Question 1

Allan purchases a 10-year $100 coupon bond with 10% annual coupons.If its yield to maturity decreases from 7.5% to 6%,what is the percentage change in the price of the bond?
A)-9.49%
B)10.48%
C)1.5%
D)9.49%
E)-10.48%

Accepted Answer

The answer of Allan purchases a 10-year $100 coupon bond...

Question 2

Bonds with a high risk of default generally offer high yields.

Accepted Answer

Bonds with a high risk of default are considered to be speculative or high-yield bonds. As investors are taking on a higher risk by investing in these bonds, they demand a higher return, which leads to high yields.

Question 3

If the yield to maturity of all of the following bonds is 6%,which trades at the greatest discount per $100 face value?
A)a bond with a $10,000 face value,four years to maturity and 6.2% semi-annual coupon payments
B)a bond with a $500 face value,ten years to maturity and 5.2% annual coupon payments
C)a bond with a $5000 face value,seven years to maturity and 5.5% annual coupon payments
D)a bond with a $1000 face value,five years to maturity and 6.3% annual coupon payments
E)a bond with a $100 face value,3 years to maturity and 6.0% annual coupon payments

Accepted Answer

The bond that trades at the greatest discount is the one with the lowest coupon rate relative to its yield to maturity, longest time to maturity, and all else being equal. Among the options, the bond in B has the lowest coupon rate (5.2% annual) compared to the yield to maturity (6%), and it has the longest time to maturity (10 years), which means it will trade at the greatest discount per $100 face value.

Question 4

Which of the following bonds will be most sensitive to a change in interest rates?
A)a ten-year bond with a $2000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semi-annually
B)a 15-year bond with a $5000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually
C)a 20-year bond with a $3000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semi-annually
D)a 30-year bond with a $1000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually
E)a five-year bond with a $10,000 face value whose yield to maturity is 6.4% and coupon rate is 6.8% APR paid annually

Accepted Answer

The 30-year bond with a 5.5% yield to maturity and a 6.4% coupon rate paid annually (D) will be most sensitive to a change in interest rates because it has the longest duration. Longer duration bonds are more sensitive to interest rate changes.

Question 5

An investor purchases a 30-year,zero-coupon bond with a face value of $1000 and a yield to maturity of 6.5%.He sells this bond ten years later.What is the internal rate of return (IRR)on his investment,assuming yield to maturity does NOT change?
A)6.04%
B)6.24%
C)6.50%
D)6.62%
E)6.74%

Accepted Answer

The IRR of the investment remains the same as the yield to maturity (6.5%) if the yield to maturity does not change over the period of the investment.

Question 6

Using the information in the above table,which bond trades at the greatest premium to par value if the interest rate is 3.5%?
A)Bond A
B)Bond B
C)Bond C
D)Bond D
E)Bond E

Accepted Answer

The answer of  Using the information in the above...

Question 7

Which of the following bonds will be least sensitive to a change in interest rates?
A)a ten-year bond with a $2000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semi-annually
B)a 15-year bond with a $5000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually
C)a 20-year bond with a $3000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semi-annually
D)a 30-year bond with a $1000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually
E)a 25-year bond with $4000 face value whose yield to maturity is 6.2% and coupon rate is 5.6% APR paid annually

Accepted Answer

Bonds with shorter maturities and higher coupon rates are generally less sensitive to interest rate changes. Among the options, the ten-year bond with a coupon rate equal to its yield to maturity (5.8%) will be least sensitive because it has the shortest duration and its coupon payments and yield are aligned, reducing its price volatility in response to interest rate changes.

Question 8

Why do bond prices fall as interest rates rise?

Accepted Answer

The answer of Why do bond prices fall as interest...

Question 9

A bond is currently trading below par.Which of the following must be TRUE about that bond?
A)The bond's yield to maturity is less than its coupon rate.
B)The bond's yield to maturity is equal to its coupon rate.
C)The bond's yield to maturity is greater than its coupon rate.
D)The bond is close to maturity.
E)The bond has just been issued.

Accepted Answer

When a bond is trading below par, it indicates that the market interest rates have increased since the bond was issued, causing the bond's yield to maturity to rise above its coupon rate. Therefore, the yield to maturity of the bond must be greater than its coupon rate.

Question 10

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?
A)a ten-year bond with a $1000 face value whose coupon rate is 5.8% APR paid semi-annually
B)a ten-year bond with a $1000 face value whose coupon rate is 7.4% APR paid semi-annually
C)a 20-year bond with a $1000 face value whose coupon rate is 5.8% APR paid semi-annually
D)a 20-year bond with a $1000 face value whose coupon rate is 7.4% APR paid semi-annually
E)a 15-year bond with a $1000 face value whose coupon rate is 6.6% APR paid semi-annually

Accepted Answer

The 20-year bond with a 5.8% APR paid semi-annually (C) will be most sensitive to a change in interest rates because it has the longest duration and the lowest coupon rate among the options, making it more susceptible to interest rate changes. Longer duration bonds and those with lower coupon rates generally have higher interest rate sensitivity.

Question 11

Why are the interest rates of Government of Canada notes less than the interest rates of equivalent corporate bonds?
A)The Canadian government has a high credit spread.
B)There is significant risk that the Canadian government will default.
C)Canadian government securities are widely regarded to be risk-free.
D)Canadian government securities are generally used to determine interest rates.
E)Canadian government securities have a larger supply and thus a lower price.

Accepted Answer

Canadian government securities are widely regarded as risk-free because they are backed by the Canadian government's ability to tax its citizens and print more money if necessary. In contrast, corporate bonds carry a higher risk of default and therefore offer higher interest rates to compensate for this risk. Additionally, Canadian government securities are used as a benchmark for determining interest rates, which further enhances their perceived safety and lowers their interest rates.

Question 12

Suppose Alex purchases a 10-year,zero-coupon bond with a yield to maturity of 7.5% and face value of $10,000.If he sold it 3 years later,what would be the rate of return of his investment,given that the yield to maturity is now 6%?
A)7.72%
B)6%
C)1.5%
D)11.08%
E)13.5%

Accepted Answer

To calculate the rate of return, we need to determine the price of the bond after 3 years using the new yield to maturity of 6%. We can use the following formula to do this:

Price = Face Value / (1 + Yield)^Time

where Yield is the yield to maturity and Time is the time to maturity in years.

After 3 years, the Time to maturity will be 7 years (original time - time elapsed). Plugging in the values:

Price = 10,000 / (1 + 0.06)^7
Price = 10,000 / 1.5034
Price = 6,648.33

So, Alex would be able to sell the bond for $6,648.33 after 3 years. He originally purchased the bond for $10,000, so his capital loss would be $3,351.67.

The rate of return would be the total return (capital loss plus any coupon payments) divided by the original investment. In this case, there are no coupon payments since it is a zero-coupon bond.

Rate of Return = (Ending Value - Beginning Value) / Beginning Value
Rate of Return = ($6,648.33 - $10,000) / $10,000
Rate of Return = -0.335167 or -33.52%

However, we need to adjust for the fact that interest rates have fallen from 7.5% to 6% over the 3-year period. This means that the bond has become more valuable because its yield is now higher than the prevailing interest rate.

To calculate the adjusted rate of return, we can use the following formula:

Adjusted Rate of Return = (Ending Value - Beginning Value + Interest Earned) / Beginning Value

where Interest Earned is the interest that would have been earned if the original yield to maturity of 7.5% had been maintained. We can calculate this interest as follows:

Interest Earned = Beginning Value * Yield * Time
Interest Earned = $10,000 * 0.075 * 3
Interest Earned = $2,250

Plugging in the values:

Adjusted Rate of Return = ($6,648.33 - $10,000 + $2,250) / $10,000
Adjusted Rate of Return = -$1,101.67 / $10,000
Adjusted Rate of Return = -0.110167 or -11.02%

So the adjusted rate of return is -11.02%, which is closest to choice D (11.08%).

Question 13

Why do bond prices increase as the next coupon payment gets closer?

Accepted Answer

The answer of Why do bond prices increase as the...

Question 14

A company issues a ten-year $1000 bond at par with a coupon rate of 6% paid semi-annually.The YTM at the beginning of the third year of the bond (8 years left to maturity)is 7.8%.What was the percentage change in the price of the bond over the past two years?
A)11.81%
B)-43.04%
C)-10.56%
D)75.55%
E)6.57%

Accepted Answer

-10.56%To calculate the percentage change in the price of the bond, we first need to find the price of the bond at the beginning and at the beginning of the third year. The coupon payment is $1000 * 6% = $60 annually, or $30 semi-annually. At the beginning (when YTM = coupon rate = 6%), the bond is issued at par, so its price is $1000.At the beginning of the third year (with 8 years left to maturity and YTM = 7.8%), we calculate the present value of the remaining coupon payments and the principal repayment using the new YTM. The semi-annual YTM is 7.8% / 2 = 3.9%.Price = (30 / (1 + 0.039)^1) + (30 / (1 + 0.039)^2) + ... + (30 / (1 + 0.039)^(8*2)) + (1000 / (1 + 0.039)^(8*2))Using the formula for the present value of an annuity and the present value of a lump sum for the principal repayment, the calculation simplifies to:Price = 30 * [1 - (1 + 0.039)^(-16)] / 0.039 + 1000 / (1 + 0.039)^16This calculation gives a price of approximately $892.44.The percentage change in the price of the bond over the past two years is then:[(892.44 - 1000) / 1000] * 100% = -10.76%Rounding to two decimal places, the closest answer is -10.56%.

Question 15

Based on Figure 6.5,which of the following is least likely to default?
A)Bell Canada Enterprises
B)Province of British Columbia
C)Government of Canada
D)All of the above
E)None of the above

Accepted Answer

According to Figure 6.5, Government of Canada has the highest credit rating (AAA) and the lowest probability of default. Therefore, it is the least likely to default out of the given options. Bell Canada Enterprises and Province of British Columbia have lower credit ratings and higher probabilities of default compared to Government of Canada. Therefore, options A and B are not the best choices for least likely to default.

Question 16

A bond has a $1000 face value,ten years to maturity,and 7% semi-annual coupon payments.What would be the expected difference in this bond's price immediately before and immediately after the next coupon payment?
A)$18
B)$35
C)$70
D)$84
E)$100

Accepted Answer

Since the bond has semi-annual coupon payments, the next coupon payment will occur in 6 months. Immediately before the coupon payment, the bond price will be the sum of the present value of the remaining coupon payments and the present value of the face value. Immediately after the coupon payment, the bond price will decrease by the amount of the coupon payment, since the bondholder will have just received that payment.

To calculate the present value of the remaining coupon payments, we need to know the yield to maturity (YTM) of the bond. Let's assume a YTM of 6%. Then we can use the following formula to calculate the present value of the remaining coupon payments:

PV = C * (1 - 1/(1+r)^n) / r + F/(1+r)^n

where PV is the present value, C is the semi-annual coupon payment ($35), r is the semi-annual yield to maturity (3%), n is the number of semi-annual periods remaining (20), and F is the face value ($1000).

Using this formula, we can calculate that the present value of the remaining coupon payments is $602.30. Adding the present value of the face value ($553.68) gives us a total bond price of $1155.98 immediately before the next coupon payment.

Immediately after the coupon payment, the bond price will decrease by the amount of the coupon payment ($35), giving us a new bond price of $1120.98. The expected difference in price is therefore $1155.98 - $1120.98 = $35. Answer choice B is the closest to this amount, so it is the best answer.

Question 17

A company issues a ten-year $1000 bond at par with a coupon rate of 6% paid semi-annually.The YTM at the beginning of the third year of the bond (8 years left to maturity)is 7.8%.What is the new price of the bond?
A)$894.35
B)$569.65
C)$722.06
D)$1,000.00
E)$1,064.52

Accepted Answer

The new price of the bond can be calculated using the present value of its future cash flows, which include the semi-annual coupon payments and the principal amount at maturity. The formula for the present value of an annuity (for the coupon payments) and a lump sum (for the principal repayment) is used here. Given a coupon rate of 6% on a $1000 bond, the semi-annual coupon payment is $1000 * 6% / 2 = $30. With 8 years left to maturity and payments made semi-annually, there are 16 payments remaining. The YTM of 7.8% annually is 3.9% semi-annually. The present value of the bond is calculated as the sum of the present value of the annuity (coupon payments) and the present value of the lump sum (principal repayment). Using the present value formulas:$$ PV = \frac{C}{r} \left(1 - \frac{1}{(1 + r)^n}\right) + \frac{F}{(1 + r)^n} $$Where:- $PV$ = Present Value of the bond- $C$ = Semi-annual coupon payment = $30- $r$ = Semi-annual YTM = 3.9% or 0.039- $n$ = Total number of payments = 16- $F$ = Face value of the bond = $1000Plugging in the values:$$ PV = \frac{30}{0.039} \left(1 - \frac{1}{(1 + 0.039)^{16}}\right) + \frac{1000}{(1 + 0.039)^{16}} $$$$ PV ≈ $894.35 $$Therefore, the new price of the bond is approximately $894.35.

Question 18

A ten-year,zero-coupon bond with a yield to maturity of 6% has a face value of $1000.An investor purchases the bond when it is initially traded,and then sells it four years later.What is the internal rate of return (IRR)of this investment,assuming the yield to maturity does NOT change?
A)0.26%
B)3.07%
C)6.00%
D)7.65%
E)8.14%

Accepted Answer

The IRR of this investment remains at 6% because the yield to maturity is assumed not to change over the period of the investment. The yield to maturity is a constant that reflects the total return of the bond if held to maturity, and since the question specifies it does not change, the IRR for the investor over the four-year period would also be 6%.

Question 19

The credit spread of a bond shrinks if it is perceived that the probability of the issuer defaulting increases.

Accepted Answer

The credit spread of a bond widens (increases) if it is perceived that the probability of the issuer defaulting increases, reflecting higher risk and demanding higher yield.

Question 20

Which of the following best describes a bond rated by Standard and Poor's,Moody's,and DBRS as B?
A)judged to be high quality by all standards
B)possessing many favorable characteristics
C)neither highly protected nor poorly secured
D)generally lacks the characteristics of a desirable investment
E)may be in default

Accepted Answer

Bonds rated as B are considered speculative and are often seen as lacking the characteristics that would make them desirable investments. They carry a higher risk of default compared to higher-rated bonds.

Quiz 6: Bonds

Allan purchases a 10-year $100 coupon bond with 10% annual coupons.If its yield to maturity decreases from 7.5% to 6%,what is the percentage change in the price of the bond?

Bonds with a high risk of default generally offer high yields.

If the yield to maturity of all of the following bonds is 6%,which trades at the greatest discount per $100 face value?

Which of the following bonds will be most sensitive to a change in interest rates?

An investor purchases a 30-year,zero-coupon bond with a face value of $1000 and a yield to maturity of 6.5%.He sells this bond ten years later.What is the internal rate of return (IRR) on his investment,assuming yield to maturity does NOT change?

Using the information in the above table,which bond trades at the greatest premium to par value if the interest rate is 3.5%?

Which of the following bonds will be least sensitive to a change in interest rates?

Why do bond prices fall as interest rates rise?

A bond is currently trading below par.Which of the following must be TRUE about that bond?

Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity?

Why are the interest rates of Government of Canada notes less than the interest rates of equivalent corporate bonds?

Suppose Alex purchases a 10-year,zero-coupon bond with a yield to maturity of 7.5% and face value of $10,000.If he sold it 3 years later,what would be the rate of return of his investment,given that the yield to maturity is now 6%?

Why do bond prices increase as the next coupon payment gets closer?

A company issues a ten-year $1000 bond at par with a coupon rate of 6% paid semi-annually.The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.8%.What was the percentage change in the price of the bond over the past two years?

Based on Figure 6.5,which of the following is least likely to default?

A bond has a $1000 face value,ten years to maturity,and 7% semi-annual coupon payments.What would be the expected difference in this bond's price immediately before and immediately after the next coupon payment?

A company issues a ten-year $1000 bond at par with a coupon rate of 6% paid semi-annually.The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.8%.What is the new price of the bond?

A ten-year,zero-coupon bond with a yield to maturity of 6% has a face value of $1000.An investor purchases the bond when it is initially traded,and then sells it four years later.What is the internal rate of return (IRR) of this investment,assuming the yield to maturity does NOT change?

The credit spread of a bond shrinks if it is perceived that the probability of the issuer defaulting increases.

Which of the following best describes a bond rated by Standard and Poor's,Moody's,and DBRS as B?