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