Question 1

If an investor were to anticipate that interest rates were going to fall, that individual should

Accepted Answer

Buying bonds would be the best choice if an investor anticipates that interest rates are going to fall since the value of existing bonds would increase in value as investors rush to buy their fixed income instruments with higher interest rates.

Question 2

Preferred stock generally pays

Accepted Answer

Preferred stock generally pays a fixed dividend, which means the dividend amount is predetermined and does not vary with the company's earnings or performance.

Question 3

A bond with a 5 percent coupon ($50 a year) that matures after eight years is selling for $779. What is the yield to maturity?

Accepted Answer

The answer of A bond with a 5 percent coupon...

Question 4

The yield to call

Accepted Answer

Yield to call is the yield that a bondholder receives if the bond is called before its maturity date. If interest rates have fallen, the issuer of the bond may call it and issue new bonds with a lower interest rate. This would result in a higher yield to call for the bondholder, making it an important consideration.

Question 5

If interest rates in general were to fall, 1. the prices of existing bonds would rise
2) the prices of existing bonds would fall
3) yields to maturity would rise
4) yields to maturity would fall

Accepted Answer

When interest rates fall, the prices of existing bonds rise because investors are willing to pay more for the same fixed coupon payments. This also causes yields to maturity to fall because the fixed coupon payments become relatively more valuable compared to other investments. Therefore, choice 1 is correct and choice 4 is incorrect.

Question 6

If a preferred stock pays an annual $4.50 dividend, what should be the price of the stock if comparable yields are 10 percent? What would be the loss if yields rose to 12 percent?

Accepted Answer

The answer of If a preferred stock pays an annual...

Question 7

If a $100 par value preferred stock pays an annual
Dividend of $5 and comparable yields are 10 percent,
The price of this preferred stock will be

Accepted Answer

The answer of If a $100 par value preferred stock...

Question 8

If a bond is selling for a premium,

Accepted Answer

When a bond is selling for a premium, it means the bond's market price is higher than its face value. This typically occurs when the bond's coupon rate (the interest rate it pays) is higher than the current market interest rates. In this scenario, the current yield (annual interest payment divided by the bond's current price) will be lower than the yield to maturity (the total return anticipated on a bond if held until it matures), because the yield to maturity accounts for the bond's price converging to its face value over time. Therefore, the current yield exceeds the yield to maturity when a bond is selling at a premium.

Question 9

While bond prices fluctuate,

Accepted Answer

While bond prices fluctuate, the coupon, which is the fixed interest payment made by the bond issuer, remains constant.

Question 10

Buying a bond with a duration equal to when the funds are needed

Accepted Answer

Buying a bond with a duration equal to when the funds are needed reduces reinvestment rate risk because the investor will receive the bond's face value at maturity, eliminating the need to reinvest the principal and risk investing at a lower interest rate. This approach may not necessarily increase the bond's yield or reduce the impact of default, but it will minimize reinvestment rate risk. Buying a longer-duration bond would increase the impact of higher interest rates, while buying a shorter-duration bond would increase reinvestment rate risk.

Question 11

If a $1,000 bond costs $1,000 and pays $50 interest, 1. the current yield is 5 percent
2) the yield to maturity is 5 percent
3) the bond is selling for par

Accepted Answer

The current yield is calculated as the annual interest payment divided by the current market price of the bond, which is $50/$1000 = 5%. The yield to maturity is also 5% because the bond is bought at its face value and the interest rate reflects the return over the bond's life. The bond is selling for par because its market price is equal to its face value ($1000).

Question 12

A bond's call feature may be exercised if
1) the yield to maturity exceeds the current yield
2) the yield to maturity is less than the current
Yield
3) interest rates have risen
4) interest rates have fallen

Accepted Answer

A bond's call feature is typically exercised when interest rates have fallen, allowing the issuer to refinance at a lower rate. When interest rates fall, the yield to maturity is less than the current yield.

Question 13

An individual may purchase preferred stock
1) in anticipation of lower interest rates
2) in anticipation of higher interest rates
3) to receive a flow of tax?free income
4) to receive a flow of income

Accepted Answer

Preferred stock provides a flow of income in the form of dividends. The purchase of preferred stock is not typically influenced by changes in interest rates, as it is a fixed income investment. While preferred stock dividends are taxed, they generally receive preferential tax treatment. Therefore, an individual may purchase preferred stock to receive a flow of income and potentially receive tax-free income.

Question 14

A bond has the following terms:
  
a. What is the current price of the bond if comparable yields are 7 percent?
b. What are the current yield and yield to maturity given the price of the bond in the previous question?
c. If you expect the bond to be called at the end of the year, what would be the maximum price you should pay for the bond?
d. Is there a reason to expect that the bond will be called?

Accepted Answer

The answer of A bond has the following terms:
 ...

Question 15

A high-yield bond has the following terms:
  
a. What is the bond's price if comparable debt yields 12 percent?
b. What would be the price if comparable debt yields 12 percent and the bond matures after five years?
c. What are the current yields and yields to maturity in a and b?
d. What would be the bond's price in a and b if interest rates declined to 9 percent?
e. What are the current yield and yield to maturity in d?

Accepted Answer

The answer of A high-yield bond has the following terms:
...

Question 16

The current yield on a long?term bond is the

Accepted Answer

The current yield on a long-term bond is calculated by dividing the annual coupon interest payment by the current market price of the bond. This gives a percentage figure that represents the return an investor would earn if they bought the bond at its current price and held it until maturity, receiving all interest payments as well as the face value of the bond.

Question 17

Preferred stock and long?term bonds are similar because

Accepted Answer

Preferred stock and long-term bonds both typically offer fixed payments; preferred stocks pay fixed dividends, while bonds pay fixed interest.

Question 18

If interest rates rise, the price of preferred stock

Accepted Answer

Preferred stock prices are sensitive to changes in interest rates. If interest rates rise, the fixed dividend payments provided by preferred stock become less attractive, making the preferred stock less valuable. As a result, the price of preferred stock will typically fall when interest rates rise.

Question 19

Compute the durations of the following bonds and rank them on the basis of their price volatility. Assume that the current rate of interest is 8 percent.
  
Confirm your ranking by calculating the percentage change in the price of each bond when interest rates rise from 8 to 12 percent.

Accepted Answer

The answer of Compute the durations of the following bonds...

Question 20

The concept of duration considers

Accepted Answer

Duration considers the timing of both interest and principal repayment, as well as the current rate of interest. It is a measure of the sensitivity of the bond's price to changes in interest rates.

Quiz 14: The Valuation of Fixed Income Securities

If an investor were to anticipate that interest rates were going to fall, that individual should

Preferred stock generally pays

A bond with a 5 percent coupon ($50 a year) that matures after eight years is selling for $779. What is the yield to maturity?

The yield to call

If interest rates in general were to fall, 1. the prices of existing bonds would rise 2) the prices of existing bonds would fall 3) yields to maturity would rise 4) yields to maturity would fall

If a preferred stock pays an annual $4.50 dividend, what should be the price of the stock if comparable yields are 10 percent? What would be the loss if yields rose to 12 percent?

If a $100 par value preferred stock pays an annual Dividend of $5 and comparable yields are 10 percent, The price of this preferred stock will be

If a bond is selling for a premium,

While bond prices fluctuate,

Buying a bond with a duration equal to when the funds are needed

If a $1,000 bond costs $1,000 and pays $50 interest, 1. the current yield is 5 percent 2) the yield to maturity is 5 percent 3) the bond is selling for par

A bond's call feature may be exercised if 1) the yield to maturity exceeds the current yield 2) the yield to maturity is less than the current Yield 3) interest rates have risen 4) interest rates have fallen

An individual may purchase preferred stock 1) in anticipation of lower interest rates 2) in anticipation of higher interest rates 3) to receive a flow of tax?free income 4) to receive a flow of income

The current yield on a long?term bond is the

Preferred stock and long?term bonds are similar because

If interest rates rise, the price of preferred stock

Compute the durations of the following bonds and rank them on the basis of their price volatility. Assume that the current rate of interest is 8 percent. Confirm your ranking by calculating the percentage change in the price of each bond when interest rates rise from 8 to 12 percent.

The concept of duration considers