FIN 6624: CH 10

Par bonds:

Bonds with a price equal to par value are said to be selling at par. The yield to maturity of a par bond is equal to its coupon rate.

Premium bonds:

Bonds with a price greater than par value are said to be selling at a premium. The yield to maturity of a premium bond is less than its coupon rate.

Discount bonds:

Bonds with a price less than par value are said to be selling at a discount. The yield to maturity of a discount bond is greater than its coupon rate.

Which of the following will increase if the coupon rate increases? I. face value II. market value III. yield-to-maturity IV. current yield A. I and II only B. III and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

D. II, III, and IV only

Assuming there is no default risk, both a premium bond and a discount bond must share which one of the following characteristics? A. market price less than a par value bond B. yield-to-maturity less than the coupon rate C. maturity value equal to a par value bond D. current yield equal to that of a par value bond E. coupon rate exceeding the yield-to-maturity

C. maturity value equal to a par value bond

A callable bond: A. can be paid off early at either the issuer's or the bondholder's request. B. can be redeemed early if the bondholder so requests. C. can have its maturity date extended by the issuer. D. can be redeemed by the issuer prior to maturity. E. is a bond that pays a variable interest payment.

D. can be redeemed by the issuer prior to maturity.

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? A. coupon payment B. time to maturity C. market price D. duration E. current yield

D. duration

Coupon rate:

a bonds annual coupon amount divided by its par value

The yield to maturity is the: a. discount rate that equates a bond's price with the present value of the bond's future cash flows. b. rate you will earn if your bond is called on the earliest possible date. c. rate computed by dividing the annual interest by the par value. d. rate used to compute the amount of each interest payment. e. rate computed as the annual interest divided by the market value.

a. discount rate that equates a bond's price with the present value of the bond's future cash flows.

According to Malkiel's theorems, bond prices and bond yields are: a. inversely related b. uncorrelated c. positively related d. directly related e. independent of each other

a. inversely related

Which one of the following is the correct definition of coupon rate? a. semi-annual interest payment/par value b. annual interest/par value c. annual interest/market value d. semi-annual coupon/bond price e. annual coupon/bond price

b. annual interest/par value

An issuer has bond outstanding that matures in 18 years. Which one of the following prevents the issuer from buying back that bond today? a. make-whole provision b. call protection period c. newly issued provision d. put provision e. call premium

b. call protection period

A bond has a current yield that is equal to the yield-to-maturity. Given this, which of the following must also be true? a. The bond must pay annual interest. b. The maturity value must be greater than the bond price. c. The bond can have any maturity date. d. The coupon rate must exceed the current yield. e. The price must exceed the par value.

c. The bond can have any maturity date.

What is the annual interest divided by the market price of a bond called? a. coupon rate b. effective annual yield c. current yield d. yield to maturity e. yield to market

c. current yield

To immunize your portfolio, you should: a. avoid callable bonds. b. match bond maturity dates to your target dates. c. match bond durations to your target dates. d. purchase only par value bonds. e. purchase only high-coupon bonds.

c. match bond durations to your target dates.

Price risk is the risk that: a. coupon payments will be reinvested at a rate that is less than the bond's yield-to-maturity. b. the bond principal will not be paid in full or on time. c. the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates d. market prices increase due to market interest rate changes making bonds more expensive to purchase e. the yield-to-maturity will be less than the inflation risk causing the real rate of return to be negative.

c. the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates

Which of the following statements is correct concerning premium bonds? a. The premium increases when interest rates increase. b. The coupon rate is less than the current yield. c. As the time to maturity decreases, the premium increases. d. The yield to maturity is less than the coupon rate. e. The par value exceeds the face value.

d. The yield to maturity is less than the coupon rate.

A dedicated portfolio is a bond portfolio created to: a. maximize current interest income b. provide an increasing steady steam of income c. maximize the return given declining interest rates d. fund a future cash outlay e. avoid taxation

d. fund a future cash outlay

Yield to maturity:

is the discount rate that equates the bond's price with the computed present value of its future cash flows