Question 1

The duration of a bond with ten-year maturity and 10% coupon is less than ten years.

Accepted Answer

The duration of a bond is typically less than its maturity when it has a coupon, as the coupon payments are received before the bond's maturity, reducing the weighted average time to receive the bond's cash flows.

Question 2

Tom deposits $10,000 in a savings deposit paying 4%, compounded monthly. What amount would he have at the end of seven years?

Accepted Answer

The answer of Tom deposits $10,000 in a savings deposit...

Question 3

A $1000 bond with a coupon rate of 7% matures in eight years. The bond is now selling for $950, what is the expected yield to maturity on the bond?

Accepted Answer

The answer of A $1000 bond with a coupon rate...

Question 4

When a bond's coupon rate is equal to the market rate of interest, the bond will sell for

Accepted Answer

When a bond's coupon rate is equal to the market rate of interest, the bond will sell at par value, meaning its market price will be equal to its face value.

Question 5

A bond with an 9% coupon and a 10% required return will sell at a premium to par.

Accepted Answer

A bond sells at a premium when its coupon rate is higher than the required return. In this case, the coupon rate (9%) is less than the required return (10%), so the bond will sell at a discount, not a premium.

Question 6

Which of the following statements is true about bonds?

Accepted Answer

The higher the coupon rate, the shorter the duration because higher coupon payments mean more cash flow is received earlier, reducing the bond's sensitivity to interest rate changes.

Question 7

A zero-coupon bond bears no interest.

Accepted Answer

The answer of A zero-coupon bond bears no interest....

Question 8

$5,000 invested at 6%, compounded quarterly, will be worth how much after 5 years?

Accepted Answer

The formula for compound interest is A = P(1 + r/n)^(nt), where P is the principal amount ($5,000), r is the annual interest rate (0.06), n is the number of times interest is compounded per year (4 for quarterly), and t is the number of years (5). Plugging in these values gives A = 5000(1 + 0.06/4)^(4*5) = 5000(1.015)^20 ≈ $6,734.

Question 9

Ceteris paribus, the holder of a fairly priced premium bond must expect a capital gain over their holding period.

Accepted Answer

A premium bond is purchased above its face value, and at maturity, it pays back the face value. Therefore, the holder should expect a capital loss, not a gain, as the bond approaches maturity and its price converges to its face value.

Question 10

A $1000 bond with a coupon rate of 10%, interest paid semiannually, matures in eight years and sells for $1120. What is the yield to maturity?

Accepted Answer

The answer of A $1000 bond with a coupon rate...

Question 11

A corporate bond, paying $65 interest at the end of each year for 6 years, has a face value of $1,000. If market rates on newly issued similarly rated corporate bonds are now 7.5%, what is the current market price of this bond?

Accepted Answer

The current market price of the bond is calculated by discounting the future cash flows (interest payments and face value) at the market rate of 7.5%. The present value of the interest payments and the face value sums up to $953.06.

Question 12

Money has time value because of inflation.

Accepted Answer

Money has time value primarily due to the potential earning capacity of money over time, not just inflation. Inflation is one factor, but the time value of money also considers interest and investment opportunities.

Question 13

Duration matching eliminates risk.

Accepted Answer

Duration matching reduces interest rate risk but does not eliminate all types of risk, such as credit risk or liquidity risk.

Question 14

Judy would like to accumulate $70,000 by the time her son starts college in ten years. What amount would she need to deposit now in a deposit account earning 6%, compounded yearly, to accumulate her savings goal?

Accepted Answer

To find the present value needed to accumulate $70,000 in 10 years at 6% interest compounded yearly, use the formula: PV = FV / (1 + r)^n. Here, FV = $70,000, r = 0.06, and n = 10. Calculating gives PV = $70,000 / (1.06)^10 = $39,088.

Question 15

If a $1000 par value bond has an 8% coupon (annual payments) rate, a 4-year maturity, and similar bonds are yielding 11%, what is the price of the bond?

Accepted Answer

The bond price is calculated using the present value of its future cash flows, which include annual coupon payments and the par value at maturity. The formula for bond pricing is: Price = (C * (1 - (1 + r)^-n) / r) + (F / (1 + r)^n), where C is the annual coupon payment ($80), r is the yield (11% or 0.11), n is the number of years (4), and F is the face value ($1000). Plugging in these values gives approximately $906.93.

Question 16

Expected yield is essentially a forecast.

Accepted Answer

Expected yield is a prediction of the amount of output or return generated from an investment, typically based on past performance and future projections. It is a forecast and not a guaranteed outcome.

Question 17

A $1000 bond with an 8.2% coupon rate, interest paid semiannually, and maturing in six years is currently yielding 7.6% in the market. What is the current price of the bond?

Accepted Answer

The answer of A $1000 bond with an 8.2% coupon...

Question 18

Which of the following statements is true?

Accepted Answer

Coupon rates are fixed at the time of issue, meaning they do not change over the life of the bond.

Question 19

All else equal, the greater a security's coupon, the lower the security's price sensitivity to a change in interest rate.

Accepted Answer

A higher coupon means more cash flows are received earlier, reducing the duration and interest rate risk, thus lowering price sensitivity to interest rate changes.

Question 20

A bond currently selling at a premium price above face value

Accepted Answer

A bond selling at a premium has a yield below its coupon rate because the price is higher than the face value, reducing the yield.

Quiz 5: Bond Prices and Interest Rate Risk