UNIT 13 PRACTICE QUESTION REVIEW (INCORRECT)
Answer: C is selling at a discount **The coupon yield is the rate stated on the face of the bond. It never changes. -However, b/c current yield is computed by dividing the coupon rate by the current market price, this return will constantly be in flux. -Anytime the price of the bond is below par (selling at a discount), its current yield will be higher than the coupon
When an investor notices that a bond's coupon yield is lower than its current yield, that is an indication taht the bond A. is selling at a premium B. is probably rated investment grade C. is selling at a discount D. is in danger of going into default
Answer: C selling at a discount **With the market return at 6%, a 4% bond just isn't as valuable, so the only way investors would be interested is if they could acquire it at a discount. -That discount would work out to be a figure taht would result in a 6% return for the purchaser **Remember, as interest rates go up, bond prices go down, and vice versa
When current interest rates are at 6%, you would expect a bond with a nominal yield of 4% to be: A. selling at par B. in danger if default C. selling at a discount D. selling at a premium
Answer: A $100 per share *If the bond is currently selling for $800, then the 8 shares must be selling at $100 each
The DERP Corp. has an outstanding convertible bond issue that is convertible into 8 shares of stock. If the current market price of the bond is 80, the parity price of the stock is: A. $100 per share B. $80 per share C. $64 per share D. $125 per share
Answer: C shorten the average duration of the portfolio *Increasing interest rates lead to declining bond prices, regardless of the ratings. -This is interest rate risk. -Those bonds with the longest duration have the most sensitivity to that risk, while short-term maturities are only slightly affected. -Reducing the average duration of the portfolio means that the average maturities will be shortened, thus reducing the effects of an increase to interest rates
The portfolio manager of a bond fund believes that interest rates are going to increase in the near future. As such, it would be wise for that manager to: A. lengthen the average duration of the portfolio B. shift into higher-rated bonds C. shorten the average duration of the portfolio D. increase the equity portion of the portfolio
Answer: A interest payments of $40 *The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. -A bond with an 8% coupon will make $40 semiannual interest payments
A bond with a par value of $1,000 and a coupon rate of 8% paid semiannually, is currently selling for $1,150. The bond is callable in 10 years at $1,100. In the computation of the bond's yield to call, which of these would be a factor? A. Interest payments of $40 B. Present value of $1,100 C. 60 payment periods D. Future value of $1,150
Answer: B the present value of future cash flows to determine an appropriate current value **The principal behind a DCF computation is that an investment made currently is worth an amount equal to the sum of all the future cash flows expected to be received. -These future cash flows are discounted to arrive at a fair value
A popular tool used by analysts is discounted cash flow (DCF). Most use this tool to evaluate: A. the future value of present cash flows to determine an appropriate current value B. the present value of future cash flows to determine an appropriate current value C. the present value of future cash flows to determine the value at a specified date in the future D. the future value of future cash flows to determine the value at a specified date in the future
Answer: B American dollars held in banks in other countries, especially in Europe
The term "eurodollars" refers to: A. a worldwide currency system that is expected to someday replace existing currency systems B. American dollars held by banks in other countries, especially in Europe C. European currency held in U.S. banks D. obsolete currency that was formerly backed by the gold standard
Answer: B *The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. -B/c there is very little difference between maturity dates of 2040 through 2042, the bond with the lowest coupon will have the longest duration.
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A. GHI 7s of 2042 B. ABC 5s of 2040 C. JKL 4s of 2020 D. DEF 6s of 2041
Answer: B Net Present Value *Key component of a DCF computation is using the time value of money. None of these, other than NPV, consider the time value of money
Which of the following is a discounted cash flow computation? A. Standard Deviation B. Net Present Value C. Holding Period return D. Current Yield
Answer: C Duration measures the holding period return on a bond **Duration does not measure the holding period return on a bond; it measures the effect of an interest rate change on the price of a bond or bond portfolio
Which of the following statements regarding the properties of duration is NOT true? A. Duration measures the effect of an interest rate changes on the price of a bond or bond portfolio B. Duration is a weighted-average term to maturity of a bond's cash flows C. Duration measures the holding period return on a bond D. Duration measures a bond's price volatility by weighing the length of time it takes for a bond to pay for itself