Question 1

Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price?

Accepted Answer

The formula to calculate the present value of a zero coupon bond is:
Present Value = Face Value / (1 + r)n
Where,
r = Required rate of return
n = Number of years to maturity

Substituting the given values in the above formula, we get:
Present Value = 1,000,000 / (1 + 0.09)10
= 422,400

Hence, the current price of the zero coupon bond is $422,400.

Question 2

The value of ____-risk securities will be relatively ____.

Accepted Answer

B

Question 3

If the coupon rate ____ the required rate of return, the price of a bond ____ par value.

Accepted Answer

A

Question 4

The appropriate discount rate for valuing any bond is the

Accepted Answer

The appropriate discount rate for valuing any bond is the yield that could be earned on alternative investments with similar risk and maturity. This is because, as an investor, the decision to invest in a bond depends on the return that could be earned on alternative investments with similar risk and maturity. Coupon rate, inflation rate, and Treasury bill rate are important factors to consider, but they do not fully capture the opportunity cost of investing in the bond. The yield on alternative investments with similar risk and maturity reflects the market's assessment of the bond's risk and return potential, and it is therefore the most appropriate discount rate to use in bond valuation.

Question 5

A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.

Accepted Answer

To calculate the fair price of the bond, we need to find the present value of its future cash flows. The quarterly coupon rate of 12% means that the bond pays $30 ($1,000 x 0.12 / 4) every quarter. Since the bond matures in 20 years, there are 80 quarters (20 x 4) in total.

To calculate the present value of the coupons, we can use the formula:

PV of coupons = Coupon payment x [1 - (1 + r/4)^(-n x 4)] / (r/4)

where r is the quarterly yield to maturity (16% / 4 = 4%), n is the number of quarters (80), and PV is the present value.

Plugging in the numbers, we get:

PV of coupons = $30 x [1 - (1 + 0.04)^(-80)] / (0.04) = $498.96

To calculate the present value of the principal (i.e. the par value), we can simply use the formula:

PV of principal = Par value / (1 + r/4)^n

Plugging in the numbers, we get:

PV of principal = $1,000 / (1 + 0.04)^80 = $262.21

Therefore, the fair price of the bond is:

Fair price = PV of coupons + PV of principal = $498.96 + $262.21 = $761.17

So the closest answer choice is C) 761.

Question 6

The prices of bonds with ____ are most sensitive to interest rate movements.

Accepted Answer

Zero coupon bonds do not make any periodic coupon payments and therefore their prices are more sensitive to interest rate movements compared to bonds with coupon payments. This is because the majority of their return comes from the difference between the purchase price and the face value, which is fixed at maturity. As interest rates change, this difference becomes more or less valuable, resulting in a greater impact on the price of the bond compared to bonds with coupon payments.

Question 7

Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

Accepted Answer

Using the formula for bond price elasticity, we have:
Price elasticity = [(new price - old price) / (old price)] / [(new required rate of return - old required rate of return) / (old required rate of return)]
= [($567 x (1-0)) - ($1,000 x (1-0)) / ($1,000 x (1-0))] / [(15%-12%) / (12%)]
= -0.494
Since elasticity is negative, we take the absolute value of it, giving us 0.494 or approximately 0.49. Therefore, the answer is C: 0.494.

Question 8

As interest rates increase, long-term bond prices

Accepted Answer

Long-term bonds are more sensitive to changes in interest rates compared to short-term bonds, which makes them more risky as they are subject to greater price fluctuations. Therefore, as interest rates increase, long-term bond prices will decrease by a greater degree than short-term bond prices.

Question 9

The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value.

Accepted Answer

The required rate of return is the rate of return that an investor expects to earn on an investment. The discount rate is the rate of return that an investor uses to calculate the present value of future cash flows. The discount is the difference between the par value of a bond and its market price. The larger the investor's required rate of return relative to the discount rate, the larger the discount of a bond with a particular par value.

Question 10

A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

Accepted Answer

The answer of A bond with a $1,000 par value...

Question 11

A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.

Accepted Answer

A decrease in the expected level of inflation results in decreasing pressure on bond prices, as investors will demand lower yields to compensate for the lower inflation risk. Conversely, an increase in the expected level of inflation results in upward pressure on bond prices, as investors will demand higher yields to compensate for the increased inflation risk. Therefore, option C is the correct choice.

Question 12

The valuation of bonds is generally perceived to be ____ the valuation of equity securities.

Accepted Answer

The answer of The valuation of bonds is generally perceived...

Question 13

Other things held constant, bond prices should increase when inflationary expectations rise.

Accepted Answer

Bond prices are negatively correlated with inflationary expectations, meaning that when inflationary expectations rise, bond prices should decrease. This is because inflation erodes the purchasing power of the fixed income from bonds, making them less attractive to investors.

Question 14

When financial institutions expect interest rates to ____, they may ____.

Accepted Answer

The answer of When financial institutions expect interest rates to...

Question 15

A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?

Accepted Answer

The present value of the bond is calculated using the formula for the present value of an annuity for the coupon payments and the present value of a lump sum for the par value. The bond pays $50 every six months (10% annual coupon rate / 2 * $1,000 par value). The required rate of return is 6% per period (12% annual rate / 2). The bond has 6 periods (3 years * 2). The present value of the bond is approximately $951.

Question 16

For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the

Accepted Answer

When an investor's required rate of return is higher than the bond's coupon rate, the bond's value decreases, resulting in a discount on the price. Therefore, the higher the required rate of return, the greater the discount on the price.

Question 17

From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.

Accepted Answer

Investing institutions are usually looking for high returns on their investments, which is why a high yield is attractive. Additionally, they prefer the currency to appreciate over the investment horizon to ensure their returns are not eroded by currency depreciation.

Question 18

An expected ____ in economic growth places ____ pressure on bond prices.

Accepted Answer

An expected increase in economic growth typically leads to higher interest rates, which places downward pressure on bond prices.

Question 19

If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.

Accepted Answer

Zero or low coupon bonds are more favorably affected by declining interest rates because their value increases as interest rates decrease. High coupon bonds have a fixed interest rate, so they may not benefit as much from declining interest rates.

Question 20

If the coupon rate equals the required rate of return, the price of the bond

Accepted Answer

If the coupon rate equals the required rate of return, the bond is said to be priced at par. This means that the bond's price is equal to its par value.

Quiz 8: Bond Valuation and Risk

Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price?

The value of -risk securities will be relatively .

If the coupon rate the required rate of return, the price of a bond par value.

The appropriate discount rate for valuing any bond is the

A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.

The prices of bonds with ____ are most sensitive to interest rate movements.

Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

As interest rates increase, long-term bond prices

The larger the investor's relative to the , the larger the of a bond with a particular par value.

A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

A(n) in the expected level of inflation results in pressure on bond prices.

The valuation of bonds is generally perceived to be ____ the valuation of equity securities.

Other things held constant, bond prices should increase when inflationary expectations rise.

When financial institutions expect interest rates to , they may .

A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?

For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the

From the perspective of investing institutions, the most attractive foreign bonds offer a and are denominated in a currency that over the investment horizon.

An expected in economic growth places pressure on bond prices.

If a financial institution's bond portfolio contains a relatively large portion of , it will be .

If the coupon rate equals the required rate of return, the price of the bond