Deck 3: Valuing Bonds

Question 1

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

A)bearer bonds
B)government bonds
C)registered bonds
D)recorded bonds

Answer 1

registered bonds

Question 2

A five-year bond with a 10% coupon rate and $1,000 face value is selling for $1,123.Calculate the yield to maturity on the bond assuming annual interest payments.

A)10.0%
B)8.9%
C)7.0%
D)5.0%

Answer 2

7.0%

Question 3

A three-year bond has an 8.0% coupon rate and a $1,000 face value.If the yield to maturity on the bond is 10.0%,calculate the price of the bond assuming that the bond makes semiannual coupon payments.

A)$857.96
B)$949.24
C)$1,057.54
D)$1,000.00

Answer 3

$949.24

Question 4

If a bond's volatility is 10.00% 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%

Question 5

The following entities issue bonds to engage in long-term borrowing EXCEPT:

A)the federal government
B)state and local governments
C)corporations
D)individuals

Question 6

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)I,II,and III

Question 7

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

A)100.00
B)106.77
C)106.33

Question 8

A government bond issued in Germany has a coupon rate of 5%,a face value of 100.00 euros,and matures in five years.The bond pays annual interest payments.Calculate the yield to maturity of the bond (in euros)if the price of the bond is 106.00 euros.

A)5.00%
B)3.80%
C)3.66%

Question 9

A bond has a face value of $1,000,a coupon rate of 0%,yield to maturity of 9%,and 10 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 10

If a bond's volatility is 5% and its yield to maturity 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)will not change

Question 11

A bond has a face value of $1,000,an annual coupon rate of 7%,yield to maturity of 10%,and 20 years to maturity.The bond's duration is:

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

Question 12

A bond with duration of 10.0 years has a yield to maturity of 10.0%.This bond's volatility is:

A)9.09%
B)6.80%
C)14.6%
D)10.00%

Question 13

Generally,bonds issued in the following countries pay interest semiannually.
(I)USA,(II)UK,(III)Canada,(IV)Germany,and (V)Japan

A)I,II,III,and IV
B)III only
C)II,III,and IV only
D)I,II,III,and V

Question 14

If a bond pays interest semiannually,then it pays interest:

A)once per year
B)every six months
C)every three months
D)every two years

Question 15

A five-year treasury bond with a coupon rate of 8% has a face value of $1,000.What is the semiannual interest payment?

A)$80
B)$40
C)$100
D)$50

Question 16

Consider a bond with a face value of $1,000,an annual coupon rate of 6.0%,a yield to maturity of 8.0%,and 10 years to maturity.This bond's duration is:

A)8.7 years
B)7.6 years
C)10.0 years
D)6.5

Question 17

A three-year bond with 10% coupon rate and $1,000 face value yields 8%.Assuming annual coupon payments,calculate the price of the bond.

A)$857.96
B)$951.96
C)$1,000.00
D)$1,051.54

Question 18

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 the 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)II and IV only

Question 19

A four-year bond has an 8% coupon rate and a face value of $1,000.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 20

A bond with duration of 5.7 years has a yield to maturity of 9.0%.The bond's volatility is:

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

Question 21

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

Question 22

The 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 23

Which of the following bonds has the greatest volatility?

A)five-year coupon bond
B)five-year,zero-coupon bond
C)ten-year coupon bond
D)ten-year,zero-coupon bond

Question 24

(1 + r_nominal)= (1 + r_real)(1 + inflation rate)

Question 25

One can best describe the term structure of interest rates as the relationship between:

A)spot interest rates and bond prices
B)spot interest rates and stock prices
C)spot interest rates and time
D)yields of coupon bonds and their maturity

Question 26

If the term structure of interest rates is flat,then the 9-year spot interest rate equals the 10-year spot interest rate.

Question 27

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

A)10.0%
B)4.1%
C)5.8%
D)14.0%

Question 28

Which of the following bonds has the longest duration?

A)five-year coupon bond
B)five-year,zero-coupon bond
C)ten-year coupon bond
D)ten-year,zero-coupon bond

Question 29

Mr.X invests $1,000 at a 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)$1,100
B)$1,000
C)$1,058
D)$1,040

Question 30

As CFO of your corporation,you would prefer (all else equal)to see the price of your corporation's bonds:

A)increase,indicating that bond investors view your firm as less risky
B)decrease,indicating that bond investors view your firm as less risky
C)increase,indicating that bond investors view your firm as more willing to take risks
D)decrease,indicating that bond investors view your firm as more willing to take risks

Question 31

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)bond A
B)bond B
C)both are equally sensitive
D)cannot be determined

Question 32

The interest rate represented by "r₂" is the:

A)spot rate on a one-year investment
B)spot rate on a two-year investment
C)expected spot rate two years from today
D)expected spot rate one year from today

Question 33

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

Question 34

U.S.Treasury bonds have almost zero default risk,but are subject to inflation risk.

Question 35

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

Question 36

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

Question 37

In the U.S.,most bonds make coupon payments annually.

Question 38

The longer a bond's duration,the greater its volatility.

Question 39

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

Question 40

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

Question 41

Inflation-indexed bonds were completely unknown in the U.S.before 1997.

Question 42

Briefly discuss the concept of volatility.

Question 43

The spread of junk bond yields,over that of U.S.Treasuries,is generally lower than the spread of investment-grade bonds.

Question 44

From the investor's perspective,briefly describe the cash flows associated with a bond.

Question 45

What is the relationship between interest rates and bond prices?

Question 46

Once a bond defaults,bondholders can no longer receive any residual payment from the bond.

Question 47

Discuss the concept of duration.

Question 48

What are TIPs? Briefly explain.

Question 49

Briefly explain the expectations theory.

Question 50

Define the term real interest rate.

Question 51

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

Question 52

A U.S.Treasury "strip" is a zero-coupon bond.

Question 53

Briefly explain the term yield to maturity.

Question 54

Corporate bond yields are generally higher than government bond yields for bonds having the same coupon rate and maturity.

Question 55

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

Question 56

Consider the impact of inflation risk on the term structure of interest rates.If investors become more wary of inflation,one would expect to observe a steeper,more upwards sloping,term structure of interest rates.

Question 57

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

Question 58

Two bonds have the same maturity,risk rating,and face value,but have different coupon rates.The bond with a lower coupon rate will have a longer duration.

Question 59

Real rates of interest tend to fluctuate more wildly than nominal rates of interest.

Question 60

Long-term spot rates are usually higher than short-term spot rates.