupons at the same yield.

Question 7

The coupon rate varies inversely with bond prices.

Question 8

The price risk of a bond tends to offset reinvestment risk somewhat as market interest rates vary.

Question 9

The higher the coupon rate, the lower the bond price volatility.

Question 10

The duration of a zero coupon bond equals the term to maturity of the bond.

Question 11

Price risk is a measure of bond volatility.

Question 12

Price risk is one aspect of interest rate risk.

Question 13

A zero coupon bond has no reinvestment risk.

Question 14

Short-term bonds have greater price risk compared to long-term bonds.

Question 15

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

Question 16

The price of a bond and the market rate of interest are inversely related.

Question 17

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

Question 18

The coupon rate may be the market rate of interest for a bond.

Question 19

If the coupon rate equals the market rate, a bond is likely to be selling at a discount.

Question 20

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

Question 21

The duration of a bond with ten-year maturity and 10% coupon is less than ten years.

Question 22

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

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

Question 23

A $1000 bond with a coupon rate of 7% matures in eight years. The bond is now selling for $950, what is the expected yield to maturity on the bond?

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

Question 24

When a bond's coupon rate is equal to the market rate of interest, the bond will sell for

A) a discount.
B) a premium.
C) par.
D) a variable rate.

Question 25

A bond with an 9% coupon and a 10% required return will sell at a premium to par.

Question 26

Which of the following statements is true about bonds?

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.

Question 27

A zero-coupon bond bears no interest.

Question 28

$5,000 invested at 6%, compounded quarterly, will be worth how much after 5 years?

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

Question 29

Ceteris paribus, the holder of a fairly priced premium bond must expect a capital gain over their holding period.

Question 30

A $1000 bond with a coupon rate of 10%, interest paid semiannually, matures in eight years and sells for $1120. What is the yield to maturity?

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

Question 31

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 32

Money has time value because of inflation.

Question 33

Duration matching eliminates risk.

Question 34

Judy would like to accumulate $70,000 by the time her son starts college in ten years. 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

Question 35

If a $1000 par value bond has an 8% coupon (annual payments) rate, a 4-year maturity, and 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

Question 36

Expected yield is essentially a forecast.

Question 37

A $1000 bond with an 8.2% coupon rate, interest 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 38

Which of the following statements is true?

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.

Question 39

All else equal, the greater a security's coupon, the lower the security's price sensitivity to a change in interest rate.

Question 40

A bond currently selling at a premium price above face value

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.

Question 41

Which of the following risks will not affect zero coupon bonds?

A) price risk
B) reinvestment risk
C) credit risk
D) default risk

Question 42

The duration of a $1000, 2-year, 7% coupon bond (interest paid annually) is _____ when market rates are 8%?

A) 2.036
B) 1.934
C) 1.902
D) 1.856

Question 43

Jane needs a specific sum of money in five years. She should invest in

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.

Question 44

If a 7% coupon (semiannual) bond purchased at par sells 2 years later for $990, what is the realized rate of return (annualized)?

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

Question 45

Calculate the volatility of $1,000 face value 8% coupon bond whose price has varied from $1,020 to $1,050.

A) $30.00
B) 5%
C) 3%
D) $50.00

Question 46

The yield to maturity measure assumes that coupon interest is reinvested at

A) the yield to maturity.
B) the changing market rates.
C) the coupon rate.
D) the treasury bond rate.

Question 47

As bond maturity _________, so does the _________ and ________.

A) decreases; coupon rate; market price.
B) decreases; duration; face value.
C) increases; duration; price variability.
D) increases; risk; coupon rate.

Question 48

Which of the following statements about duration is true?

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.

Question 49

Interest rate risk is

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.

Question 50

A $1,000 par, 8% Treasury bond maturing in three years is priced to yield 7%. Its market price (assuming semiannual compounding) is

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

Question 51

Calculate the realized return on a $1,000 face value, 9 percent coupon bond (annual) purchased for $800 and sold one year later for $850.

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

Question 52

A $1000 2-year 10% coupon bond is priced at $1000 in the market. The duration is

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

Question 53

Price risk and reinvestment risk

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.

Question 54

In a fixed-rate bond, the variable which changes to determine market rate of return is

A) price.
B) coupon rate.
C) coupon amount.
D) face value.

Question 55

A bond yield measure should capture all of the following except

A) coupon payments.
B) reinvestment income.
C) changing coupon rate levels.
D) capital gains or losses.

Question 56

Duration is a measure of

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.

Question 57

A 3-year zero coupon bond selling at $900 and yielding 12.18 percent has a duration of

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

Question 58

If market interest rates fall after a bond is issued, the

A) face value of the bond increases.
B) investor will sell the bond.
C) market value of the bond is increasing.
D) market value of the bond is decreasing.

Question 59

Which of the following statements is true?

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.

Question 60

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

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.

Question 61

The duration of any financial instrument

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

Question 62

In a fixed rate bond, the variable which changes to provide the current market rate of return to investors is

A) face value
B) coupon rate
C) maturity
D) price

Question 63

An increase in the supply of bonds in the bond market will

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.

Question 64

The bond yield to maturity calculation is

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.

Question 65

What is the price of the bond in the above question, if the market rate rises to 12% and the bond matures in 5 years? (Assume semiannual compounding).

A) $829.60
B) $1,000.00
C) $926.40
D) $1,040.80

Question 66

An investor worried about interest rate risk should

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.

Question 67

An 16 year corporate bond pays has a 3.5% coupon rate. What should be the bond's price if 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.

Question 68

The sum of time weighted discounted cash flows divided by the price of the security is the

A) volatility of the security.
C) duration of the security.
D) always greater than the maturity of the security.
D) present value of the security cash flows.

Question 69

If a bond investor receives all the coupon payments on time and the face value on the contract maturity date, investor's return could still vary because of

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

Question 70

The _______ the interest rate and the ________ the number of compounding periods in a 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

Question 71

Reinvestment risk is the variability of return associated with

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.

Question 72

An investor who selects coupon bond maturities matching his/her holding period

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.

Question 73

What is the duration of this par bond?

A) 10.00 years
B) 8.392 years
C) 8.452 years
D) 7.355 years

Question 74

All of the following are contractually fixed except

A) par value
B) yield
C) maturity
D) coupon

Question 75

What is the price of a $1,000 face value bond with a 10% coupon if the market rate is 10%?

A) more than $1,000
B) $1,000
C) less than $1,000
D) cannot ascertain

Question 76

An increase in the demand for securities

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.

Question 77

There is generally a _______ relationship between term to maturity and duration.

A) positive
B) favorable
C) inverse
D) large

Question 78

Bonds with _______ coupon rates have a ________ duration than bonds with ________ coupons of the same maturity.

A) higher; shorter; smaller
B) lower; longer; smaller
C) higher; longer; larger
D) higher; shorter; larger

Question 79

Tom purchased a bond last year for $1240, received $60 in interest return, and sold the 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%.

Question 80

Two factors that affect interest rate risk are

A) default risk and reinvestment risk.
B) liquidity risk and reinvestment risk.
C) price risk and political risk.
D) price risk and reinvestment risk.