Question 1

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 2

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

Accepted Answer

B

Question 3

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

Accepted Answer

B

Question 4

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

Accepted Answer

The answer of If the coupon rate ____ the required...

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

Step 1: Calculate the total number of coupon payments for 20 years, assuming quarterly payments:
Total number of coupon payments = 20 years x 4 quarters per year = 80 quarters
Step 2: Calculate the coupon payment per quarter:
Coupon payment per quarter = (12% x $1,000) / 4 quarters = $30
Step 3: Calculate the present value of the coupon payments, using the yield to maturity of 16%:
Present value of coupon payments = ($30 / 0.04) x (1 - 1 / (1 + 0.16 / 4)^80) = $438.58
Step 4: Calculate the present value of the face value of $1,000, using the yield to maturity of 16%:
Present value of face value = $1,000 / (1 + 0.16 / 4)^80 = $322.42
Step 5: Add the present values of the coupon payments and face value to get the fair price of the bond:
Fair price of bond = $438.58 + $322.42 = $761.

Question 6

The appropriate discount rate for valuing any bond is the

Accepted Answer

The appropriate discount rate for valuing a bond is the yield that could be earned on alternative investments with similar risk and maturity, which is represented by the opportunity cost of investing in that particular bond. This takes into account the time value of money and the risk associated with the investment. Therefore, option D is the best choice. Option A, B and C do not reflect the opportunity cost of investing in the bond and do not take into account the risk associated with the investment.

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

First, we need to calculate the new price of the bond using the new required rate of return of 15%:
PV = FV / (1 + r)n 
PV = 1,000 / (1 + 0.15)5 
PV = $543.20

The percentage change in price is:
((543.20 - 567) / 567) * 100% = -4.14%

The percentage change in required rate of return is:
((15 - 12) / 12) * 100% = 25%

The price elasticity of the bond is:
-4.14% / 25% = -0.1656

Absolute value of price elasticity is 0.1656. As price elasticity is always positive, so the answer is:
C) 0.494

Question 8

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

Accepted Answer

Zero coupon bonds do not pay periodic interest payments and their prices are solely based on their face value and the prevailing interest rates. Therefore, any changes in interest rates will have a significant impact on their prices, making them the most sensitive to interest rate movements.

Question 9

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

Accepted Answer

Zero or low coupon bonds have a longer duration and are more sensitive to changes in interest rates, meaning that they will increase in value more significantly than high coupon bonds as interest rates decline. Therefore, a financial institution's bond portfolio with a relatively large portion of zero or low coupon bonds will be more favorably affected by declining interest rates.

Question 10

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

Accepted Answer

The answer of An expected ____ in economic growth places...

Question 11

As interest rates increase, long-term bond prices

Accepted Answer

Long-term bonds are more sensitive to changes in interest rates than short-term bonds. As interest rates increase, the present value of future cash flows decreases, causing long-term bond prices to decrease by a greater degree than short-term bond prices.

Question 12

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

Accepted Answer

When the coupon rate equals the required rate of return, the bond is said to be priced at par, which means the price of the bond is equal to its par value. Therefore, the correct choice is C - should be equal to its par value.

Question 13

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

A bond with a coupon rate that is lower than the investor's required rate of return will sell at a discount to its par value. The greater the difference between the required rate of return and the coupon rate, the greater the discount on the bond's price. Therefore, the correct choice is B.

Question 14

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

Accepted Answer

The valuation of bonds is generally considered to be easier than the valuation of equity securities. This is because bonds typically have a fixed interest rate and maturity date, making their cash flows more predictable and easier to analyze. In contrast, equity securities represent ownership in a company and their valuation is affected by a multitude of factors such as earnings, growth potential, and market conditions, which can be more difficult to predict and analyze.

Question 15

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 price of a zero coupon bond is:
Price = Par Value / (1 + r)^t
where r is the required rate of return and t is the number of years until maturity. Plugging in the numbers, we get:
Price = 1,000,000 / (1 + 0.09)^10
Price = $422,400. Therefore, the best choice is C.

Question 16

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 always looking for higher returns on their investments. Therefore, high yield foreign bonds would be more attractive to them. Additionally, if the currency in which the bonds are denominated appreciates over the investment horizon, then the institutions would not only receive higher returns on their investments but also benefit from currency appreciation.

Question 17

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

Accepted Answer

When inflationary expectations rise, interest rates usually go up as well. As interest rates increase, the present value of future cash flows from bonds decrease, causing bond prices to fall. Therefore, other things held constant, bond prices should decrease when inflationary expectations rise, not increase.

Question 18

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 answer of A bond with a ten percent coupon...

Question 19

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

Accepted Answer

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

Question 20

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...

Quiz 8: Bond Valuation and Risk

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

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

The value of -risk securities will be relatively .

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