Question 1

Describe the shape of the normal yield curve. Why is that shape fairly typical?

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Question 2

Describe two bond characteristics that increase a bond's price sensitivity to changes in market rates of interest.

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Question 3

One-year Treasury bonds yield 5% while 2-year bonds yield 6%. You are quite confident that one year from now 1-year bonds will yield 8%. Would the higher yield on 2-year bonds cause you to prefer them?

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Question 4

Which one of these statements is correct?

Accepted Answer

Germany, as part of the Eurozone, does not have the ability to independently print euros; this power lies with the European Central Bank. Italian bonds were generally considered riskier and thus more expensive to insure than German bonds during 2007-2013. It was possible to insure Irish bonds during that period. When Greece defaulted on its bonds in 2012, many investors indeed received compensation through credit default swaps, a form of insurance against default.

Question 5

How can one find the market price of a bond given its yield to maturity and find a bond's yield given its price? Why do prices and yields vary inversely?

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Question 6

Why might an investor prefer a convertible bond over a regular bond?

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Question 7

When comparing a highly liquid bond with a comparable but less liquid bond, the highly liquid bond is most apt to have:

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A highly liquid bond is easier to buy and sell, which means it is in higher demand and will likely have a lower yield than a less liquid bond. Investors are willing to accept a lower yield for the benefit of being able to easily buy and sell the bond when needed.

Question 8

Explain why bond investors may be interested in TIPS rather than traditional bonds. Why have TIPS not been popular lately?

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Question 9

Assume you just purchased a 12% annual coupon bond for $1,100 that matures in 3 years. Determine the current yield, yield to maturity, and price of the bond as of the date of purchase and on each anniversary date of its purchase until maturity.

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Question 10

Why might a bond's current yield offer an incomplete idea of what return the investor is receiving?

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Question 11

What might cause investors to rationally stay away from long-term bonds even when the yield curve is upward-sloping?

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Question 12

Why should many investors be cautious when relying on yield to maturity? Is it a convenient measure of rate of return for investors who might not hold their bonds to maturity?

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Question 13

Describe the process for calculating a yield to maturity for a bond, and explain what could cause the yield to maturity to change.

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Question 14

Why are long-term bonds more sensitive to changes in interest rates than short-term bonds?

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Question 15

You own two bonds: a 5-year and a 10-year bond, each with a 7% annual coupon. Both bonds currently sell at par. How much will the price of each bond change if interest rates increase to 8%? Why is there a difference in the price change?

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Question 16

What are the differences between a bond's coupon rate, its current yield, and its yield to maturity?

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Question 17

Why do investors pay attention to bond ratings and demand a higher interest rate for bonds with low ratings?

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Question 18

What is meant by "default risk" in bonds, and how do investors respond to it?

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Question 19

Explain why bond prices fluctuate in response to changing interest rates. What adverse effect might occur if bond prices remain fixed prior to their maturity?

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Quiz 6: Valuing Bonds