Question 1

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

Accepted Answer

The answer of A 15-year corporate bond pays $40 interest...

Question 2

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

Accepted Answer

When the coupon rate and required return of a bond are equal, the bond will sell at par value, which is the face value of the bond. Therefore, the price of this bond is $1,000.

Question 3

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

Accepted Answer

The realized return being higher than the expected return without default occurring suggests that the coupons received during the bond's term were reinvested at a rate higher than initially expected, leading to a higher overall return.

Question 4

A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r)?

Accepted Answer

The answer of A six-year annual payment corporate bond has...

Question 5

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

Accepted Answer

The bond's duration can be calculated using the formula for Macaulay duration for bonds paying periodic interest. Since the bond's coupon rate equals its yield to maturity (YTM), and it pays semiannually, the bond's duration will be less than its maturity but not as low as the modified duration would suggest. The correct duration for a bond like this, given the parameters, is closer to its weighted average time to cash flows, which in this case is 7.35 years. This takes into account the time value of money and the fact that the bond pays interest semiannually.

Question 6

The interest rate used to find the present value of a financial security is the

Accepted Answer

The required rate of return is the minimum rate of return that an investor expects to earn when investing in a financial security. It is used as the discount rate in calculating the present value of the security. This rate is based on factors such as the risk of the investment, inflation, and the opportunity cost of investing in other securities.

Question 7

Duration is

Accepted Answer

Duration is defined as the weighted average time to maturity of the bond's cash flows, taking into account both the timing and amount of future cash flows. It is a measure of a bond's sensitivity to changes in interest rates, and is used to estimate the expected change in the bond's price for a given change in interest rates. The other choices are not accurate definitions of duration.

Question 8

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

Accepted Answer

The bond's required rate of return is less than its expected return, so the market price must be less than its present value. Hence, the correct option is D.

Question 9

A security has an expected return less than its required return. This security is

Accepted Answer

The answer of A security has an expected return less...

Question 10

An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually?

Accepted Answer

To find the bond's price when the coupon is paid semiannually, we use the formula for the present value of an annuity to calculate the present value of the coupon payments, and the present value formula for a single sum to calculate the present value of the bond's face value. The bond's price is the sum of these two present values. Given a 7% annual coupon rate on a $1,000 face value bond, semiannual payments are $35 ($1,000 * 7% / 2). The required semiannual return is 3% (6% annual return / 2). The number of periods is 16 (8 years * 2). The bond's price is calculated as follows:$$ \text{Present Value of Coupons} = 35 \times \left( \frac{1 - (1 + 0.03)^{-16}}{0.03} \right) $$$$ \text{Present Value of Face Value} = \frac{1000}{(1 + 0.03)^{16}} $$Adding these two components gives the bond's price, which is approximately $1,062.81.

Question 11

A corporate bond returns 12 percent of its cost (in PV terms)in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

Accepted Answer

The answer of A corporate bond returns 12 percent of...

Question 12

The required rate of return on a bond is

Accepted Answer

The answer of The required rate of return on a...

Question 13

Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75 percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the first five years and 60 percent of its cost in the sixth year. If A and B have the same required return,which of the following is/are true?
I. Bond A has a bigger coupon than Bond B.
II. Bond A has a longer duration than Bond B.
III. Bond A is less price-volatile than Bond B.
IV. Bond B has a higher PV than Bond A.

Accepted Answer

Bond A has a higher final year return (75% vs. 60%), which suggests it pays more at the end, potentially indicating a longer duration since duration measures the weighted average time to receive the bond's cash flows. Bond B, with a higher annual return (8% vs. 5%), might have a lower present value (PV) due to its lower final year return, not higher, making IV incorrect. The information provided does not directly indicate which bond has a bigger coupon or which is less price-volatile, as these aspects depend on factors not specified in the question, such as the bonds' face values, market interest rates, and the exact nature of their cash flows.

Question 14

You would want to purchase a security if P ________ PV or E(r)________ r.

Accepted Answer

When the price of a security (P) is low, the potential profit is high, making it more attractive to purchase. Therefore, P ≤ PV is the desired condition. However, when it comes to expected return (E(r)), a higher value is always preferred. Therefore, E(r) ≥ r is the desired condition. Hence, the correct answer is C, where P ≤ PV and E(r) ≥ r.

Question 15

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

Accepted Answer

To calculate if the bond is mispriced, we need to calculate the bond's intrinsic value or fair value. The intrinsic value of a bond is the present value of all future cash flows (coupon payments and principal repayment) discounted at the required rate of return.

In this case, the bond pays $100 per year for ten years and returns the par value of $1000 at maturity. We can calculate the present value of each cash flow using the formula:

PV = CF / (1 + r)^n

where PV is the present value, CF is the cash flow, r is the required rate of return, and n is the number of periods.

Using a financial calculator or spreadsheet, we can calculate the intrinsic value of the bond as follows:

PV of coupon payments = $100 * [(1 - 1/(1 + 0.09)^10) / 0.09] = $634.94

PV of principal repayment = $1000 / (1 + 0.09)^10 = $422.63

Intrinsic value of bond = PV of coupon payments + PV of principal repayment = $1057.57

Therefore, the bond is underpriced by $7.43 ($1057.57 - $1050). However, this calculation assumes that the required rate of return is 9 percent, which may not be accurate. If the actual required rate of return is lower than 9 percent, the bond would be overpriced; if it is higher, the bond would be more underpriced.

Question 16

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r)must be

Accepted Answer

To solve for the annual E(r), we can use the following formula:

Bond Price = (Coupon Payment / E(r)) x [1 - 1 / (1 + E(r))^n] + Face Value / (1 + E(r))^n

where:
Coupon Payment = 7% x $1,000 face value = $70
n = 8 years
Face Value = $1,000

Plugging in the given values, we get:

$1,075 = ($70 / E(r)) x [1 - 1 / (1 + E(r))^8] + $1,000 / (1 + E(r))^8

Using trial and error or a financial calculator, we can solve for E(r) such that both sides of the equation are equal. The closest answer choice is B) 5.80 percent, which gives a bond price of $1,075.12. Therefore, B) is the best choice.

Question 17

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate,a 6 percent promised YTM,and six years to maturity. What is the bond's duration?

Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates, effectively representing the weighted average time until a bond's cash flows are received. For a bond with a 5% coupon rate, a 6% YTM, and 6 years to maturity, the duration can be calculated using a financial calculator or duration formula. The correct duration for this bond, given the options, is 5.31 years, indicating that it's the weighted average time it takes for an investor to be repaid by the bond's internal cash flows.

Question 18

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

Accepted Answer

Duration is a measure of the weighted average timing of the cash flows from an investment, taking into account the present value of each cash flow. If an N year security recovered the same percentage of its cost in PV terms each year, then the cash flows would be evenly spread out over N years. Therefore, the duration would be the sum of the years (1 + 2 + 3 + ... + N) divided by N, which simplifies to (N+1)/2.

Question 19

Which of the following bond terms are generally positively related to bond price volatility?
I. Coupon rate
II. Maturity
III. YTM
IV. Payment frequency

Accepted Answer

II only. Bond price volatility is generally positively related to the bond's maturity. Longer maturity bonds are more sensitive to interest rate changes, leading to higher volatility in their prices. Coupon rate, YTM (Yield to Maturity), and payment frequency do not have a direct positive relationship with bond price volatility in the same way maturity does.

Question 20

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7 percent. By how much is the bond mispriced?

Accepted Answer

The answer of A 12-year annual payment corporate bond has...

Quiz 3: Interest Rates and Security Valuation

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r) ?

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

The interest rate used to find the present value of a financial security is the

Duration is

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

A security has an expected return less than its required return. This security is

An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually?

A corporate bond returns 12 percent of its cost (in PV terms) in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

The required rate of return on a bond is

You would want to purchase a security if P PV or E(r) r.

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r) must be

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate,a 6 percent promised YTM,and six years to maturity. What is the bond's duration?

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7 percent. By how much is the bond mispriced?

Quiz 3: Interest Rates and Security Valuation

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r) ?

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate,a 7 percent promised YTM,and 10 years to maturity. What is the bond's duration?

The interest rate used to find the present value of a financial security is the

Duration is

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

A security has an expected return less than its required return. This security is

An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually?

A corporate bond returns 12 percent of its cost (in PV terms) in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

The required rate of return on a bond is

You would want to purchase a security if P ________ PV or E(r) ________ r.

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced?

An eight-year annual payment 7 percent coupon Treasury bond has a price of $1,075. The bond's annual E(r) must be

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate,a 6 percent promised YTM,and six years to maturity. What is the bond's duration?

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7 percent. By how much is the bond mispriced?

You would want to purchase a security if P PV or E(r) r.