finance chapter 8
International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements. a. True b. False
true
A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price? a. $1,069.31 b. $1,000.00 c. $9712 d. $927.66 e. none of the above
a
An expected ____ in economic growth places ____ pressure on bond prices. a. increase; downward b. increase; upward c. decrease; downward d. none of the above
a
As interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.) a. consistently increase b. consistently decrease c. remain unchanged d. change in a direction that cannot be determined with the above information
a
Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is a. 1.90 years. b. 1.50 years. c. 1.92 years. d. none of the above
a
Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is a. 1.73 years. b. 1.71 years. c. 1.90 years. d. none of the above
a
Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are ____ than liability portfolio durations, then the market value of assets are ____ interest-rate sensitive than the market value of liabilities. a. greater; more b. greater; equally c. greater; less d. less; equally e. B and D
a
Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value. a. above; above b. above; below c. below; below d. below; above
a
From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon. a. high yield; appreciates b. high yield; remains stable c. low yield; appreciates d. low yield; depreciates
a
If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase
a
If the coupon rate ____ the required rate of return, the price of a bond ____ par value. a. equals; equals b. exceeds; is less than c. is less than; is greater than d. B and C e. none of the above
a
When financial institutions expect interest rates to ____, they may ____. a. increase; sell bonds and buy short-term securities b. increase; sell short-term securities and buy bonds c. decrease; sell bonds and buy short-term securities d. B and C
a
When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds. a. higher; lower b. higher; higher c. lower; higher d. lower; lower
a
Which of the following is most likely to cause a decrease in bond prices? a. a decrease in money supply growth and an increase in the demand for loanable funds b. a forecast of decreasing oil prices c. a forecast of a stronger dollar d. an increase in money supply growth and no change in the demand for loanable funds
a
A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity? a. 13 percent b. 12 percent c. 11 percent d. 10 percent
b
A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for a. $1,000.00. b. $1,081.11. c. $798.70. d. $880.22. e. none of the above.
b
As interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.) a. consistently increase b. consistently decrease c. remain unchanged d. change in a direction that cannot be determined with the above information
b
Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is a. 0.77. b. −0.77. c. −0.90. d. −1.06. e. none of the above.
b
For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the a. greater is the premium on the price. b. greater is the discount on the price. c. smaller is the premium on the price. d. smaller is the discount on the price.
b
Holding other factors constant, a higher budget deficit leads to ______ interest rates, and higher inflationary expectations lead to _______ interest rates. a. higher; lower b. higher; higher c. lower; higher d. lower; lower
b
If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____. a. high coupon bonds; more favorably affected by declining interest rates b. zero or low coupon bonds; more favorably affected by declining interest rates c. zero or low coupon bonds; more favorably affected by rising interest rates d. high coupon bonds; completely insulated from rising interest rates
b
If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase
b
If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices, and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity. a. downward pressure; downward pressure b. downward pressure; upward pressure c. upward pressure; upward pressure d. upward pressure; downward pressure
b
If the United States announces that it will borrow an additional $10 billion, this announcement will normally cause the bond traders to expect a. higher interest rates in the future, and will buy bonds now. b. higher interest rates in the future, and will sell bonds now. c. stable interest rates in the future, and will buy bonds now. d. lower interest rates in the future, and will buy bonds now. e. lower interest rates in the future, and will sell bonds now.
b
Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond? a. $1,000.00 b. $1,147.20 c. $856.80 d. none of the above
b
Stephanie would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has ten years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Stephanie pay for the bond? a. $1,000.00 b. $1,147.20 c. $856.80 d. none of the above
b
The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value. a. discount rate; required rate of return; discount b. required rate of return; discount rate; discount c. required rate of return; discount rate; premium d. none of the above
b
The credit risk premium tends to be larger for bonds that have longer terms to maturity. a. True b. False
true
The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____. a. slightly; rises b. very; rises c. very; declines d. slightly; declines
b
The prices of ____-coupon and ____ maturities are most sensitive to changes in the required rate of return. a. low; short b. low; long c. high; short d. high; long
b
The prices of bonds with ____ are most sensitive to interest rate movements. a. high coupon payments b. zero coupon payments c. small coupon payments d. none of the above (The size of the coupon payment does not affect sensitivity of bond prices to interest rate movements.)
b
The relationship reflecting the actual response of a bond's price to a change in bond yields is a. concave. b. convex. c. linear. d. quadratic.
b
The valuation of bonds is generally perceived to be ____ the valuation of equity securities. a. more difficult than b. easier than c. just as difficult as d. none of the above
b
The value of ____-risk securities will be relatively ____. a. high; high b. high; low c. low; low d. none of the above
b
Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes. a. matching b. laddered c. barbell d. interest rate e. none of the above
b
When two securities have the same expected cash flows, the value of the ____ security will be higher than the value of the ____ security. a. high-risk; low-risk b. low-risk; high-risk c. high-risk; high-risk d. low-risk; low-risk e. none of the above
b
Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.) a. reduced Treasury borrowing along with anticipation that money supply growth will decrease b. reduced Treasury borrowing along with anticipation that money supply growth will increase c. an anticipated drop in money supply growth along with increasing Treasury borrowing d. higher levels of Treasury borrowing and corporate borrowing
b
A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years. a. 1.33 b. 1.27 c. 3.24 d. 1.31 e. none of the above
c
A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____. a. 1,302 b. 763 c. 761 d. 1,299
c
A(n) ____ in the expected level of inflation results in ____ pressure on bond prices. a. increase; upward b. increase; downward c. decrease; downward d. none of the above
c
As interest rates increase, long-term bond prices a. increase by a greater degree than short-term bond prices. b. increase by an equal degree as short-term bond prices. c. decrease by a greater degree than short-term bond prices. d. decrease by an equal degree as short-term bond prices. e. decrease by a smaller degree than short-term bond prices.
c
Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years. a. 1.92 b. 1.50 c. 1.90 d. none of the above
c
Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond? a. −.980 b. +.980 c. −.494 d. +.494 e. none of the above
c
Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value. a. above; above b. above; below c. below; below d. below; above
c
Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Bullock intends to sell the bonds in two years and expects investors' required rate of return at that time on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years? a. $9.33 million b. $11.00 million c. $10.64 million d. $9.82 million e. none of the above
c
If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase
c
If the coupon rate equals the required rate of return, the price of the bond a. should be above its par value. b. should be below its par value. c. should be equal to its par value. d. is negligible.
c
In the ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. a. matching b. laddered c. barbell d. interest rate e. none of the above
c
Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond? a. $1,063.40 b. $1,000 c. $939.25 d. none of the above
c
The ____________ was recently established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks. a. Financial Risk Assessment Commission b. Financial Markets Protection Agency c. Financial Stability Oversight Council d. Federal Bureau of Financial Markets
c
The price of short-term bonds are commonly ____ those of long-term bonds. a. more volatile than b. equally volatile as c. less volatile than d. A and C occur with about equal frequency
c
With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs. a. matching b. laddered c. barbell d. interest rate e. none of the above
c
Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price? a. $363,212 b. $385,500 c. $422,400 d. $424,100 e. none of the above
c
A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds pay annual payments. The bonds mature in four years. The bank wants to sell them in two years, and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years? a. $24,113,418 b. $24,667,230 c. $25,000,000 d. $25,891,632
d
A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond? a. $1,021 b. $1,000 c. $981 d. $951 e. none of the above
d
An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then? a. $52,115,093 b. $55,341,216 c. $55,000,000 d. $56,935,022
d
Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____. a. increase; long-maturity bonds with zero-coupon rates b. decrease; short-maturity bonds with high-coupon rates c. increase; high-coupon bonds with long maturities d. decrease; long-maturity bonds with zero-coupon rates
d
If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates. a. underestimate; underestimate b. overestimate; overestimate c. underestimate; overestimate d. overestimate; underestimate
d
If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds. a. increase; upward; downward b. decrease; upward; downward c. decrease; upward; upward d. increase; upward; upward e. increase; downward; upward
d
Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio? a. 10 percent b. 8.82 percent c. 4.32 percent d. 13.86 percent e. none of the above
d
The appropriate discount rate for valuing any bond is the a. bond's coupon rate. b. bond's coupon rate adjusted for the expected inflation rate over the life of the bond. c. Treasury bill rate with an adjustment to include a risk premium if one exists. d. yield that could be earned on alternative investments with similar risk and maturity.
d
The bonds that are most sensitive to interest rate movements have a. no coupon and a short-term maturity. b. high coupons and a short-term maturity. c. high coupons and a long-term maturity. d. no coupon and a long-term maturity.
d
The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is a. −0.36. b. −0.44. c. −0.55. d. −0.67. e. 0.67.
d
To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond? a. The annualized coupon should be split in half. b. The annual discount rate should be divided by 2. c. The number of annual periods should be doubled. d. The par value should be split in half. e. All of the above adjustments have to be made.
d
When the European Central Bank provides credit to a country that is experiencing debt repayment problems, the ECB commonly: a. allows the country's government to conduct its own monetary policy. b. recommends that the country withdraw from the eurozone. c. urges the country's government to increase spending and lower taxes to stimulate the economy. d. imposes austerity conditions to enable the government to reduce its budget deficit.
d
Which of the following bonds is most susceptible to interest rate risk from an investor's perspective? a. short-term, high-coupon b. short-term, low-coupon c. long-term, high-coupon d. long-term, zero-coupon
d
Which of the following is not a factor affecting the market price of a foreign bond held by a U.S. investor? a. foreign interest rate movements b. credit risk c. exchange rate fluctuations d. All of the above are factors affecting the market price of a foreign bond.
d
f analysts expect that the demand for loanable funds will decrease, and the supply of loanable funds will increase, they would most likely expect interest rates to ____ and prices of existing bonds to ____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase
d
An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____. a. weak; decrease b. strong; increase c. weak; increase d. strong; decrease e. Answers C and D are correct.
e
If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds. a. increase; upward; downward b. decrease; upward; downward c. decrease; upward; upward d. increase; downward; upward e. increase; upward; upward
e
Although the European debt crisis has had substantial effects on European financial markets, the crisis has been contained and has not affected markets and financial institutions outside Europe. a. True b. False
false
An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase. a. True b. False
false
Any announcement that signals stronger than expected economic growth tends to increase bond prices. a. True b. False
false
As interest rates increase, prices of short-term bonds will decline by a greater degree than prices on long-term bonds. a. True b. False
false
Bonds that sell below their par value are called premium bonds. a. True b. False
false
If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value. a. True b. False
false
If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds. a. True b. False
false
In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses. a. True b. False
false
The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities. TRUE FALSE
false
Other things held constant, bond prices should increase when inflationary expectations rise. a. True b. False
flase
The appropriate price of a bond is simply the sum of the cash flows to be received. a. True b. False
flase
A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds. a. True b. False
true
A zero-coupon bond makes no coupon payments. a. True b. False
true
Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return. a. True b. False
true
Duration is a measure of bond price sensitivity. a. True b. False
true
Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency. a. True b. False
true
The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit. a. True b. False
true
The market price of a bond is partly determined by the timing of the payments made to bondholders. a. True b. False
true