Question 1

The yield on a small,regional corporate bond is generally higher than the yield on a large,national corporate bond mainly due to:

Accepted Answer

D

Question 2

Under a laddering approach,investors mitigate the effects of an interest rate increase by:

Accepted Answer

Under a laddering approach, investors purchase bonds with a variety of maturity dates. This helps to mitigate the effects of an interest rate increase because as bonds mature, investors can reinvest the proceeds at the higher interest rates. This strategy helps to reduce the overall impact of interest rate fluctuations on the portfolio. Purchasing bonds in two maturity groups, long or short, or with a variety of coupon rates or YTMs, do not necessarily achieve the same effect as laddering with a variety of maturity dates.

Question 3

The yield curve is normally plotted using Treasury securities because:

Accepted Answer

C

Question 4

During periods of economic expansion,the spread between corporate bonds and U.S.Treasuries generally:

Accepted Answer

During economic expansion, investors are more willing to take risks and there is greater confidence in the economy, which generally leads to a decrease in demand for U.S. Treasuries as safe-haven assets. As a result, their yields increase, causing the spread between corporate bonds and U.S. Treasuries to narrow.

Question 5

The term structure of interest rates is also known as the:

Accepted Answer

The term structure of interest rates refers to the relationship between the time to maturity of a fixed income security and its yield. This relationship can be graphed as a curve, which is known as the yield curve or the term structure of interest rates. Option A (yield to maturity) is a specific calculation of the total return anticipated on a bond if held until it matures. Option B (probability distribution) refers to the likelihood of different outcomes occurring. Option C (yield differential) refers to the difference in yield between two different fixed income securities.

Question 6

Regardless of its maturity date,it is very unusual for a coupon-paying bond to have a duration greater than:

Accepted Answer

The answer of Regardless of its maturity date,it is very...

Question 7

Which form of interest rate forecasting involves evaluating bonds to determine which will perform best over a selected holding period?

Accepted Answer

Horizon analysis involves evaluating bonds to determine which will perform best over a selected holding period. It takes into account factors such as credit risk, duration, and yield to maturity to estimate the total return on a bond investment. This approach is useful for investors who have a specific time horizon in mind and want to select bonds that will provide the highest possible return over that period. Yield-to-maturity analysis focuses on determining the expected return on a bond assuming it is held until maturity, while yield curve analysis involves analyzing the relationship between yields on different maturities of bonds. Bond immunization analysis is a method for managing interest rate risk in a portfolio of bonds.

Question 8

Which of the following is considered to have the biggest impact on bond yields?

Accepted Answer

The answer of Which of the following is considered to...

Question 9

Bond investors can avoid the losses caused by rising interest rates by:

Accepted Answer

Holding individual bonds until maturity ensures that the investor receives the full face value of the bond at maturity and is not subject to fluctuations in market value due to changes in interest rates. This strategy also eliminates the need to sell bonds in a potentially unfavorable market, avoiding losses from selling at a lower price than the purchase price.

Question 10

Duration is a measure that relates a:

Accepted Answer

The answer of Duration is a measure that relates a:
...

Question 11

Historically,the yield curve has most often been:

Accepted Answer

The yield curve has historically been more often upward sloping, meaning that longer-term interest rates are higher than shorter-term interest rates. This is because investors typically demand a higher return for tying up their money for a longer period of time, and because inflation expectations often increase over longer horizons. However, there have been periods of time when the curve has been downward sloping or flat, and there have been instances of a "inverted" yield curve where short-term rates are higher than long-term rates, which can be an indicator of an impending recession.

Question 12

Floating rate bonds often have yields tied to the:

Accepted Answer

Floating rate bonds typically have their yields tied to a benchmark rate, such as the London Interbank Offered Rate (LIBOR), which reflects the interest rate at which banks borrow funds from each other in the London market. This means that the interest rate paid on the bond will fluctuate as the benchmark rate changes.

Question 13

Which of the following would not be expected to cause yield spreads to widen?

Accepted Answer

Issuing equity to repurchase debt would be expected to reduce the firm's leverage, making it less risky and lowering its borrowing costs, thereby causing yield spreads to narrow. The other options would all increase the perceived riskiness of the firm, which would raise its borrowing costs and cause yield spreads to widen.

Question 14

The introduction of the Euro:

Accepted Answer

The introduction of the Euro decreased the transactions cost of trading foreign bonds as it eliminated the need for currency exchange and reduced uncertainty associated with currency fluctuations.

Question 15

During recessions,yield spreads tend to:

Accepted Answer

During recessions, investors tend to become more cautious and risk-averse, which leads to an increase in demand for safe-haven assets like U.S. Treasuries. This increase in demand drives down yields on Treasuries and widens the spread between Treasury yields and other bonds, such as corporate bonds or high-yield bonds. Conversely, during economic expansions, investors tend to be more willing to take on risk, which increases demand for non-Treasury bonds and narrows the spread between Treasury yields and other bonds.

Question 16

Which of the following statements concerning yield spreads is not true?

Accepted Answer

Yield spreads are typically calculated between bonds of different credit qualities or sectors, not across maturities, which is more related to the yield curve.

Question 17

Which of the following statements is true regarding investments in bonds?

Accepted Answer

Generally, longer maturity bonds have a higher yield than shorter maturity bonds because they involve a greater risk of inflation disrupting the payments made by the bond issuer.

Question 18

Which of the following statements about the bond market is not true?

Accepted Answer

The answer of Which of the following statements about the...

Question 19

Which of the following is an active bond strategy?

Accepted Answer

Bond swaps involve selling one bond and using the proceeds to purchase another bond with similar characteristics in order to improve the portfolio's overall performance. This is an active strategy that requires making decisions based on market conditions and individual bond performance. The other choices (B, C, and D) are passive strategies that involve holding bonds for a predetermined amount of time without actively managing the portfolio.

Question 20

Bond investors expecting interest rates to rise should shift their portfolios toward:

Accepted Answer

When interest rates rise, the prices of existing bonds fall. Shorter-term bonds are less sensitive to changes in interest rates than longer-term bonds, and therefore provide less risk to investors who expect interest rates to rise. Additionally, higher quality bonds (such as those with a higher credit rating) may also provide some protection against rising interest rates, but shorter-term bonds are generally considered the better choice in this scenario.

Quiz 18: Bonds: Analysis and Strategy