Question 1

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

Accepted Answer

According to the expectations hypothesis, a rising yield curve suggests that investors anticipate higher future short-term interest rates, which would push up long-term rates.

Question 2

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 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

The liquidity preference hypothesis states that investors prefer short-term, more liquid investments to long-term investments, as they are less likely to be affected by changes in interest rates and are easier to sell. Therefore, demand for short-term investments increases, which drives up their price and decreases their yield, while the low demand for long-term investments decreases their price and increases their yield, resulting in an upward sloping yield curve.

Question 5

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

Accepted Answer

Option adjusted duration takes into account the likelihood of the option being exercised, which can shorten the effective maturity of the bond. When interest rates are significantly above the coupon rate, the call option has very little value as the issuer is unlikely to call the bonds and refinance at a higher rate. Therefore, the option adjusted duration will approach the duration to maturity.

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 a bond with high convexity will experience a greater increase in price when interest rates decline compared to a bond with lower convexity. This is beneficial for bondholders as it provides greater potential for capital gains.

Question 7

____ 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 8

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

Accepted Answer

According to the segmented-market hypothesis, different maturities of bonds are traded in separate markets and are not substitutes for each other. Therefore, a rising yield curve indicates that demand for long-term bonds has fallen (pushing up their yields) and demand for short-term bonds has risen (pushing down their yields).

Question 9

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

Accepted Answer

Being long a callable bond means that the bondholder owns a bond that can be called or redeemed by the issuer before the maturity date. This creates uncertainty for the bondholder, who may not receive the remaining interest payments and principal they were expecting. To compensate for this risk, the bond's yield is typically higher than that of a noncallable bond. 
The position of a bondholder that is long a callable bond can be replicated by being long a noncallable bond (which has a lower yield) and short a call option on the bond (which provides some protection against the issuer calling the bond). Therefore, the correct choice is B: Long a noncallable bond + short a call option on the bond.

Question 10

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

Accepted Answer

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

Question 11

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

Accepted Answer

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

Question 12

The promised yield to maturity calculation assumes that

Accepted Answer

The promised yield to maturity assumes that all coupon interest payments are reinvested at the current market interest rate for the bond. This is because it is assumed that the investor will reinvest the coupon payments to earn additional interest on the investment, and the current market interest rate provides the best estimate for what that return will be.

Question 13

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 14

Reinvestment risk is greatest for bonds that have

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

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

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

Question 17

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 18

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 one-year interest rates expected to prevail over the maturity of the issue. This means that long-term rates are determined by market participants' expectations of future short-term rates.

Question 19

Option adjusted duration can be calculated as

Accepted Answer

Option adjusted duration is calculated by taking the duration of a noncallable bond and subtracting the duration of the call option on the bond.

Question 20

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

Accepted Answer

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

Quiz 18: The Analysis and Valuation of Bonds