Deck 6: Pricing Fixed-Income Securities

Question 1

A bank quotes you a rate of 7% on a CD, compounded quarterly.What is the effective annual rate?

A)6.79%
B)6.81%
C)6.87%
D)7.13%
E)7.19%

Answer 1

E

Question 2

If you invested $200 today, another $400 in one year, and another $600 in two years, how much will your investment be worth (to the nearest dollar) in five years, assuming a 7% annual compound return?

A)$1,540
B)$600
C)$720
D)$770
E)None of the above

Answer 2

A

Question 3

If a bond is selling at a premium, then:

A)the yield to maturity is less than the coupon rate.
B)the yield to maturity is greater than the coupon rate.
C)the yield to maturity is equal to the coupon rate.
D)its duration must be greater than its maturity.
E)its duration must be equal to its maturity.

Answer 3

A

Question 4

To the nearest dollar, what is the value today of an investment that pays $15,000 in seven years, assuming an annual opportunity cost of 9%?

A)$7,473
B)$27,421
C)$8,206
D)$7,130
E)None of the above

Question 5

What is the effective annual rate of an investment that offers 8%, compounded quarterly?

A)8.00%
B)8.16%
C)8.24%
D)8.32%
E)8.64%

Question 6

What is the effective annual cost of a credit card that charges 18%, compounded monthly?

A)16.63%
B)18.00%
C)18.81%
D)19.56%
E)19.61%

Question 7

In January, you purchased a 14% semi-annual coupon bond ($1,0000 par) that had a remaining maturity of five years for $827.95.Six months later, immediately following an interest payment, you sold the bond.At the time of the sale, interest rates were 10%.What was your return?

A)7.1%
B)38.2%
C)46.4%
D)146.4%
E)296.3%

Question 8

If you invested $700 today and another $1,000 in two years, to the nearest dollar, how much will your investment be worth in seven years.? Assume an 8.4% annual compound return.

A)$616
B)$749
C)$1,364
D)$2,728
E)None of the above

Question 9

A bond with a par value of $1,000 and a 13% semi-annual coupon rate has 20 years to maturity.Assuming it is priced to yield 10%, compounded semi-annually, what is the market value of the bond, to the nearest dollar?

A)$1,187
B)$1,107
C)$1,257
D)$2,373
E)None of the above

Question 10

To the nearest dollar, what is the value today of an investment that pays $10,000 in five years, assuming an annual opportunity cost of 6%?

A)$7,473
B)$11,592
C)$8,626
D)$7,130
E)None of the above

Question 11

A bond with a par value of $1,000 and a 10% semi-annual coupon rate has 9 years to maturity.Assuming it is priced to yield 8%, compounded semi-annually, what is the market price of the bond, to the nearest dollar?

A)$1,074
B)$1,127
C)$1,450
D)$1,510
E)None of the above

Question 12

If a bond is selling at a discount, then:

A)the yield to maturity is less than the coupon rate.
B)the yield to maturity is greater than the coupon rate.
C)the yield to maturity is equal to the coupon rate.
D)its duration must be greater than its maturity.
E)its duration must be equal to its maturity.

Question 13

You invested $10,000 ten years ago.During the first two years, you earned 9% per year and during the last eight years, you earned 12% per year.To the nearest dollar, how much is your investment worth today?

A)$25,937
B)$29,417
C)$37,014
D)$40,456
E)None of the above

Question 14

A bank quotes you an effective annual rate of 10% on a semi-annual investment.What is the annual simple interest rate?

A)9.76%
B)10.00%
C)10.25%
D)10.79%
E)10.96%

Question 15

At what annual interest rate will you double your money if you invest for 8 years?

A)10.11%
B)9.05%
C)8.19%
D)7.91%
E)6.73%

Question 16

Assuming an 8% return, compounded semi-annually, what is the market value of a 12% coupon bond with three years to maturity?

A)$1,000.00
B)$1,104.84
C)$1,419.68
D)$1,809.35
E)$2,000.00

Question 17

To the nearest dollar, what is the value today of an investment that pays $1,000,000 in 15 years, assuming an annual opportunity cost of 8%?

A)$555,265
B)$315,242
C)$463,193
D)$3,238,387
E)None of the above

Question 18

You purchase a 10-year bond at face value for $1,000.It pays a semi-annual coupon payment of $50.If you can reinvest the coupon payments at 8% annually, what is your expected total return?

A)5.73%
B)6.63%
C)7.53%
D)8.43%
E)9.33%

Question 19

How long will it take you to double your money if you can invest at 7.2% per year?

A)9.97 years
B)9.28 years
C)8.62 years
D)7.21 years
E)6.98 years

Question 20

If a bond is selling at par value, then:

A)the yield to maturity is less than the coupon rate.
B)the yield to maturity is greater than the coupon rate.
C)the yield to maturity is equal to the coupon rate.
D)its duration must be greater than its maturity.
E)its duration must be equal to its maturity.

Question 21

Duration:

A)is always greater than maturity.
B)rises as the coupon payment rises.
C)measures how bond prices change with changes in maturity.
D)is a measure of total return.
E)is a measure of how price sensitive a bond is to a change in interest rates.

Question 22

All other things the same, longer maturity bonds have greater relative price volatility than shorter maturity bonds.

Question 23

A bank buys a $10,000 Treasury bill with a maturity of 1 year.Current market rates are 8%.If interest rates rise to 8.25%, what is the approximate change in the price of the T-bill?

A)-0.02%
B)-0.23%
C)-2.31%
D)-23.15%
E)-231.15%

Question 24

A bond that has an annual coupon rate of 15% has two years to maturity.If the current discount rate is 8%, what is the bond's Macaulay's duration?

A)2.00 years
B)1.99 years
C)1.88 years
D)1.77 years
E)1.66 years

Question 25

The effective annual interest rate will never be less than the simple interest rate.

Question 26

What is the market value of a zero coupon bond with a face value of $1,000 and 20 years to maturity, assuming an annual discount rate of 7%?

A)$100.00
B)$258.42
C)$502.57
D)$1,000.00
E)None of the above

Question 27

A stripped security:

A)pays no interest.
B)has no par value.
C)is easier to value than a traditional bond.
D)should sell as a package of zero coupon bonds.
E)None of the above

Question 28

A 90-day Treasury bill is quoted as having a 6% bond equivalent yield.What is the effective annual yield?

A)6.00%
B)6.14%
C)6.23%
D)6.62%
E)6.79%

Question 29

Which of the following are sources of a bond's total return?

A)Coupon interest
B)Reinvestment income
C)Capital gains or losses realize at maturity
D)All of the above are sources of a bond's total return
E)a.and c.only

Question 30

The Macaulay's duration of a 10-year, 10% bond with a face value of $1,000 and a market rate of 8%, compounded annually is:

A)10 years
B)11 years
C)12 years
D)13 years
E)None of the above

Question 31

A bond's Macaulay duration is 7.95 years.If the current annual interest rate is 7%, what is the modified duration of this bond?

A)7.00 years
B)7.88 years
C)7.43 years
D)7.95 years
E)8.51 years

Question 32

For a given absolute change in interest rates, the percentage increase in an option free bond's price will be less than the percentage decrease.

Question 33

All other things the same, low coupon bonds have greater relative price volatility than high coupon bonds.

Question 34

Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

A)A 25-year 11% coupon bond.
B)A 25-year 7.5% coupon bond.
C)A 25-year zero-coupon bond.
D)A 3-year zero coupon bond.
E)A 3-year bond with a 7.5% coupon.

Question 35

Which of the following is false?

A)As interest rates rise, bond prices rise, everything else the same.
B)Given an absolute change in interest rates, the percentage increase in a bond's price will be greater than the percentage decrease, everything else the same.
C)Long-term bonds change proportionately more in price than short-term bonds for a given rate change, everything else the same.
D)A bond with a lower coupon will change more in price than a bond with a higher coupon, everything else the same.
E)A bond's duration is a measure of its price elasticity.

Question 36

A 90-day Treasury bill is quoted as having a price of $987.50.What is its bond equivalent yield?

A)5.00%
B)5.13%
C)5.23%
D)5.62%
E)5.79%

Question 37

Bond prices and interest rates move in the same direction.

Question 38

What is the Macaulay's duration of a 10 year zero-coupon bond with a face value of $1,000 and a market rate of 8%, compounded annually is:

A)10 years
B)11 years
C)12 years
D)13 years
E)None of the above

Question 39

A bond that has an annual coupon rate of 11% has three years to maturity.If the current discount rate is 16%, what is the bond's Macaulay's duration?

A)3.00 years
B)2.991.years
C)2.89 years
D)2.79 years
E)2.69 years

Question 40

A bond that with a 12% coupon rate (paid semi-annually) has two years to maturity.If the current discount rate is 10%, what is the bond's Macaulay's duration?

A)4.00 years
B)3.47 years
C)2.00 years
D)1.73 years
E)1.50 years

Question 41

There is an inverse relationship between a bond's duration and its price volatility.

Question 42

Using a 360-day year results in higher returns than using a 365-day year.

Question 43

What are some of the problems with the discount yield?

Question 44

The duration of any security with interim cash flows will be less than the security's maturity.

Question 45

Assuming all other factors are held constant, discuss how changes in each of the following impact a bond's duration.
-Maturity
-Coupon Rate
-Market Rate

Question 46

Why might a security be worth more if its cash flows are "stripped "?

Question 47

Why is knowing a bond's duration useful?

Question 48

The greater the compounding frequency, the higher the future value, everything else the same.

Question 49

The greater the compounding frequency, the higher the present value, everything else the same.

Question 50

Discuss why the effective annual rate will never be less than the simple interest rate.