Deck 15: The Analysis and Valuation of Bonds

Question 1

The term structure of interest rates is a static function that relates the

A) term to call and the yield to maturity.
B) term to maturity and the yield to maturity.
C) term to call and the yield to call.
D) term to maturity and the coupon rate.
E) term to maturity and the current yield.

Answer 1

B

Question 2

The convexity of a bond is affected as follows:

A) Positively with maturity.
B) Positively with yield.
C) Inversely with coupon.
D) Choices a and b
E) Choices a and c

Answer 2

E

Question 3

The annual interest paid on a bond relative to its prevailing market price is called its ____.

A) Promised yield
B) Yield to maturity
C) Coupon rate
D) Effective yield
E) Current yield

Answer 3

E

Question 4

If the holding period is equal to the term to maturity for a corporate bond the rate of discount represents the

A) Coupon yield.
B) Effective yield.
C) Yield to call.
D) Yield to maturity.
E) Reinvestment rate.

Question 5

Which term-structure hypothesis suggests that any long-term interest rate simply represents the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue?

A) Expectations hypothesis
B) Liquidity preference hypothesis
C) Segmented market hypothesis
D) Preferred habitat hypothesis
E) Hedging pressure hypothesis

Question 6

Consider a bond portfolio manager who expects interest rates to decline and has to choose between the following two bonds. Bond A: 10 years to maturity, 5% coupon, 5% yield to maturity
Bond B: 10 years to maturity, 3% coupon, 4% yield to maturity

A) Bond A because it has a higher coupon rate.
B) Bond A because it has a higher yield to maturity.
C) Bond B because it has a lower coupon rate.
D) Bond A or Bond B because the maturities are the same.
E) None of the above.

Question 7

Which of the following is not a major risk premium component for bond investors?

A) Quality differentials
B) Term to maturity
C) Indenture provisions
D) Yield to maturity
E) Exchange rate risk differences

Question 8

Which of the following statements is true?

A) An inverse relationship exists between coupon and convexity.
B) A direct relationship exists between maturity and convexity.
C) An inverse relationship exists between yield and convexity.
D) Choices a and c only.
E) All of the above statements are true.

Question 9

If the coupon payments are not reinvested during the life of the issue then the

A) promised yield is greater than the realised yield.
B) promised yield is less than the realised yield.
C) nominal yield declines.
D) nominal yield is greater than the promised yield.
E) current yield equals the yield to maturity.

Question 10

According to the segmented-market hypothesis a downward sloping yield curve indicates that

A) demand for long term bonds has fallen and demand for short term bonds has fallen.
B) demand for long term bonds has risen and demand for short term bonds has fallen.
C) demand for long term bonds has fallen and demand for short term bonds has risen.
D) demand for long term bonds has risen and demand for short term bonds has risen.
E) none of the above.

Question 11

Which of the following is not a risk premium component of bonds?

A) Bond quality
B) Term to maturity of the bond
C) Indenture provisions
D) Foreign bond risk
E) All of the above are risk premium components of bonds.

Question 12

Option adjusted duration can be calculated as

A) Duration of noncallable bond − duration of call option on the bond.
B) Duration of noncallable bond + duration of call option on the bond.
C) Duration of callable bond − duration of call option on the bond.
D) Duration of callable bond + duration of call option on the bond.
E) None of the above.

Question 13

Convexity is a desirable feature of bonds because

A) as interest rates decline, the price of a low convexity bond decreases at a decreasing rate.
B) as interest rates decline, the price of a high convexity bond decreases at an increasing rate.
C) as interest rates decline, the price of a low convexity bond increases at a decreasing rate.
D) as interest rates decline, the price of a high convexity bond increases at an increasing rate.
E) as interest rates decline, the price of a high convexity bond decreases at a decreasing rate.

Question 14

Which duration is computed by discounting flows using the yield to maturity of the bond?

A) Effective
B) Macaulay Duration
C) Modified Duration
D) Present Value Duration
E) Cash Flow Duration

Question 15

If you expected interest rates to fall, you would prefer to own bonds with

A) short maturities and low coupons.
B) long maturities and high coupons .
C) long maturities and low coupons.
D) short maturities and high coupons.
E) none of the above.