Chapter 10 quiz
Which one of the following is the correct definition of a coupon rate?
annual interest/par value
Which one of the following prices is equal to the present value of a bond's future cash flows and is paid when a bond is redeemed prior to maturity?
make-whole call
A bond has 8 years to maturity, a 7 percent coupon, a $1,000 face value, and pays interest semiannually. What is the bond's current price if the yield to maturity is 6.91 percent?
$1,005.46
A bond has a par value of $1,000 and a coupon rate of 6.5 percent. What is the dollar amount of each semiannual interest payment if you own 8 of these bonds?
$260
A bond has a face value of $1,000 and a coupon rate of 5.5 percent. What is your annual interest payment if you own 8 of these bonds?
$440
The Country Inn has bonds outstanding with a par value of $1,000 each and a 5.25 percent coupon. The bonds mature in 8.5 years and pay interest semiannually. What is the current value of each of these bonds if the yield to maturity is 6.0 percent?
$950.63
A bond has a par value of $1,000, a market price of $1,030, and a coupon rate of 6.0 percent. What is the current yield?
5.83%
A bond pays semiannual interest payments of $35.25. What is the coupon rate if the par value is $1,000?
7.05%
The yield-to-maturity assumes which one of the following?
All coupon payments are reinvested at the yield-to-maturity rate.
An issuer has a bond outstanding that matures in 18 years. Which one of the following prevents the issuer from buying back that bond today?
Call protection period
Which one of the following must be equal for two bonds if they are to have similar changes in their prices given a relatively small change in bond yields?
Duration
Davidson Industrial bonds have a current market price of $992 and a 5 percent coupon. The bonds pay interest semi-annually on March 1 and September 1. Assume today is January 1. How many months of accrued interest are included in the dirty price of these bonds?
Four
Which combination of bond characteristics causes a bond to be most sensitive to changes in market interest rates? I. low coupon rates II. high coupon rates III. short time to maturity IV. long time to maturity
I and IV
Which one of the following involves creating a portfolio in a manner which minimizes the uncertainty of the portfolio's maturity target date value?
Immunization
According to Malkiel's theorems, bond prices and bond yields are:
Inversely related.
Which one of the following statements is correct concerning discount bonds?
The current yield is less than the yield to maturity.
Which one of the following statements applies to a par value bond?
The current yield, coupon rate, and yield-to-maturity are equal.
Which one of the following statements is correct concerning Macaulay duration?
The duration of a zero coupon bond is equal to the time to maturity.
Which one of the following statements is correct concerning premium bonds?
The yield to maturity is less than the coupon rate.
The yield value of a 32nd is the change needed in which one of the following to cause a bond's price to change by 1/32nd?
Yield to maturity
A bond pays interest semiannually on February 1 and August 1. Assume today is October 1. How many months of accrued interest are included in the clean price of this bond?
Zero
Which one of the following does an issuer pay to redeem a bond prior to maturity?
call price
A callable bond:
can be redeemed by the issuer prior to maturity.
A change in a bond's price caused by which one of the following is defined as the dollar value of an 01?
change in yield to maturity of one basis point
The price of a bond, net of accrued interest, is referred to as the bond's:
clean price
For a premium bond, the:
coupon rate exceeds both the yield to maturity and the current yield.
What is the annual interest divided by the market price of a bond called?
current yield
The yield to maturity is the:
discount rate that equates a bond's price with the present value of the bond's future cash flows.
Which one of the following measures a bond's sensitivity to changes in market interest rates?
duration
A dedicated portfolio is a bond portfolio created to:
fund a future cash outlay.
A discount bond:
has a face value that exceeds the market value.
A premium bond is defined as a bond that:
has a market price that exceeds par value
Which one of the following is the risk that market rates may increase causing the price of a bond to decline?
interest rate risk
The dirty price of a bond is the:
invoice price
Assuming there is no default risk, both a premium bond and a discount bond must share which one of the following characteristics?
maturity value equal to a par value bond
The rate of return an investor actually earns from owning a bond is called which one of the following?
realized yield
Which one of the following risks is associated with investing a coupon payment at a rate that is lower than the bond's yield-to-maturity?
reinvestment rate risk
Price risk is the risk that:
the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates.
The yield that a bond will earn given that it is bought back by the issuer at the earliest possible date is the
yield to call.