Deck 11: Bond Yields and Prices

Question 1

A bond's intrinsic value is:

A) another name for par value.
B) the value that the bond will pay to the bondholder at maturity.
C) the present value of the expected cash flows to be received from the bond.
D) the amount by which the market value exceeds the par value of the bond.

Answer 1

the present value of the expected cash flows to be received from the bond.

Question 2

Subtracting the inflation rate from the market interest rate results in an approximate:

A) inflation-adjusted rate of interest.
B) real risk-free rate of interest.
C) real risky rate of interest.
D) inflation-adjusted yield

Answer 2

real risk-free rate of interest.

Question 3

The bond market in Canada is dominated by:

A) corporate issues.
B) provincial government bonds, especially Alberta.
C) government of Canada bonds.
D) foreign bonds.

Answer 3

government of Canada bonds.

Question 4

Under the Fisher hypothesis, inflation rate were expected to increase by 50 basis points, nominal rates on short-term securities would:

A) rise by 50 basis points since inflation and nominal rates are directly related.
B) fall by 50 basis points since inflation and nominal rates are inversely related.
C) fall by less 50 basis points since the Fisher hypothesis assumes a slow speed of adjustment to
Economic news.
D) rise by less than 50 basis points since the Fisher hypothesis assumes market inefficiency.

Question 5

Which of the following regarding the current yield on a bond is not true?

A) The current yield is superior to the coupon rate because it uses market price instead of face value.
B) The current yield is equal to the coupon rate if the bond is trading at par. .
C) The current yield does not account for difference between purchase price and redemption value.
D) The current yield shows the bond's expected rate of return if held to maturity.

Question 6

The yield to maturity for a bond:

A) like the current yield takes into account only the interest income payable on the bond.
B) is calculated in the same way as the IRR for a capital budgeting project.
C) will always be greater than the yield to call since the time horizon is longer.
D) does not take into account the reinvestment of interest income from the bond.

Question 7

In order to have a yield to maturity less than the coupon rate, the bond must be:

A) selling at a discount.
B) selling at par.
C) selling at a premium.
D) a zero coupon bond.

Question 8

A yield to call calculation:

A) is best used when the bond is trading at par.
B) is the same as the YTM but uses the last period in which the bond can be called prior to maturity.
C) is best used for high coupon bonds trading at a premium.
D) is only applicable to bonds that have already been called for redemption.

Question 9

When interest rates decrease:

A) bond prices rise.
B) bond prices fall.
C) prices of newly issued bonds are lowered.
D) interest rates of existing bonds are raised.

Question 10

If a bond is callable, this means:

A) the issuing company may extend the maturity date.
B) the bondholder may sell the bond back to the company prior to maturity at her option.
C) the issuing company can require the bondholder to sell the bonds back to the company prior to maturity.
D) the bondholder can convert the bond into the issuing company's stock at any time at any time prior to maturity.

Question 11

A deferred call provision means:

A) the bond cannot be called before a certain time.
B) the bond pays interest on a deferred basis.
C) the bond is called only in the last year of the term.
D) the shareholders must defer to the bondholders regarding the call date.

Question 12

For most bonds the coupon rate is stated:

A) as an annual percent and paid annually.
B) as an annual percent and paid semi-annually.
C) as a semi-annual percent and paid annually.
D) as a semi-annual percent and paid semi-annually.

Question 13

Which of the following statements regarding changes in bond prices relative to changes in market yields is true?

A) Short-term bond prices will increase more than long-term bond prices if market yields increase.
B) Short-term bond prices will increase less than long-term bond prices if market yields decrease.
C) Short-term bond prices will increase more than long-term bond prices if market yields decrease.
D) Short-term bond prices will remain constant and long-term bond prices will increase if market yields decrease.

Question 14

Which of the following bonds would you expect to have the lowest price volatility?

A) 8%, 20 year bond
B) 8%, 10 year bond
C) 4%, 20 year bond
D) 4%, 10 year bond

Question 15

Duration was designed to:

A) provide a better method to calculate the intrinsic value of a bond.
B) provide bond portfolio managers a method of determining the effect of yield changes on the prices and rates of return for different bonds.
C) provide a way of reconciling computational differences between current yield, yield to call and yield to maturity for different bonds.
D) provide bond managers with a method of pricing bond swap strategies.

Question 16

The duration of a zero-coupon bond:

A) will be greater than the duration of a coupon bond with the same maturity.
B) will be less than the duration a coupon bond with the same maturity.
C) will be equal to the duration of a coupon bond with the same maturity.
D) is impossible to determine.

Question 17

Assuming that interest rates do not change over the remaining life of a bond which of the following will not occur?

A) discount bonds will increase in price as maturity approaches
B) premium bonds will decrease in price as maturity increases
C) par bonds will become more volatile in price as maturity approaches
D) par bonds will not change in price over the remaining life of the bond

Question 18

The Fisher hypothesis best provides an approximation for the:

A) return on the risk-free asset.
B) return provided on corporate bonds.
C) return provided on blue chip stocks.
D) return on international securities.

Question 19

Bonds with deferred call features:

A) can be retired at any time prior to maturity on condition that the issuer gives notice.
B) can only be retired after a specified period following the date of issue.
C) can be retired at any time, but the issuer will have to pay an additional premium.
D) generally have no call premium.

Question 20

A decrease in reinvestment rate risk:

A) is caused by an increase in interest rates.
B) leads to a decline in coupon rates.
C) results from a decline in interest rates.
D) results from an increase in inflation.

Question 21

The yield to call is like the yield to maturity except for the:

A) coupon payments and maturity value.
B) number of periods to maturity and maturity value.
C) number of periods to maturity and inflation premium.
D) coupon rate and coupon payments.

Question 22

The yield to maturity is 6 percent. If the yield increases by a quarter of a point, the new yield is:

A) 6.025 percent.
B) 6.250 percent.
C) 8.500 percent.
D) 5.750 percent.

Question 23

A bond is selling at a premium if the:

A) yield to maturity is greater than the coupon rate.
B) yield to maturity is less than the coupon rate.
C) market price is greater than the par value.
D) yield to call is less than the coupon rate.

Question 24

The real rate of interest is almost always:

A) the opportunity cost of foregoing consumption.
B) greater than the nominal rate of interest.
C) equal to the nominal rate of interest.
D) easily affected by risk factors.

Question 25

Which of the following statements about the risk premium affecting market interest rates is false? The risk premium:

A) results in a yield differential.
B) is additional compensation demanded by investors for the risk involved.
C) is not reflected in the price of the security.
D) is by definition a negative amount. .

Question 26

Find the price of a 10 percent coupon bond with three years to maturity if the yield to maturity is now 12 per cent. Use semi-annual discounting.

A) $1196.70
B) $950.85
C) $952.20
D) $999.80

Question 27

Which of the following statements about bond prices is true?

A) Bond price volatility and time to maturity are inversely related.
B) A decrease in yields raises prices less than an increase in yields lowers prices.
C) Bond price fluctuations and bond coupons are inversely related.
D) Bond prices move directly to bond yields.

Question 28

The YTM for a zero-coupon bond with 10 years to maturity and selling for $450 is:

A) 9.00 percent.
B) 8.15 percent.
C) 2.22 percent.
D) 4.07 percent.

Question 29

If bond investors do not reinvest the coupons received during the life of the bond, then the:

A) the calculated YTM will be less than the realized yield.
B) the calculated YTM will exceed the realized yield.
C) nominal yield will be greater than the calculated YTM.
D) current yield will equal the calculated YTM.

Question 30

Convexity is important in bond analysis because:

A) duration is an approximation that works best for large changes in the required yield.
B) duration does not capture changes in required yield changes.
C) the relationship between changes in bond prices and duration is an approximation for small changes in the required yield.
D) bonds exhibit a linear relationship with duration.

Question 31

Which of the following bond relationships is not inverse?

A) Coupon and duration
B) Duration and yield to maturity
C) Interest rate changes and bond prices
D) Duration and maturity

Question 32

To calculate duration one does not need which of the following inputs?

A) the maturity date of the bond
B) the magnitude and frequency of coupon payments
C) the return on a bond index
D) the yield to maturity for the bond

Question 33

For all bonds paying coupons, duration is:

A) less than maturity.
B) greater than maturity.
C) about equal to maturity.
D) not related to maturity.

Question 34

With regard to duration, choose the incorrect statement.

A) Duration expands with time to maturity but at a decreasing rate.
B) Yield to maturity is directly related to duration.
C) Coupon is inversely related to duration.
D) Duration is a measure of bond price sensitivity to interest rate movements.

Question 35

Interest rate sensitivity for bonds with embedded options is most accurately measured by:

A) convexity
B) effective duration
C) modified duration
D) Macaulay duration

Question 36

A 15-year $1,000 par value bond with semi-annual coupon payments has the following characteristics: Coupon Rate and Yield-to-Maturity equal 8%.What is the bond's effective duration estimated for a 50 basis point change in interest rates?

A) 8.65
B) 11.98
C) 12.24
D) 15.00

Question 37

The par value of a convertible security divided by the conversion ratio is known as the conversion:

A) price.
B) value.
C) premium.
D) ratio.

Question 38

A convertible bond is not issued for which of the following reasons?

A) A convertible feature is issued an a sweetener to make the issue more attractive to investors.
B) It is intended is a long-term financing measure as the issuing company does not want to face dilution after conversion.
C) Convertibles offer the company the opportunity to issue stock at a higher price than the current market price.
D) Issuing convertibles is often a cheaper source of financing to the issuer than the common stock and the gradual conversion places less price pressure on the existing common shares.

Question 39

Convertible bonds:

A) are always issued as mortgage bonds.
B) cannot trade in the marketplace for an amount greater than the straight bond value.
C) are usually short-term bonds.
D) are also usually callable by the issuing company.

Question 40

Which of the following is not an advantage of convertible bonds?

A) Downside protection
B) Upside potential
C) A yield in excess of the common stock
D) The call feature

Question 41

A disadvantage of a convertible bond is:

A) the lack of downside protection for the investor.
B) its exposure to upside movements in the stock price.
C) a yield less than straight bonds of similar risk and maturity.
D) that convertibles are not callable, and must be held to maturity.

Question 42

One of the advantages of a convertible is "downside protection." This means that the:

A) convertible bond's price will not fall below the bond's investment value.
B) price of the bond will not decline below its par value.
C) bond price will be fairly stable irrespective of changes in the interest rate.
D) price of the bond will always be at least 90 per cent of its market price.

Question 43

If a convertible bond is quoted at 90 (par value = $1000) and has a conversion rate of 30, then the underlying stock should be trading at:

A) $30
B) $3
C) $90
D) $27

Question 44

ABC Corporation's convertible bond has a face value of $1000 and a conversion price of 25. If the issue is currently quoted at 120, while the stock trades at $22.50, what is the bond's conversion premium?

A) $200
B) $300
C) $100
D) $187.50

Question 45

The Bank of Canada can implement monetary policy using all of the following techniques except:

A) open market operations.
B) purchase and resale agreements.
C) moral suasion.
D) All of the above constitute monetary policy.

Question 46

Treasury bills and bonds are both typically used as a proxy for the short-term riskless rate.

Question 47

The real risk-free rate of interest is the rate that must be offered to persuade individuals to consume rather than save.

Question 48

If the current yield is below the coupon rate, the bond is selling at a premium.

Question 49

If two bonds have the same coupon rate and the same remaining time to maturity, they will be priced the same in the market.

Question 50

Duration measures the weighted average maturity of a callable bond's cash flows on a present value basis.

Question 51

Duration decreases as cash inflows are received more frequently.

Question 52

The term used to describe the degree to which duration changes as the yield to maturity changes is immunization.

Question 53

The horizon return is the bond return to be earned based on assumptions about reinvestment rates.

Question 54

In bond valuation, the appropriate discount rate is the required yield.

Question 55

The lower the discount rate used in bond valuation, the higher the bond's intrinsic value.

Question 56

What weakness of modified duration does convexity correct?

Question 57

Why does the coupon rate affect the volatility of bond price?

Question 58

For each of the following variables, state whether duration has a direct or inverse relationship: term to maturity, size of coupon payment, yield to maturity, frequency of coupon payment.

Question 59

If a bond is both callable and convertible and it is called, how does this "force conversion"?

Question 60

What are the components affecting the market yield to maturity on a long-term bond?

Question 61

What variables are taken into account by each of the following: coupon rate, current yield, and yield to maturity?

Question 62

What is the reinvestment rate assumption in regard to the yield to maturity?

Question 63

Explain the difference between Macaulay's duration and modified duration. Is the unit of measurement "years" for each?

Question 64

How can a bond portfolio's duration be calculated?

Question 65

Why is the yield to call a more appropriate measure to use for callable bonds with high coupons rather than the yield to maturity?

Question 66

How does the value of a bond change as it nears its maturity?

Question 67

Why do convertible bonds usually sell at a premium over comparable straight bonds?

Question 68

How can duration and convexity assist the portfolio manager in assessing the interest-rate risk inherent in a bond portfolio?

Question 69

What are three reasons that duration is important in bond analysis and management?

Question 70

Why would you not expect a convertible bond with a high conversion premium to be converted any time soon?

Question 71

T-bills
(a) A 182-day Treasury bill with a face value of $10,000 is selling for $9805. Calculate the discount yield.
(b) Calculate the bond equivalent basis for this Treasury bill.

Question 72

A 10-year, $1000 corporate bond paying $100 in interest annually is currently selling for $950.
(a) Calculate its current yield.
(b) Calculate the coupon rate.
(c) Calculate the Total Return for this bond if it is sold one year later for $800.

Question 73

Calculate the two components of Total Return for a 12 per cent coupon bond bought at $720 and sold one year later for $860.

Question 74

If an investor buys a 10 per cent bond that has 20 years until maturity, at a quoted price of 90 and sells it a year later when it is quoted at 95, what is his total return?

Question 75

Two 10 per cent coupon bonds are selling at par, Bond A has a 15-year maturity and Bond B has a 25- year maturity. If the appropriate required rate of return for these two bonds drops to 8 per cent, calculate the percentage change in the price of each bond.

Question 76

Three years ago, Stryker Corp.'s 10 per cent coupon, 20-year bond (par value = $1000) was selling at par. The bond had an 8 per cent call premium and a deferred call period of 5 years.
(a) Currently, investors are demanding a return of 8 per cent on this bond. Calculate its current price using both annual and semi-annual compounding.
(b) What is the approximate yield to call that an investor would earn if the bond is called back at this time? (Use annual compounding only.)

Question 77

XYZ Co.'s 12 per cent, 20-year callable bond is currently selling for $1050.
(a) Calculate its current yield.
(b) Calculate its yield to maturity (annualized) using semi-annual compounding.
(c) Calculate its yield to first call if it is callable 5 years from now at a call premium of 6 per cent.

Question 78

Calculate the realized compound yield for an 8 per cent bond with 13 years remaining until maturity and an expected reinvestment rate of 6 per cent per year, that is currently selling for $920.

Question 79

Tyler Toy convertible bonds have a conversion rate of 25 shares and are selling at $1,015. The current market quote of the stock is 37½. What is the conversion value and conversion premium on this bond?

Question 80

A bond trader buys five, 6-month Canadian Treasury bills, each with a face value of $1,000,000 and 182 days to expiration at a yield of 4.45%. She sells them 20 days later at a yield of 4.65%. How much money has she made for her firm? What is the effective annual rate of return on her investment?