Chapter 5

If a bond's yield to maturity is greater than the coupon rate, the bond must be ________. A. selling at a discount B. selling at a premium C. selling at par D. a zero-coupon bond

A. Selling at a discount

The actual bond price change for a 1% yield increase is a decrease of 5%. If you use duration to estimate the bond's price change for the same yield change, it would predict a(n) ______ of ______. A. decrease, more than 5% B. increase, more than 5% C. decrease, less than 5% D. increase, less than 5% E. decrease, 5%

A. decrease, more than 5%

You use duration to estimate a bond's price sensitivity to yields, and it predicts the price would increase by 5% if the yield decreased by 1%. The actual bond price change for a 1% yield decrease will be a(n) _____ of _____. A. increase, more than 5% B. decrease, less than 5% C. increase, less than 5% D. decrease, more than 5% E. increase, 5%

A. increase, more than 5%

All else equal, the _____ the maturity of a bond, the greater the bond's price volatility; all else equal, the _____ the coupon rate, the greater the bond's price volatility. A. longer; lower B. shorter; higher C. longer; higher D. shorter; lower

A. longer; lower

If a ten-year $1,000 par bond offers a 6% annual coupon rate paid semiannually and sells for $1,000, what is the bond's yield to maturity? A. 5% B. 6% C. 7% D. 10% E. More information is needed to answer the question.

B. 6%

Which of the following is NOT true about duration? A. Duration can be used to measure a bond's interest rate risk. B. All else equal, higher coupon rates mean lower duration. C. All else equal, higher yields mean higher duration. D. Duration is equal to maturity for zero-coupon bonds. E. All else equal, longer maturities mean higher duration.

C. All else equal, higher yields mean higher duration.

Why do fixed-rate bond prices change with interest rates? A. Because bond coupon rates are equal to the market rates of interest. B. Because bond prices move directly with interest rates. C. Because of the fixed nature of the bond's coupon rate. D. Because coupon payments are made more than once a year. E. Because of foreign exchange risk.

C. Because of the fixed nature of the bonds coupon rate

If a bond investor receives all the coupon payments on time and the face value on the contract maturity date, investor's return could still vary because of _____ risk. A. price B. liquidity C. reinvestment D. unsystematic E. credit

C. Reinvestment Risk

Bond A has duration of 7 years, bond B has duration of 8 years. Bond B will have ____. A. a shorter maturity than bond A B. a higher coupon rate than bond A C. greater change in price for a given change in interest rates, relative to bond A. D. smaller change in price for a given change in interest rates, relative to bond A.

C. greater change in price for a given change in interest rates, relative to bond A.

An investor worried about interest rate risk should ______. A. not purchase coupon bonds B. select bonds whose maturity matches the investor's holding period C. select bonds whose duration matches the investor's holding period D. invest only in U.S. Treasury bonds E. not reinvest bond coupon payments

C. select bonds whose duration matches the investor's holding period

Which of the following statements is not true? A. Low-coupon bonds are more sensitive to interest rate changes compared to high-coupon bonds, holding everything else constant. B. Bond prices are inversely related to bond yields. C. Long-term bonds are more sensitive to interest rate changes than short-term bonds, all else equal. D. The higher a bond's duraton, the lower its price sensitivity to yield changes. E. All of the above statements are true.

D. The higher a bond's duraton, the lower its price sensitivity to yield changes

Which bond yield measure allows for a coupon reinvestment rate to be different from the yield itself? A. Yield to maturity B. Expected yield C. Realized yield D. Total return E. both (A) and (B)

D. Total Return

What are the two components of interest rate risk? A. price risk and liquidity risk B. liquidity risk and reinvestment risk C. credit risk and reinvestment risk D. price risk and reinvestment risk E. liquidity risk and credit risk

D. price risk and reinvestment risk