Deck 3: Valuing Bonds

Question 1

If a bond's volatility is 10% and the interest rate goes down by 0.75% (points) then the price of the bond:

A) decreases by 10%
B) decreases by 7.5%
C) increases by 7.5%
D) increases by 0.75%

Answer 1

increases by 7.5%

Question 2

A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and maturing in five years. The interest payments are made annually. Calculate the price of the bond (in euros)if the yield to maturity is 3.5%.

A) 100
B) 106.77
C) 106.33
D) none of the above

Answer 2

106.77

Question 3

A bond with duration of 5.7 years has yield to maturity of 9%. The bond's volatility is:

A) 1.9%
B) 5.2%
C) 5.7%
D) 9.0%

Answer 3

5.2%

Question 4

A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and maturing in five years. The interest payments are made annually. Calculate the yield to maturity of the bond (in euros) if the price of the bond is 106 euros.

A) 5.00%
B) 3.80%
C) 3.66%
D) none of the above

Question 5

Generally, a bond can be valued as a package of:
I. Annuity, II) Perpetuity,
III. Single payment

A) I and II only
B) II and III only
C) I and III only
D) none of the above

Question 6

If a bond's volatility is 5% and the interest rate changes by 0.5% (points) then the price of the bond:

A) changes by 5%
B) changes by 2.5%
C) changes by 7.5%
D) none of the above

Question 7

A 5-year bond with 10% coupon rate and $1000 face value is selling for $1123. Calculate the yield to maturity on the bond assuming annual interest payments.

A) 10.0%
B) 8.9%
C) 7.0%
D) None of the above

Question 8

If a bond is paying interest semi-annually, then:

A) interest is paid once a year
B) interest is paid every six moths
C) interest is paid every three months
D) none of the above

Question 9

Which of the following statements about the relationship between interest rates and bond prices is true?
I. There is an inverse relationship between bond prices and interest rates. II) There is a direct relationship between bond prices and interest rates.
III. The price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates. (Assuming that coupon rate is the same for both)
IV. The price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates. (Assuming that the coupon rate is the same for both)

A) I and IV only
B) I and III only
C) II and III only
D) None of the given statements are true

Question 10

A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the semi-annual interest payment?

A) $80
B) $40
C) $100
D) None of the above

Question 11

A bond with duration of 10 years has yield to maturity of 10%. This bond's volatility is:

A) 9.09%
B) 6.8%
C) 14.6%
D) 6.0%

Question 12

A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%, and twenty years to maturity. The bond's duration is:

A) 10.0 years
B) 7.4 years
C) 20.0 years
D) 12.6 years

Question 13

A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming annual coupon payment, calculate the price of the bond.

A) $857.96
B) $951.96
C) $1000.00
D) $1051.54

Question 14

Generally, bonds issued in the following countries pay interest semi-annually. I) USA, II) UK, III) Canada,
IV) Germany, & V) Japan

A) I, II, III, & IV
B) I, II, III, & V
C) II, III, & IV only
D) None of the above

Question 15

The type of bonds where the identities of bonds' owners are recorded and the coupon interest payments are sent automatically are called:

A) Bearer bonds
B) Government bonds
C) Registered bonds
D) None of the above

Question 16

A bond with a face value of $1,000, coupon rate of 0%, yield to maturity of 9%, and ten years to maturity. This bond's duration is:

A) 6.7 years
B) 7.5 years
C) 9.6 years
D) 10.0 years

Question 17

The following entities issue bonds to raise long-term loans except:

A) The federal government
B) State and local governments
C) Companies
D) Individuals

Question 18

A four-year bond has an 8% coupon rate and a face value of $1000. If the current price of the bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest payments).

A) 8%
B) 10%
C) 12%
D) 6%

Question 19

A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon interest payments.

A) $857.96
B) $949.24
C) $1057.54
D) $1000.00

Question 20

Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of
8%, and ten years to maturity. This bond's duration is:

A) 8.7 years
B) 7.6 years
C) 0.1 years
D) 6.5 years

Question 21

The expectations hypothesis states that the forward interest rate is the:
I. expected future spot rate
II. always greater than the spot rate
III. yield to maturity

A) I only
B) II only
C) III only
D) II and III only

Question 22

Which of the following statements is true?
I. The spot interest rate is a weighted average of yields to maturity
II. Yield to maturity is the weighted average of spot interest rates and estimated forward rates
III. The yield to maturity is always higher than the spot rates

A) I only
B) II only
C) III only
D) I and III only

Question 23

The longer a bond's duration greater is its volatility.

Question 24

A forward rate prevailing from period three through to period four can be:
I. readily observed in the market place
II. extracted from spot interest rate with 3 and 4 years to maturity
III. extracted from 1 and 2 year spot interest rates

A) I only
B) II only
C) III only
D) I and III only

Question 25

The yield to maturity on a bond is really its internal rate of return.

Question 26

In the US, most bonds make coupon payments annually.

Question 27

What forward rate is embedded in a two year zero coupon bonds with a yield to maturity
Of 6% and a three year zero coupon bond and a yield to maturity of 6.5%? Assume both bonds are currently priced at par.

A) 5.50%
B) 6.00%
C) 6.50%
D) 7.50%

Question 28

If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real rate of interest?

A) 10%
B) 4%
C) 5.8%
D) None of the above

Question 29

How can one invest today at the 2-year forward rate of interest?
I. By buying a 2-year bond and selling a 1-year bond with the same coupon
II. By buying a 1-year bond and selling a 2-year bond with the same coupon
III. By buying a 1-year bond and then after a year reinvesting in a further 1-year bond

A) I only
B) II only
C) III only
D) II and III only

Question 30

The term structure of interest rates can be described as the:

A) Relationship between the spot interest rates and the bond prices
B) Relationship between spot interest rates and stock prices
C) Relationship between spot interest rates and maturity of a bond
D) None of the above

Question 31

Mr. X invests $1000 at 10% nominal rate for one year. If the inflation rate is 4%, what is the real value of the investment at the end of one year?

A) $1100
B) $1000
C) $1058
D) None of the above

Question 32

Which bond is more sensitive to an interest rate change of 0.75%?
Bond A: YTM = 4.00%, Maturity = 8 years, Coupon = 6% or $60, Par Value = $1,000
Bond B: YTM = 3.50%, Maturity = 5 years, Coupon = 7% or $70, Par Value = $1,000

A) A
B) B
C) Both the same
D) Cannot be determined

Question 33

Volatility of a bond is given by:
I. Duration/ (1 + yield)
II. Slope of the curve relating the bond price to the interest rate
III. Yield to maturity

A) I only
B) II only
C) III only
D) I and II only

Question 34

Interest represented by "r2" is:

A) Spot rate on a one-year investment (APR)
B) Spot rate on a two-year investment (APR)
C) Expected spot rate 2 years from today
D) Expected spot rate one year from today

Question 35

If the 3-year spot rate is 10.5% and the 2-year spot rate is 10%, what is the one-year forward rate of interest two years from now?

A) 3.7%
B) 9.5%
C) 11.5%
D) None of the above

Question 36

If the 5-year spot rate is 10% and the 4-year spot rate is 9%, what is the one-year forward rate of interest four years from now?

A) 14.1%
B) 9.5%
C) 1.0%
D) 11.0%

Question 37

The duration of a zero coupon bond is the same as its maturity.

Question 38

If the 4-year spot rate is 7% and the 3-year spot rate is 6%, what is the one-year forward rate of interest three years from now?

A) 10.0%
B) 6.5%
C) 9.6%
D) None of the above

Question 39

The term structure of interest rate is the relationship between yield to maturity and maturity.

Question 40

The duration of any bond is the same as its maturity.

Question 41

What is the relationship between spot and forward rates?

Question 42

Define the term, "real interest rate."

Question 43

What are TIPs? Briefly explain.

Question 44

Short-term and long-term interest rates always move in parallel.

Question 45

If the term structure of interest rate is flat the nine-year interest rate is equal to the ten-year interest rate.

Question 46

Defaulted bonds often pay some level of residual?

Question 47

Briefly explain what is meant by "the term structure of interest rates."

Question 48

Discuss the concept of duration.

Question 49

What is the relationship between real and nominal rates of interest?

Question 50

The U.S. Treasury issues inflation-indexed bonds known as TIPs.

Question 51

The relationship between nominal interest rate and real interest rate is given by: (1 + rnominal) = (1 + rreal)(1 + inflation rate)

Question 52

What is the relationship between interest rates and bond prices?

Question 53

Briefly explain the term "yield to maturity."

Question 54

Briefly explain the cash flows associated with a bond to the investor.

Question 55

Treasury bonds do not have default risk, but are subject to inflation risk.

Question 56

Briefly discuss the concept of volatility.

Question 57

Briefly explain the expectations theory.

Question 58

Indexed bonds were completely unknown in the U.S. before 1997.

Question 59

Forward rates are always higher than spot rates.

Question 60

The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall.