Question 1

Which of the following statements is CORRECT?

Accepted Answer

As inflation is expected to increase in the future, the expected future interest rates would also increase. This would make long-term bonds less attractive as they would be locked into a lower interest rate for a longer period of time. Therefore, investors would demand a higher yield on long-term bonds, creating an upward sloping yield curve. The MRP being greater than zero would further increase the yield on long-term bonds. Option B is incorrect as the MRP being greater than zero does not necessarily mean that the yield curve must have an upward slope, it only suggests that long-term bonds would have a higher yield. Option C is incorrect as yields on long-term Treasury bonds can be lower than yields on short-term T-bonds if the market perceives short-term bonds to be riskier in the current economic environment. Option D is incorrect as the yield curve can be upward sloping or downward sloping even when the MRP is zero. Option E is incorrect as the yield curve can be downward sloping in certain economic conditions such as a recession or when the market expects future interest rates to decline.

Question 2

Which of the following statements is NOT CORRECT?

Accepted Answer

The statement that bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons is NOT CORRECT. Bonds with larger coupons have less interest rate (price) risk than bonds with smaller coupons because a larger coupon helps to offset the potential for a decrease in the bond's price due to rising interest rates.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

When interest rates drop, bond prices increase. Since the YTM has dropped to 5%, the bond's coupon rate of 10% is above the current market rate, making it an attractive investment, resulting in a premium over its par value.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 5

Which of the following statements is CORRECT?

Accepted Answer

If a coupon bond is selling at par, its coupon rate equals its yield to maturity, which also equals its current yield.

Question 6

investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?

Accepted Answer

One year from now, Bond A's price will be higher than it is today because as time passes, the bond's price will move closer to its face value, assuming the yield to maturity remains constant.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 8

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

The differences in rates are primarily caused by default risk differences, as reflected by the higher yields on the lower-rated bonds.

Question 9

12-year bond has an annual coupon rate of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Accepted Answer

If the yield to maturity is lower than the coupon rate, the bond is selling at a premium. As the bond approaches maturity, its price will decrease towards its par value if market interest rates remain unchanged.

Question 10

Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

The answer of Treasury bond has an 8% annual coupon...

Question 11

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
...

Question 12

Which of the following statements is CORRECT?

Accepted Answer

The total return on a bond during a given year is indeed the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.

The other statements are not entirely correct:
A) 10-year, zero coupon bonds have lower reinvestment rate risk than 10-year, 10% coupon bonds. 
B) A 10-year, 5% coupon bond has less reinvestment rate risk than a 10-year, 10% coupon bond (assuming all else equal). 
D) The price of a 5-year, 10% bond is less sensitive to changes in interest rates than the price of a 20-year, 10% bond.
E) A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were greater than 11% and at a premium if interest rates were below 9%.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

When a coupon bond sells at par value, the yield to maturity consists entirely of the current interest yield because there is no expected capital gain or loss upon maturity. The current interest yield is the yield an investor will receive on the bond by holding it to maturity.

Question 14

are considering two bonds.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Accepted Answer

The price of a bond moves inversely with changes in interest rates. Since the yield to maturity is expected to remain constant at 7%, the price of each bond will change depending on its coupon rate. Bond A has a higher coupon rate and will therefore be in greater demand. As a result, its price will tend to rise over time. Conversely, Bond B has a lower coupon rate and will be in less demand. That means its price will tend to fall over time. Therefore, the price of Bond A will decrease over time, but the price of Bond B will increase over time.

Question 15

Which of the following statements is CORRECT?

Accepted Answer

When a coupon bond is selling at par, it means that the bond's current market price is equal to its face value. In this case, the bond's coupon rate will be equal to its yield to maturity, which in turn will be equal to its current yield. Therefore, option E is the correct statement.

Question 16

X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Each of the bonds has a maturity of 10 years and a yield to maturity of 10%.Which of the following statements is CORRECT?

Accepted Answer

If the market interest rate remains at 10%, Bond Z's price will decrease over time as it approaches its face value at maturity, since it is currently priced at a premium due to its higher coupon rate.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

As the bond approaches maturity, the remaining time to receive the fixed interest payments decreases, which makes the bond's cash flows more certain. This certainty leads to a decrease in required return, which leads to an increase in bond price. As a result, the market value of a bond will approach its par value as its maturity date approaches, provided the bond's required return remains constant.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

Reinvestment rate risk is the risk that future interest rates will not be favorable for reinvestment of cash flows from an investment, and it is generally higher for long-term bonds than for short-term bonds. Thus, reinvestment rate risk is lower on short-term than on long-term bonds. The other statements are incorrect. The yield curve would have a downward slope if interest rates were expected to decrease in the future and the maturity risk premium were zero. Liquidity premiums are generally higher on corporate than Treasury bonds, and default risk premiums are generally higher on corporate than Treasury bonds. Finally, the maturity risk premiums on Treasury securities are mainly due to the fact that investors demand a higher return to compensate for the greater price risk inherent in longer-term bonds.

Question 19

10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Accepted Answer

When the yield to maturity of both bonds increases, that means the market interest rate has gone up. As a result, the present value of future cash flows decreases, causing bond prices to decline. The bond with a higher coupon rate (10%) will have less of a price decline than the bond with a lower coupon rate (8%). Therefore, the 10-year bond would have the greater percentage decline in price.

Question 20

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?

Accepted Answer

The answer of Bonds A, B, and C all have...

Quiz 5: Bonds

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

12-year bond has an annual coupon rate of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

are considering two bonds.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon.Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Each of the bonds has a maturity of 10 years and a yield to maturity of 10%.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon.Both bonds have the same yield to maturity.If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?

Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%.Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value.Which of the following statements is CORRECT?