Question 1

____ measures the expected rate of return of a bond assuming that you sell it prior to its maturity.

Accepted Answer

The answer of ____ measures the expected rate of return...

Question 2

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

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The answer of Which of the following is not a...

Question 3

According to the liquidity preference hypothesis yield curves generally slope upward because

Accepted Answer

The liquidity preference hypothesis proposes that investors prefer to hold shorter-term bonds because they are more liquid and less risky than longer-term bonds. As a result, the demand for shorter-term bonds drives down their yield, while the lesser demand for longer-term bonds keeps their yield higher, resulting in an upward sloping yield curve.

Question 4

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

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The answer of According to the segmented-market hypothesis a rising...

Question 5

Which of the four major yield spreads defines the difference in yields between pure government agency bonds and corporate bonds?

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The answer of Which of the four major yield spreads...

Question 6

Convexity is a desirable feature of bonds because.

Accepted Answer

Convexity is a desirable feature of bonds because as interest rates decline, the price of a high convexity bond increases at an increasing rate. This means that investors can potentially earn higher returns in a declining interest rate environment with a high convexity bond compared to a low convexity bond.

Question 7

The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted at a value

Accepted Answer

The answer of The yield to call is a more...

Question 8

According to the expectations hypothesis a rising yield curve indicates that investors expect

Accepted Answer

According to the expectations hypothesis, a rising yield curve indicates that investors expect future short-term rates to rise. This is because if investors expect future short-term rates to rise, they will demand a higher yield on longer-term bonds to compensate for the risk of holding a long-term bond in a rising interest rate environment.

Question 9

Option adjusted duration can be calculated as

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The answer of Option adjusted duration can be calculated as
...

Question 10

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

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The answer of If the coupon payments are not reinvested...

Question 11

The promised yield to maturity calculation assumes that

Accepted Answer

The promised yield to maturity calculation takes into account the reinvestment of coupon interest payments at the current market interest rate for the bond, which is typically different from the coupon interest rate. This assumption helps to provide a more accurate estimate of the actual yield that an investor can expect to earn by holding the bond until maturity.

Question 12

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?

Accepted Answer

The expectations hypothesis suggests that any long-term interest rate is simply the geometric mean of current and future on-year interest rates expected to prevail over the maturity of the issue.

Question 13

All of the following are one of Malkiel's stated relationships between yield changes and bond prices except

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The answer of All of the following are one of...

Question 14

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

Accepted Answer

Macaulay duration is computed by discounting the cash flows of a bond using its yield to maturity. It is a weighted average of the times until each payment is received, with the weights being the present value of the payment divided by the current price of the bond.

Question 15

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

Accepted Answer

The answer of According to the segmented-market hypothesis a downward...

Question 16

The position of a bondholder that is long a callable bond is equal to being

Accepted Answer

When an investor is long a callable bond, they are essentially long a noncallable bond and short a call option on the bond. Therefore, the correct choice is long a noncallable bond + short a call option on the bond, which is represented by choice B.

Question 17

The option adjusted duration will approach the duration to maturity, when

Accepted Answer

Option adjusted duration measures the sensitivity of a bond's price to changes in interest rates, taking into account the embedded options. When interest rates are significantly above the coupon rate, the likelihood of the bond being called decreases, resulting in a lower value for the call option. Hence, the option adjusted duration will approach the duration to maturity.

Question 18

A graph of a bond's Price-Yield curve reveals all of the following except

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The answer of A graph of a bond's Price-Yield curve...

Question 19

Reinvestment risk is greatest for bonds that have

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The answer of Reinvestment risk is greatest for bonds that...

Question 20

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

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The answer of Consider a bond portfolio manager who expects...

Quiz 18: The Analysis and Valuation of Bonds