Question 1

What is the difference between the Yield-to-Maturity and the Realized Compound Yield?

Accepted Answer

The realized compound yield is the actual return calculated at the end of the investment, while the yield to maturity is the expected return calculated at the beginning of the investment.

Question 2

Which of the following bonds will be most sensitive to changes in market interest rates?

Accepted Answer

Bonds with lower coupon rates and longer maturities are more sensitive to interest rate changes. Option B has the lowest coupon rate and the longest maturity among the choices.

Question 3

Which of the following is NOT a true statement?

Accepted Answer

Duration does not measure the time until the principal is repaid; it measures the weighted average time until cash flows are received, considering both interest and principal payments.

Question 4

What is meant by "Yield to Maturity"?

Accepted Answer

Yield to Maturity (YTM) is the periodic interest rate that equates the current price of a bond with the present value of its expected future cash flows, including all coupon payments and the repayment of face value at maturity.

Question 5

What is meant by the real risk-free rate of interest?

Accepted Answer

The real risk-free rate of interest is the rate that compensates investors for deferring consumption, representing the opportunity cost of capital without any inflation or risk premium.

Question 6

An investor has three sources of dollar returns from a bond investment.Which of the following is NOT included among the three sources?

Accepted Answer

The three sources of dollar returns from a bond investment are the semi-annual coupon payments, the interest earned on reinvesting those coupon payments, and the principal paid at maturity. The interest earned on reinvesting the last coupon and the principal is not typically considered a separate source of return.

Question 7

Bond traders use the term "basis point" to mean one percentage point in interest rate.

Accepted Answer

The answer of Bond traders use the term "basis point"...

Question 8

Both stocks and bonds are valued by summing the discounted future flows of interest (or dividends),and the repayment of principal (or sale of the stock).

Accepted Answer

Both stocks and bonds are valued by summing the discounted future flows of interest (or dividends), and the repayment of principal (or sale of the stock). This is a widely accepted method of valuation in finance.

Question 9

For most long term bonds,when coupons are reinvested,what is the most important component of the bond's total return?

Accepted Answer

The answer of For most long term bonds,when coupons are...

Question 10

Which of the following typically contributes the greatest portion to the Total Dollar Return?

Accepted Answer

The answer of Which of the following typically contributes the...

Question 11

Which of the following statements is most correct?

Accepted Answer

The real risk-free rate of interest is the nominal rate minus the expected inflation rate. It is often approximated by the rate on short-term federal securities plus expected inflation.

Question 12

Assume an investor buys a newly issued 8 percent,semi-annual 10 year bond at par.He sells it two years later,when market interest rates have decreased to 6 percent.How much is the investor's capital gain or loss?

Accepted Answer

The bond's price increases when market interest rates decrease. The investor bought the bond at par ($1,000) and sells it when rates are lower, increasing the bond's price. The bond's price can be calculated using the present value of future cash flows, resulting in a gain of $125.44.

Question 13

Which of the following is the best definition of "realized compound yield"?

Accepted Answer

Realized compound yield refers to the total return on a bond, including both the coupon and principal payments, as well as the reinvestment of these cash flows at a certain rate.

Question 14

Which of the following is NOT one of the factors used in calculating duration?

Accepted Answer

Duration is calculated using the bond's final maturity, coupon payment, and yield to maturity, but not the current price.

Question 15

Examine Example 17-13.The basic data is repeated here,in financial calculator format: FV = 1000,N=30,PMT=50
 $$\begin{array} { | l | l | l | } 
\hline \mathrm { I } / \mathrm { Y } & \text { Price=PV } & \% \text { change } \
\hline \text { At } 10 \% & \$ 1,000.00 & \
\hline \text { At } 8 \% & \$ 1,172.93 & + 17.29 \% \
\hline \text { At } 12 \% & \$ 862.35 & - 13.77 \% \
\hline
\end{array}$$ Why are the % changes different?

Accepted Answer

The relationship between interest rates and price is not linear, which causes different percentage changes when interest rates change.

Question 16

How is the value of a bond determined?

Accepted Answer

The value of a bond is determined by calculating the present value of its future cash flows, which include periodic coupon payments and the principal repayment at maturity, discounted at an appropriate rate.

Question 17

What happens to the price of bonds,if interest rates go up?

Accepted Answer

When interest rates rise, the price of existing bonds typically falls. This is because new bonds are issued with higher yields, making existing bonds with lower yields less attractive, thus decreasing their market price.

Question 18

Now let's look from the view of the investor who buys an 8 percent semiannual bond with 8 years remaining to maturity,when market rates are 6%.If this investor pays $1,125.44 for the bond,what is his current yield?

Accepted Answer

The current yield is calculated as the annual coupon payment divided by the price of the bond. The bond pays 8% of its face value annually, which is $80 (assuming a $1,000 face value). The current yield is $80 / $1,125.44 = 0.0711 or 7.11%.

Question 19

Which of the following is a situation in which an investor will NOT receive the promised yield to maturity?

Accepted Answer

If the issuer calls the bond prior to its original maturity, the investor will not receive the promised yield to maturity because the bond is redeemed early, potentially at a different yield.

Question 20

Why is duration important for investing in bonds?

Accepted Answer

Duration is important because it measures the sensitivity of a bond's price to changes in interest rates, helping investors understand the potential price volatility.

Quiz 17: Bond Yields