Question 1

Which of the following statements is CORRECT?

Accepted Answer

Current yield is defined as annual interest payment divided by the bond's current market price. If the bond is selling at par, its current market price equals its face value, and hence its annual interest payment (the coupon payment) divided by its face value equals the bond's coupon rate. Thus, in this case, the bond's current yield equals its coupon rate. If the bond is selling at a discount, its current yield exceeds its coupon rate. And, if the bond is selling at a premium, its current yield is less than its coupon rate. The yield to maturity is the rate implied by the current bond price, and it is the bond's true rate of return. Thus, if the bond is selling at par, its yield to maturity equals its coupon rate (and its current yield).

Question 2

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 3

Which of the following bonds has the greatest price risk?

Accepted Answer

Zero coupon bonds have the greatest price risk because they have no cash flows until maturity, and their prices are sensitive to changes in interest rates. This means that changes in interest rates will have a larger impact on the price of a zero coupon bond than on a bond with cash flows distributed throughout its life.

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

The answer of Which of the following statements is CORRECT?
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Question 6

Which of the following statements is CORRECT?

Accepted Answer

When a coupon bond is sold at its par value, the yield to maturity will consist entirely of the current interest yield since there will be no capital gains or losses upon maturity. A premium bond will have a lower current yield, but the total yield will still include both current interest and expected capital gains/losses. A rising inflation rate will increase the actual yield to maturity, but it will not necessarily be greater than the quoted yield based on market prices. Option B is false since the market value of a bond can potentially deviate significantly from its par value, especially if the issuer faces financial difficulties. Option E is false since investors may purchase a bond for reasons other than expected capital gains, such as to diversify their portfolio or for its creditworthiness.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 8

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

Bond prices and interest rates have an inverse relationship. When interest rates increase, bond prices decrease, and vice versa. Since all three bonds have a yield to maturity of 10%, their prices are equal at present. However, Bond Z has the highest coupon rate, which means it has the most significant exposure to reinvestment risk. If the market interest rate remains constant at 10%, Bond Z's coupon payments will have to be reinvested at 10%, which is lower than its 12% coupon rate, resulting in a lower price for Bond Z in the future. Therefore, statement A is correct. Statements B, C, D, and E are incorrect.

Question 9

Which of the following statements is CORRECT?

Accepted Answer

When a coupon bond is selling at par, it means the bond's current price is equal to its face value. In this scenario, the coupon payment equals the yield to maturity, which is also the current yield. Therefore, the statement "If a coupon bond is selling at par, its current yield equals its yield to maturity" is correct.

Question 10

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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Question 11

Which of the following statements is CORRECT?

Accepted Answer

The answer of Which of the following statements is CORRECT?
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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

The statement in option C is correct as it defines the total return formula for a bond. Option A is incorrect as zero coupon bonds have no reinvestment risk since they do not pay any coupons. Option B is incorrect as a higher coupon bond has more reinvestment risk since it produces more cash flows to be reinvested. Option D is incorrect as the price of a longer-term bond is more sensitive to interest rate changes than that of a shorter-term bond. Option E is incorrect as the discount/premium on a bond depends on the current market interest rate compared to its coupon rate, not the rate of interest at maturity.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

Senior debt generally has a lower yield to maturity because it has higher priority in case of default, whereas subordinated debt has lower priority and is therefore riskier. The other statements are incorrect.

Question 15

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 16

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

Accepted Answer

A bond's price moves inversely to the yield. Therefore, as the yield to maturity declines, the bond's price will increase. The price increase will be most significant for a bond with a longer maturity and a lower coupon rate. Among the given choices, the 10-year zero coupon bond has the longest maturity and a coupon rate of 0%, making it extremely sensitive to changes in yield. Hence, it would have the largest percentage increase in value when the yield to maturity declines.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

Reinvestment risk refers to the risk that an investor will not be able to reinvest their cash flows at the same rate as their original investment. Since long-term bonds have a longer timeframe for cash flows, there is greater uncertainty about future interest rates and therefore greater reinvestment risk. Hence, reinvestment risk is generally lower on short-term bonds.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

As the bond approaches its maturity date, its remaining cash flows become known and more certain, reducing the bond's risk. As a result, bond prices will tend to approach their par value, which is the value at maturity. This relationship only holds if the required return or yield to maturity stays constant, as changes in required return can impact the market price of the bond.

Question 19

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 20

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 answer of An investor is considering buying one of...

Quiz 7: Bonds

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following bonds has the greatest price risk?

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?

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 statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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?

A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. 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?

Which of the following statements is CORRECT?

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