Question 1

Which of the following statements is CORRECT?

Accepted Answer

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

Question 2

Bond 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 is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Accepted Answer

The answer of Bond X has an 8% annual coupon,...

Question 3

Which of the following bonds has the greatest price risk?

Accepted Answer

Zero coupon bonds have greater price risk than coupon bonds with the same maturity and face value because they have no cash flows until maturity, making them more sensitive to interest rate changes. The other choices are coupon bonds with either annual or semiannual interest payments, which provide some cash flow in the form of interest payments, reducing their price sensitivity.

Question 4

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. None of the bonds can be called. Which of the following statements is CORRECT?

Accepted Answer

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

Question 5

Which of the following statements is CORRECT?

Accepted Answer

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

Question 6

Which of the following statements is CORRECT?

Accepted Answer

When a coupon bond is selling at par, it means that its price is equal to its face value. In this case, the current yield (annual interest payment divided by current price) would be equal to the coupon rate (annual interest payment divided by face value) and also equal to the yield to maturity (the total return an investor would earn if they held the bond until maturity, taking into account interest payments and any capital gains or losses). Therefore, statement E is correct. Statements A, B, C, and D are all incorrect.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

This statement is true based on the concept of bond pricing. As the maturity date of a bond approaches, the bond’s market price will gradually approach its par value (the initial price of the bond) because the bondholder will receive the par value at maturity. As long as the required return (yield to maturity) on the bond remains constant, the price of the bond will adjust accordingly to reach its par value at maturity.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

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

Question 9

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Accepted Answer

The answer of A 10-year bond with a 9% annual...

Question 10

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 are no capital gains or losses expected at maturity.

Question 11

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

The longest maturity bond, a 10-year zero coupon bond, will have the largest percentage increase in value when its yield to maturity declines by 1%. This is because zero coupon bonds have no coupon payments to discount, and therefore their prices are more sensitive to changes in interest rates (yield to maturity). Additionally, longer maturity bonds will have a higher duration and be more sensitive to changes in interest rates.

Question 12

A 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 A Treasury bond has an 8% annual...

Question 13

Which of the following statements is CORRECT?

Accepted Answer

If a coupon bond is selling at par, it means that the coupon rate equals the required rate of return or yield to maturity (YTM) of the bond. Therefore, the current yield (annual coupon payment divided by market price) also equals YTM.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

Senior debt is considered less risky than subordinated debt because it has a higher priority in the event of bankruptcy. As a result, investors are willing to accept a lower yield on senior debt in exchange for the lower risk.

Question 15

An investor is considering buying one of two 10-year, $1,000 face value, noncallable 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%, and the YTM is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

Accepted Answer

The price of a bond with a lower coupon rate will increase more than the price of a bond with a higher coupon rate when interest rates decrease. Conversely, the price of a bond with a lower coupon rate will decrease more than the price of a bond with a higher coupon rate when interest rates increase. Since both Bond A and Bond B have a YTM of 8%, their current prices will be equal. However, Bond A's price will increase more than Bond B's price if interest rates remain constant over the next year because Bond A has a lower coupon rate. Therefore, statement B is correct. Statement A is incorrect because Bond A has a lower price than Bond B today. Statement C is incorrect because both bonds have a YTM of 8%, and the coupon rate is not relevant to the current yield. Statement D is incorrect because Bond B has a higher price than Bond A today. Statement E is incorrect because Bond B has a higher coupon rate and, therefore, a lower price than Bond A today.

Question 16

Which of the following statements is CORRECT?

Accepted Answer

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

Question 17

Which of the following statements is CORRECT?

Accepted Answer

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

Question 18

Which of the following statements is CORRECT?

Accepted Answer

This is a basic bond pricing concept. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. This is because the bond is selling at a discount to compensate for the lower coupon rate compared to the yield to maturity.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

The total (rate of) return on a bond during a given year is 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, divided by the bond's price at the beginning of the year.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

Reinvestment risk refers to the risk that future cash flows will have to be reinvested at lower rates. Since long-term bonds have longer maturities, investors are exposed to this risk for a longer period of time. Therefore, reinvestment risk is lower on long-term bonds than on short-term bonds.

Quiz 9: Bonds

Which of the following statements is CORRECT?

Bond 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 is noncallable, has a maturity of 10 years, and has a yield to maturity of 10%. Which of the following statements is CORRECT?

Which of the following bonds has the greatest price risk?

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. None of the bonds can be called. 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?

Which of the following statements is CORRECT?

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?

A 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?

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?