Bond Valuation, Bond Theorems, Convexity

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Check your understanding of bond features, theories, bond price, interest rate effect, yield, duration, convexity, immunization.

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If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased, the investor is exposed to

1 point

the coupon effect.

interest rate risk.

a perpetuity.

an indefinite maturity.

Clear selection

When interest rates decrease, the duration of a 30-year coupon bond normally:

1 point

decreases.

the answer cannot be determined without more information.

increases.

may increase or decrease, depending on whether the bond sells at a premium or discount

Clear selection

Which of the following might be found in a bond indenture?

1 point

A sinking fund clause.

A subordination clause.

A dividend restriction clause.

All of the above.

Clear selection

Bonds rated double A and higher are called:

1 point

high-grade bonds.

investment grade bonds.

speculative grade bonds.

supreme bonds.

Clear selection

What is the purchase price of a bond that has 5 years and 6 months until it matures? The face value of the bond is $2000 and the coupon rate is 6.2% compounded semi-annually. The yield rate is 7.5% compounded semi-annually.

5 points

$1784.56

$1984.56

$2084.56

$1884.56

Clear selection

What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your required rate of return is 15 percent?

1 point

More than its face value.

Less than its face value.

Same as face Value

Zero

Clear selection

When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:

1 point

a premium.

a discount.

cannot be determined without more information.

face value.

Clear selection

An investor who expects increasing interest rates should purchase a bond that has a _____ coupon and a _____ term to maturity.

1 point

high, short

low, long

zero, long

high, long

Clear selection

Which of the following causes a lower required return on a bond?

1 point

The bond is callable.

The bond is convertible.

The bond’s rating changes from AA to A.

Both the first and third option.

Clear selection

Interest rates and bond prices

1 point

move in the same direction.

move in opposite directions.

sometimes move in the same direction, sometimes in opposite directions.

have no relationship with each other (i.e., they are independent).

Clear selection

Which of the following terms describes strategies designed to ensure that the market values of assets always exceed the market values of liabilities by a specified amount?

1 point

Contingent immunization.

Income immunization.

Price immunization.

Duration matching immunization.

Clear selection

If a bond sells at a high premium, then which of the following relationships hold true? (P0 represents the price of a bond and YTM is the bond's yield to maturity.)

1 point

P0 < par and YTM > the coupon rate.

P0 > par and YTM > the coupon rate.

P0 > par and YTM < the coupon rate.

P0 < par and YTM < the coupon rate.

Clear selection

R’s 9% coupon is paid once per year. The bond’s yield to maturity is 12% and its duration is 15 years. What will be the percentage change in bond R’s price if its yield to maturity increases by 20 basis points?

2 points

2.68%

–0.268%

0.268%

–2.68%

Clear selection

In the United States, most bonds pay interest_______ a year, while many European bonds pay interest________a year.

1 point

once; twice

twice; once

once; once

twice; twice

Clear selection

Which of the following would cause the required return on a bond to increase, everything else held equal?

1 point

The bond is senior to the issuer’s other bonds.

The borrower is subject to dividend restrictions.

The bond’s rating changes from B to BB.

The bond is callable.

Clear selection

The expected rate of return on a bond if bought at its current market price and held to maturity.

1 point

yield to maturity

current yield

coupon yield

capital gains yield

Clear selection

The contract between a bond issuer and a bondholder is called:

1 point

a collateral.

a general obligation.

an indenture.

a debenture.

Clear selection

Which of the following bonds will have the longest duration?

1 point

10-year maturity and a 15% coupon.

15-year maturity and a 12% coupon.

20-year maturity and an 8% coupon.

20-year maturity and a 12% coupon.

Clear selection

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