FIN 330 Ch. 10 Quiz

A bond has a modified duration of 5.56 years, a par value of $1,000, and a current market value of $1,076. What is the dollar value of an 01?

$0.5983 Dollar value of an 01= 5.56/100 × $1,076 × 0.01 = $0.5983

A bond has a face value of $1,000 and a coupon rate of 4.0 percent. What is your annual interest payment if you own 25 of these bonds?

$1,000

Brown Plumbing Materials has 5.4 percent bonds outstanding that are currently priced at $1,044 each. The bonds pay interest on January 1 and July 1. What is the dirty price of this bond if today's date is June 1? Assume a 360-day year.

$1,066.50

A bond has 9.0 years to maturity, a 5.8 percent coupon, a $1,000 face value, and pays interest semiannually. What is the bond's current price if the yield to maturity is 6.8 percent?

$933.50

You want to buy a bond that has a quoted price of $935. The bond pays interest semiannually on February 1 and August 1. The coupon rate is 5.5 percent. What is the clean price of this bond if today's date is June 1? Assume a 360-day year.

$935.00 Clean price = Quoted price = $935

JBM Homes has 11.0 percent bonds outstanding that mature in 12 years. The bonds pay interest semiannually. These bonds have a par value of $1,000 and are callable in 6 years at a premium of $55. What is the yield to call if the current price is equal to $1,597.5?

1.45 percent

A zero-coupon bond has a par value of $1,000 and matures in 5.5 years. The yield to maturity is 4.64 percent. What is the Macaulay duration?

5.50 years The duration of a zero-coupon bond is equal to the time to maturity. Thus, the answer is 5.5 years.

A $1,000 semiannual coupon bond matures in 12 years, has a coupon rate of 5.2 percent, and a market price of $962. What is the yield to maturity?

5.64 percent

A bond has a Macaulay duration of 7.80, a yield to maturity of 6.2 percent, a coupon rate of 5.1 percent, and semiannual interest payments. What is the bond's modified duration?

7.57 years

If a bond is selling at a market price above the bond's par value, then:

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

If a bond is callable and is currently selling below face value. If there is no risk of default and the issuer only calls bonds when they can be refinanced at a lower rate of interest. Which of the following is correct?

The yield-to-maturity is presently more relevant to an investor than the yield-to-call. A bond is typically called when market rates are sufficiently below the bond's coupon rate to make the call and reissue financially viable. A bond selling at a discount is unlikely to be called thus the YTM is more relevant to the bond holder.

The coupon rate on a bond can be calculated as the _________________ divided by the ______________.

annual interest / par value defines the coupon rate as the annual coupon (interest) divided by the par value.

Assuming no default risk, both a premium bond and a discount bond share one of the following characteristics:

at maturity the price of both bonds converges to its par value Regardless of whether a bond is selling at a premium or discount versus par, as the bond approaches maturity, its market price will converge toward its face value.

The dollar value of a 01 is defined as the change in a bond's price caused by which one of the following?

change in yield to maturity of one basis point The dollar value of an 01 is the change in a bond's price resulting from a change in YTM of one basis point.

The quoted price of a bond is referred to as the bond's:

clean price. The clean price is the price of a bond, net of accrued interest and is the price that is typically quoted.

The yield to maturity of a bond is best defined as:

discount rate that equates a bond's price with the present value of the bond's future cash flows. The yield to maturity is the discount rate that equates a bond's price with the present value of its future cash flows.

A bond's sensitivity to changes in market interest rates is referred to as its___________.

duration Duration is a widely used measure of a bond's sensitivity to changes in bond yields.

In order to continually match the duration of a bond portfolio with a target date, a portfolio manager would practice ______________________.

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

The risk that market interest rates may increase causing the price of a bond to decline is called ______________.

interest rate risk Interest rate risk is the possibility that changes in interest rates will result in losses in a bond's value.

According to Malkiel's theorems, bond prices and bond yields are:

inversely related. Malkiel's first theorem states that bond prices and bond yields move in opposite directions or inversely.

If a bond is called prior to maturity and the call price equals the present value of a bond's future cash flows, this is a _______________.

make-whole call When a bond is called under a make-whole call provision the call price is equal to the present value of the bonds remaining cash flows.

Immunizing a bond portfolio typically involves:

matching bond durations to your target dates. Immunization requires constructing a portfolio to minimize the uncertainty surrounding the target date value. This is typically accomplished by duration matching.

Uncertainty about the value of a portfolio on the target date represents _________________ .

reinvestment rate risk Reinvestment rate risk is the uncertainty about the future or target date portfolio value that results from the need to reinvest bond coupons at yields not known in advance.

If the issuer of a bond wishes to redeem the bond prior to its maturity date, the price will be:

the call price The call price is the price the issuer of a callable bond must pay to buy it back.

If the yield to maturity on a bond increases, what will happen?

the market price will decrease If the YTM increases, the market price of the bond will decrease causing the bond to sell at a discount from par.

If a bond is called at its earliest possible call date, the bond holder will earn the:

yield to call. The yield to call is a measure of the return that assumes a bond will be redeemed at the earliest call date.