Finance : Investments

True or false: All else equal, the price of a discount bond will decline over time as it approaches maturity.

False

The quoted price for a bond is the _________ (clean/dirty) price, and the price you actually pay is the __________ (clean/dirty) price.

1. clean | 2. dirty

The yield value of a 32nd is equal to the change in yield to maturity that would equal a 1/______ change in bond price.

32

____________ (Long/Short)-term bonds are more sensitive to changes in interest rates.

Long

The equation for the modified duration is as follows:

Macaulay duration / (1 + YTM/2)

True or false: The dirty price is generally higher than the clean price.

True

For a premium bond, the _______ will likely be the most appropriate measure.

YTC

For a discount bond, the _______ will likely be the most appropriate measure.

YTM

The ____ is the discount rate that equates a bond's price with the present value of its cash flows. It is also called the promised yield.

YTM

All else equal, the higher the YTM, the ________ (longer/shorter) the duration.

shorter

A bond is __________ if the issuer has the right to buy it back before it matures.

callable

An issuer would typically call bonds after a(n) _________ in market interest rates.

decrease

A bond with a YTM of 10% and a coupon rate of 8% will trade at (a) _______.

discount

The coupon rate is the bond's annual coupon _______, whereas the current yield is the bond's annual coupon divided by its market price

divided by its par value

The change in bond price resulting from a change in yield to maturity of one basis point is the ________.

dollar value of an 01

A bond's ______________ is a measure of its sensitivity to changes in bond yields.

duration

Dynamic immunization is the periodic rebalancing of a dedicated bond portfolio to maintain a ___________ that matches the target maturity date.

duration

To immunize a dedicated portfolio, an investor needs to match its __________ to the portfolio's target date.

duration

The strategy of periodically rebalancing a dedicated bond portfolio to maintain a portfolio duration matched to a specific target date is called _____ immunization.

dynamic

True or false: An investor is guaranteed to earn at least the YTM.

false

True or false: Callable bonds always have a call price equal to par value.

false

True or false: The uncertainty about future portfolio value that results from the need to reinvest bond coupons at yields not known in advance is called price risk.

false

True or false: Two bonds with the same maturity will also have the same duration.

false

A straight bond is an IOU that obligates the issuer to pay the bondholder a _____ at the bond's maturity along with constant, periodic interest payments during the life of the bond.

fixed sum of money

All else equal, an investor who sells a bond following a decline in interest rates will have a realized yield that is _________ than the promised YTM.

higher

____________ (Low/High) coupon bonds are more sensitive to changes in interest rates.

low

The first fundamental principle for calculating duration of a bond concerns the duration of a zero coupon bond. The second principle concerns the duration of a coupon bond with _____.

multiple cash flows

A bond with a YTM of 10% and a coupon rate of 10% will trade at (a) _______.

par

The bond's annual coupon divided by its _____ value is called the coupon rate. (Enter one word per blank.)

par

The call _________ period is the time during which a callable bond cannot be called.

protection / deferment

The uncertainty about the future or target date portfolio value that results from the need to reinvest bond coupons at yields that cannot be predicted in advance is called _____ risk.

reinvestment rate

All else equal, the higher a bond's coupon, the ________ (shorter/longer) its duration.

shorter

True or false: If interest rates rise, bond prices will fall.

true

True or false: Modified duration is a variation of Macaulay duration.

true

True or false: Price risk and reinvestment risk tend move in opposite directions, meaning they tend to offset each other.

true

True or false: The Macaulay duration of a zero coupon bond is equal to its maturity.

true

True or false: The longer a bond's maturity, the longer is its duration.

true

True or false: The price of a bond is the present value of its coupons and par value.

true