Question 1

As CFO of your corporation, you would prefer (all else equal)to see the price of your corporation's bonds
A)increase, indicating that bond investors view your firm as less risky.
B)decrease, indicating that bond investors view your firm as less risky.
C)increase, indicating that bond investors view your firm as more willing to take risks.
D)decrease, indicating that bond investors view your firm as more willing to take risks.

Accepted Answer

As CFO, you would want bond investors to view your firm as less risky, which would lead to an increase in the price of your corporation's bonds. This would allow your corporation to potentially issue bonds in the future at a lower interest rate, lowering the cost of borrowing for the corporation.

Question 2

The volatility of a bond is given by
A)duration/(1 + yield)only.
B)slope of the curve relating the bond price to the interest rate only.
C)yield to maturity only.
D)duration/(1 + yield)and slope of the curve relating the bond price to the interest rate only.

Accepted Answer

The volatility of a bond is affected by both duration and the slope of the curve relating the bond price to interest rates. Duration measures the sensitivity of a bond's price to changes in interest rates, while the slope of the curve reflects the shape of the yield curve (i.e., whether it is steep or flat). Therefore, the best choice is D, which includes both duration and the slope of the curve.

Question 3

One can best describe the term structure of interest rates as the relationship between
A)spot interest rates and bond prices.
B)spot interest rates and stock prices.
C)spot interest rates and time.
D)yields of coupon bonds and their maturity.

Accepted Answer

The term structure of interest rates refers to the relationship between spot interest rates and the time to maturity of debt securities.

Question 4

The duration of any bond is the same as its maturity.

Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates and is typically shorter than the bond's maturity, except for zero-coupon bonds where they are the same.

Question 5

Which of the following bonds has the greatest volatility?
A)5-year coupon bond
B)5-year, zero-coupon bond
C)10-year coupon bond
D)10-year, zero-coupon bond

Accepted Answer

Zero-coupon bonds generally have greater volatility than coupon bonds because their prices are more sensitive to changes in interest rates. Additionally, longer-term bonds tend to be more volatile than shorter-term bonds. Therefore, the 10-year, zero-coupon bond has the greatest volatility among the given options.

Question 6

The longer a bond's duration, the greater its volatility.

Accepted Answer

This statement is true. The duration of a bond measures its sensitivity to changes in interest rates. The longer the duration, the more sensitive the bond is to interest rate changes, resulting in greater fluctuations in its price or volatility.

Question 7

U.S. Treasury bonds have almost zero default risk but are subject to inflation risk.

Accepted Answer

U.S. Treasury bonds are backed by the full faith and credit of the U.S. government, making them almost free of default risk. However, they are subject to inflation risk because inflation can erode the purchasing power of the interest and principal payments they provide.

Question 8

The term structure of interest rates determines the relationship between yield to maturity and maturity.

Accepted Answer

The term structure of interest rates is a graphical representation of the relationship between yield to maturity and maturity for a set of comparable bonds or other fixed income securities. Therefore, yield to maturity is directly determined by the term structure of interest rates.

Question 9

Short-term and long-term interest rates always move in parallel.

Accepted Answer

Short-term and long-term interest rates do not always move in parallel. They can move independently of each other depending on various economic factors and market conditions.

Question 10

(1 + r_nominal)= (1 + r_real)(1 + inflation rate).

Accepted Answer

This equation is known as the Fisher equation and it relates the nominal interest rate to the real interest rate and the expected inflation rate.

Question 11

Mr. X invests $1,000 at a 10 percent nominal rate for one year. If the inflation rate is 4 percent, what is the real value of the investment at the end of one year?
A)$1,100
B)$1,000
C)$1,058
D)$1,040

Accepted Answer

Nominal rate = 10%
Inflation rate = 4%
Real rate = (1+nominal rate)/(1+inflation rate)-1
= (1+0.1)/(1+0.04)-1
= 0.058 or 5.8%
Real value of the investment = $1,000 * (1+0.058) = $1,058. Answer: C.

Question 12

The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall.

Accepted Answer

The expectations theory suggests that long-term interest rates reflect the market's expectations for future short-term rates. Therefore, if the term structure is declining, it implies that investors expect future spot interest rates to decrease.

Question 13

In the United States, most bonds make coupon payments annually.

Accepted Answer

In the United States, most bonds make coupon payments semi-annually, not annually.

Question 14

The yield to maturity on a bond is really its internal rate of return.

Accepted Answer

The yield to maturity is the rate that equates the present value of a bond's expected future cash flows to the current market price of the bond. This is essentially the internal rate of return on the bond's investment.

Question 15

The duration of a zero-coupon bond is the same as its maturity.

Accepted Answer

A zero-coupon bond is a type of bond that does not pay any periodic interest but is sold at a discount from the face value. The duration of a zero-coupon bond is equal to its maturity because there are no coupon payments to affect the bond's duration.

Question 16

If the term structure of interest rates is flat, then the 9-year spot interest rate equals the 10-year spot interest rate.

Accepted Answer

If the term structure of interest rates is flat, it means that the yield curve is not sloping up or down but is instead a straight line. In this case, the yield on every maturity is the same, so the 9-year spot interest rate would be equal to the 10-year spot interest rate.

Question 17

The interest rate represented by "r₂" is the A)spot rate on a one-year investment. B)spot rate on a two-year investment. C)expected spot rate two years from today. D)expected spot rate one year from today.

Accepted Answer

The string "r₂" can be interpreted as follows: - "r" indicates that it is a spot rate - "S1U1" indicates a one-year investment - "B12" indicates a one-year break in between - "S1U1" indicates another one-year investment - "B0" indicates the end of the string, meaning the spot rate for a two-year investment has been given. Therefore, the string represents the spot rate on a two-year investment, making choice B the correct answer.

Question 18

Which bond is more sensitive to an interest rate change of 0.75 percent?
Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000.
Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000.
A)Bond A
B)Bond B
C)Both are equally sensitive.
D)Cannot be determined

Accepted Answer

Bond A has a longer maturity and a lower yield to maturity, making it more sensitive to interest rate changes.

Question 19

If the nominal interest rate per year is 10 percent and the inflation rate is 4 percent, what is the real rate of interest?
A)10.0 percent
B)4.1 percent
C)5.8 percent
D)14.0 percent

Accepted Answer

The real rate of interest is calculated as nominal rate of interest - inflation rate. Therefore, real rate of interest = 10% - 4% = 6%.

Question 20

Which of the following bonds has the longest duration?
A)5-year coupon bond
B)5-year, zero-coupon bond
C)10-year coupon bond
D)10-year, zero-coupon bond

Accepted Answer

Zero-coupon bonds have longer durations than coupon bonds of the same maturity because they do not pay any interest, thus their prices are more sensitive to changes in interest rates. Among the given options, the 10-year, zero-coupon bond has the longest duration.

Quiz 3: Valuing Bonds

As CFO of your corporation, you would prefer (all else equal) to see the price of your corporation's bonds

The volatility of a bond is given by

One can best describe the term structure of interest rates as the relationship between

The duration of any bond is the same as its maturity.

Which of the following bonds has the greatest volatility?

The longer a bond's duration, the greater its volatility.

U.S. Treasury bonds have almost zero default risk but are subject to inflation risk.

The term structure of interest rates determines the relationship between yield to maturity and maturity.

Short-term and long-term interest rates always move in parallel.

(1 + r_nominal)= (1 + r_real)(1 + inflation rate).

Mr. X invests $1,000 at a 10 percent nominal rate for one year. If the inflation rate is 4 percent, what is the real value of the investment at the end of one year?

The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall.

In the United States, most bonds make coupon payments annually.

The yield to maturity on a bond is really its internal rate of return.

The duration of a zero-coupon bond is the same as its maturity.

If the term structure of interest rates is flat, then the 9-year spot interest rate equals the 10-year spot interest rate.

The interest rate represented by "r₂" is the

Which bond is more sensitive to an interest rate change of 0.75 percent? Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000. Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000.

If the nominal interest rate per year is 10 percent and the inflation rate is 4 percent, what is the real rate of interest?

Which of the following bonds has the longest duration?

Quiz 3: Valuing Bonds

As CFO of your corporation, you would prefer (all else equal) to see the price of your corporation's bonds

The volatility of a bond is given by

One can best describe the term structure of interest rates as the relationship between

The duration of any bond is the same as its maturity.

Which of the following bonds has the greatest volatility?

The longer a bond's duration, the greater its volatility.

U.S. Treasury bonds have almost zero default risk but are subject to inflation risk.

The term structure of interest rates determines the relationship between yield to maturity and maturity.

Short-term and long-term interest rates always move in parallel.

(1 + rnominal)= (1 + rreal)(1 + inflation rate).

Mr. X invests $1,000 at a 10 percent nominal rate for one year. If the inflation rate is 4 percent, what is the real value of the investment at the end of one year?

The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall.

In the United States, most bonds make coupon payments annually.

The yield to maturity on a bond is really its internal rate of return.

The duration of a zero-coupon bond is the same as its maturity.

If the term structure of interest rates is flat, then the 9-year spot interest rate equals the 10-year spot interest rate.

The interest rate represented by "r2" is the

Which bond is more sensitive to an interest rate change of 0.75 percent? Bond A: YTM = 4.00%, maturity = 8 years, coupon = 6% or $60, par value = $1,000. Bond B: YTM = 3.50%, maturity = 5 years, coupon = 7% or $70, par value = $1,000.

If the nominal interest rate per year is 10 percent and the inflation rate is 4 percent, what is the real rate of interest?

Which of the following bonds has the longest duration?

(1 + r_nominal)= (1 + r_real)(1 + inflation rate).

The interest rate represented by "r₂" is the