Deck 17: Bond Yields

Question 1

What is the difference between the yield-to-maturity (YTM)and the realized compound yield (RCY)?

A)They are actually the same concept.
B)The YTM is the actual return,whereas,the RCY is the expected return at the beginning of the investment.
C)The RCY is the actual return,whereas,the YTM is the expected return at the beginning of the investment.
D)The YTM considers only coupon payments,whereas,the RCY includes all the bond's cash flows.

Answer 1

C

Question 2

Relative to a decrease in interest rates,an increase in interest rates of the same size will produce:

A)a larger percentage change in a bond's price.
B)a smaller percentage change in a bond's price.
C)the same sized change in a bond's price.
D)no change in the bond's price since its coupon rate is fixed.

Answer 2

B

Question 3

An investor has three sources of dollar returns from a bond investment.Which of the following is not included among the three sources?

A)The semi-annual coupon payments
B)The interest earned on reinvesting the coupon payments
C)The principal paid at maturity
D)The interest earned on reinvesting the last coupon and the principal

Answer 3

D

Question 4

What is meant by "yield to maturity"?It is measured as the:

A)coupon payment divided by the face value of the bond.
B)coupon payment divided by the current price of the bond.
C)rate that equates the bond's current price with the PV of its expected future cash flows.
D)rate that equates the bond's face value with the PV of its expected future cash flows.

Question 5

Which of the following bonds will be most sensitive to changes in market interest rates?

A)A bond with an 8 percent semiannual coupon and 8 years to maturity
B)A bond with a 6 percent semiannual coupon and 8 years to maturity
C)A bond with an 8 percent semiannual coupon and 6 years to maturity
D)A bond with a 6 percent semiannual coupon and 6 years to maturity

Question 6

Six years ago,Carl purchased an 8% coupon bond that had 10 years to maturity for $1,150.Since the bond purchase,the required return on the bond has remained constant.If Carl sells the bond now,the price he receives for the bond will be:

A)$1,150.
B)between $1,000 and $1,150.
C)higher than $1,150.
D)less than $1,000.

Question 7

The yield-to-maturity calculation assumes that coupon payments are reinvested at the:

A)coupon rate on the bond.
B)bond's current yield.
C)bond's yield to maturity.
D)forward interest rate.

Question 8

Assume an investor is considering purchasing an 8 percent semiannual bond with 8 years remaining to maturity when market rates are 6%.The bond's value is closest to:

A)$502.
B)$798.
C)$1,000.
D)$1,126.

Question 9

What is meant by the real risk-free rate of interest?It is the:

A)opportunity cost of foregoing consumption.
B)rate actually used in the market,not in textbooks.
C)rate quoted on long-term Treasury bonds.
D)the nominal risk-free interest rate,multiplied by 1 minus the marginal tax rate.

Question 10

Which of the following statements is most accurate? The real risk-free rate of interest is the:

A)rate quoted for the shortest term federal government securities.
B)rate quoted for the longest term federal government securities.
C)the rate on federal government securities adjusted to remove the effects of inflation.
D)the rate on federal government securities adjusted to remove the effects of taxes.

Question 11

Relative to interest rates,bond prices have:

A)an inverse and linear relationship.
B)a direct and linear relationship.
C)an inverse and convex relationship.
D)an inverse and concave relationship.

Question 12

If a bond has a coupon rate that is greater than the bond's YTM,the bond:

A)will sell at a premium.
B)will sell at par.
C)will sell at a discount.
D)will not be called.

Question 13

Which of the following is included in the "realized compound yield"?

A)The bond coupon payments,only.
B)The bond coupon and principal payments,only.
C)The bond principal payment,only.
D)The bond coupon and principal payments and the reinvestment income.

Question 14

In finding a bond's value,the rate used to discount the bond's future cash flows is:

A)the bond's required rate of return.
B)the firm's weighted average cost of capital.
C)the firm's after-tax cost of debt.
D)the bond's coupon rate

Question 15

Sam holds a $1 million bond portfolio with an average maturity of 9 years,whereas Walt holds a $1 million bond portfolio with an average maturity of 3 years.If interest rates increase substantially,Sam's portfolio will experience the:

A)larger decline in value of the two portfolios.
B)larger increase in value of the two portfolios.
C)smaller decline in value of the two portfolios.
D)smaller increase in value of the two portfolios.

Question 16

To achieve the maximum price impact from an estimated interest rate decrease,a bond buyer should purchase bonds with relatively:

A)high coupon rates and long maturities.
B)high coupon rates and short maturities.
C)low coupon rates and long maturities.
D)low coupon rates and short maturities.

Question 17

Assume an investor buys an 8 percent,semi-annual,10-year bond at par.He sells it two years later after market interest rates have decreased to 6 percent.The investor's capital gain is closest to:

A)$41.
B)$124.
C)$126.
D)$149.

Question 18

Which of the following is a situation in which an investor will not receive the promised yield to maturity?

A)The investor holds the bond until maturity and reinvests coupon payments at the original yield to maturity.
B)Interest rates do not change during the life of the bond.
C)The issuer calls the bond prior to original maturity.
D)The realized compound yield equals the promised yield to maturity.

Question 19

What happens to the price of bonds if interest rates go up?

A)The price of bonds goes up.
B)The price of bonds stays the same.
C)The price of bonds goes down.
D)The direction of price change depends on the shape of the yield curve.

Question 20

Based on which of the following term structure theories are forward rates most useful?

A)Expectations theory
B)Liquidity preference theory
C)Preferred habitat theory
D)Market segmentation theory

Question 21

Yield spreads vary inversely with the: ______________________________.

Question 22

If interest rates rise,then price risk and reinvestment risk decline.

Question 23

Assume a bond has a YTM of 8% and its YTM increases by 2 basis points.What is the new YTM on the bond?

A)8.002%
B)8.020%
C)8.200%
D)10.000%

Question 24

Correct bond calculations in the United States usually involve semiannual periods because bond interest is typically paid twice a year.

What does this formula imply about the term structure of interest rates?How would real-world bond investors price bonds to correct for this?

Question 25

Risk premiums,or yield spreads,refer to the issue characteristics of bonds.They are the result of which 7 factors:1)______ 2)______3)______4)______5)______6)_____7)_____

Question 26

A financial crisis or an accounting scandal can just as easily cause yield spreads to widen as weak earnings at a company.

Question 27

As interest rates increase,long bonds will decrease in price more slowly than shorter bonds.

Question 28

If the yield curve has a steep upward slope,investors expect:

A)interest rates to increase and inflation rates to decrease.
B)interest rates to decrease and inflation rates to increase.
C)interest rates to increase and inflation rates to increase.
D)interest rates to decrease and inflation rates to decrease.

Question 29

The three most prominent theories proposed to explain the term structure of interest rates are: __________________,__________________,and __________________.

Question 30

Bond traders use the term "basis point" to mean one percentage point in interest rate.

Question 31

The term structure of interest rates denotes the relationship between _____________ and _________________ for a specific category of bonds at a particular point in time.

Question 32

Reinvestment risk represents the possibility that future payments cannot be reinvested at the assumed rate.

Question 33

Both stocks and bonds are valued by summing the discounted future flows of interest (or dividends)and the repayment of principal (or sale of the stock).

Question 34

The vast majority of corporate bonds pay floating rates on a quarterly basis.