Question 1

A bond investor seeking capital gains should purchase [blank].

Accepted Answer

Bonds with distant maturity dates are more sensitive to interest rate changes. When interest rates are expected to decline, the value of these bonds increases, potentially leading to capital gains for the investor.

Question 2

Shorter-term bonds have greater interest rate risk than do longer-term bonds.

Accepted Answer

This statement is false. Longer-term bonds have greater interest rate risk because they are exposed to interest rate fluctuations over a longer period of time, whereas shorter-term bonds mature sooner and thus are less affected by interest rate changes.

Question 3

Durand Chemicals with headquarters in Perth issues bonds in France with interest and principal payable in Australian dollars.This bond is [blank].

Accepted Answer

The bond issued by Durand Chemicals is a Eurobond because it is issued outside the home country of the issuer and is denominated in a currency that is different from the currency of the country where it is issued.

Question 4

A bond has a coupon rate of 6% paid semi-annually, a par value of $1000, and matures tomorrow.The bond will sell for [blank].

Accepted Answer

The bond will sell for approximately $1030 because it is a premium bond. The coupon rate is greater than the market rate of interest, so the bond will sell for more than its par value.

Question 5

Which of the following bond types has the greatest risk for investors?

Accepted Answer

Subordinated debentures have the greatest risk for investors as they are the lowest priority in the event of bankruptcy or default, meaning that investors are less likely to receive their principal investment back.

Question 6

Why are longer-term bonds more sensitive to changes in interest rates than shorter-term bonds?

Accepted Answer

The answer of Why are longer-term bonds more sensitive to...

Question 7

Raisa purchased a bond for $1150 that repaid $1000 at maturity.This is an example of a [blank] bond.

Accepted Answer

A premium bond is purchased for more than its maturity value. Since Raisa paid $1150 for a bond that repaid $1000 at maturity, it means she bought the bond at a premium.

Question 8

A bond with a face value of $1000 has annual coupon payments of $100 and was issued seven years ago.The bond currently sells for $1085, has eight years left to maturity.This bond's [blank] must be less than 10%.

Accepted Answer

The coupon rate is fixed at 10% ($100 annual payment on a $1000 face value bond), which is already given. The current yield, calculated as the annual coupon payment divided by the current price ($100/$1085), is less than 10%. The yield to maturity (YTM) takes into account the entire return of the bond if held to maturity, including coupon payments and the difference between its purchase price and its face value at maturity. Given the bond sells for more than its face value ($1085 vs. $1000), the YTM must be less than the coupon rate to account for the premium paid over its face value, thus also making it less than 10%.

Question 9

Which of the following statements about zero-coupon bonds is false?

Accepted Answer

Zero-coupon bonds are issued at a discount and pay no interest until maturity, resulting in a large cash outflow at maturity when the face value is paid, contrary to the statement in choice A.

Question 10

As investors' required rate of return on a bond increases, the value of the bond increases also.

Accepted Answer

As investors' required rate of return on a bond increases, the bond's value decreases because the bond's coupon payments become less attractive compared to alternative investment opportunities that offer higher returns.

Question 11

Bonds with a longer time to maturity have less interest rate risk.

Accepted Answer

Bonds with a longer time to maturity have more interest rate risk because there is more time for interest rates to change, which can affect the bond's value.

Question 12

As market interest rates increase, bond prices decrease.

Accepted Answer

When market interest rates increase, newly issued bonds will offer higher yields, making previously issued bonds less attractive, and thus causing their prices to decrease.

Question 13

So long as a bond sells for an amount above its par value, the coupon interest rate and yield to maturity remain equal.

Accepted Answer

If a bond sells for an amount above its par value, the coupon interest rate remains the same, but the yield to maturity decreases because the investor paid more for the bond than its face value. This inverse relationship between bond price and yield to maturity is known as the bond's yield curve.

Question 14

As bond approaches maturity, discounts and premiums become less and less significant.

Accepted Answer

As a bond approaches maturity, its price gradually approaches its face value, leading to discounts and premiums becoming less significant.

Question 15

Bonds cannot be worth less than their book value.

Accepted Answer

Bonds can be worth less than their book value if the market perceives a higher risk associated with the issuer or the overall market conditions have changed since the bond was issued. This can result in a decrease in demand for the bond and a subsequent decrease in its market value.

Question 16

Which of the following statements about bonds is true?

Accepted Answer

Bond prices and market interest rates move in opposite directions. When market interest rates are higher than a bond's coupon rate, the bond's price falls below its par value to make its yield more attractive to potential buyers, aligning with the current market rates.

Question 17

Which of the following statements about bonds is true?

Accepted Answer

Long-term bonds are more sensitive to changes in interest rates compared to short-term bonds, meaning their prices will fluctuate more when interest rates change. This is because the present value of their future cash flows (interest payments and principal repayment) is more affected by changes in the discount rate (interest rate).

Question 18

Interest rates have increased by 50 basis points (0.5%).Which of the following bonds will decline most in price? All of the bonds have AA ratings.

Accepted Answer

The longer the maturity of the bond, the more sensitive it is to changes in interest rates. Therefore, the bond that matures in 10 years will decline the most in price. Bond A, which matures in 10 days, will not be affected significantly by a 0.5% change in interest rates. Bond B, which matures in five years, will be affected but to a lesser extent than Bond C.

Question 19

As the maturity date of a bond approaches, the bond's market value approaches its par value.

Accepted Answer

This is because at maturity, the bondholder will receive the par value of the bond, regardless of any changes in market conditions or interest rates. Therefore, as the maturity date approaches, investors are willing to pay more for the bond to ensure they will receive the par value upon maturity, resulting in the bond's market value approaching its par value.

Question 20

Which of the following statements about bonds is true?

Accepted Answer

The market value of a bond moves in the opposite direction of market interest rates- this is due to the fact that as market interest rates increase, the value of existing fixed income securities decreases.

Quiz 9: Debt Valuation and Interest Rates

A bond investor seeking capital gains should purchase [blank].

Shorter-term bonds have greater interest rate risk than do longer-term bonds.

Durand Chemicals with headquarters in Perth issues bonds in France with interest and principal payable in Australian dollars.This bond is [blank].

A bond has a coupon rate of 6% paid semi-annually, a par value of $1000, and matures tomorrow.The bond will sell for [blank].

Which of the following bond types has the greatest risk for investors?

Why are longer-term bonds more sensitive to changes in interest rates than shorter-term bonds?

Raisa purchased a bond for $1150 that repaid $1000 at maturity.This is an example of a [blank] bond.

A bond with a face value of $1000 has annual coupon payments of $100 and was issued seven years ago.The bond currently sells for $1085, has eight years left to maturity.This bond's [blank] must be less than 10%.

Which of the following statements about zero-coupon bonds is false?

As investors' required rate of return on a bond increases, the value of the bond increases also.

Bonds with a longer time to maturity have less interest rate risk.

As market interest rates increase, bond prices decrease.

So long as a bond sells for an amount above its par value, the coupon interest rate and yield to maturity remain equal.

As bond approaches maturity, discounts and premiums become less and less significant.

Bonds cannot be worth less than their book value.

Which of the following statements about bonds is true?

Which of the following statements about bonds is true?

Interest rates have increased by 50 basis points (0.5%) .Which of the following bonds will decline most in price? All of the bonds have AA ratings.

As the maturity date of a bond approaches, the bond's market value approaches its par value.

Which of the following statements about bonds is true?