Chapter 10 Bonds & 18
True or false: All else equal, the price of a discount bond will decline over time as it approaches maturity.
False; Reason: a discount bond will increase as its price approaches par value
T/F: The uncertainty about future portfolio value that results from the need to reinvest bond coupons at yields not know in advance is called price risk.
False; called reinvestment rate risk
True/False: Two bonds with the same maturity will have the same duration.
False; duration is a function of maturity but they are not identical
True/False: Callable bonds always have a call price equal to par value.
False; the call price is often set at a premium to par value
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; if rates fall, prices rise, which means the investor earns a higher return from selling the bond at a premium relative to the purchase price
The formal written agreement between the corporation and the bond holders is the bond ________.
indenture
A bond with a YTM of 10% and a coupon rate of 10% will trade at (a) ______. A) discount B) par C) premium
par
The bond's annual coupon divided by its _____ value is called the coupon rate.
par
The call ______ period is the time during which a callable bond cannot be called.
protection (call protection period also called deferment period)
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 the YTM, the _______ (longer/shorter) the duration.
shorter
True or false: An investor is guaranteed to earn at least the YTM. True false question.
False
The yield value of a 32nd is equal to the change in maturity that would equal a 1/______ change in bond prices.
32; 1/32 change
_______(Long/Short)-term bonds are more sensitive to changes in interest rates.
Long
A bond's ____ duration is a measure of its sensitivity to changes in bond yields.
Macaulay
The equation for the modified duration is as follows: A) Macaulay duration/YTM B) YTM/2 + Macaulay duration C) (1+YTM/2)/Macaulay duration D) Macaulay duration/(1+YTM/2)
Macaulay duration/(1+YTM/2)
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
True or false: The dirty price is generally higher than the clean price.
True
True or false: The price of a bond is the present value of its coupons and par value.
True
For a premium bond, the ______ will likely be the most appropriate measure. A) YTC B) YTM
YTC yield to call
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. A) YTD B) YTM C) MTY D) DTM
YTM: yield to maturity
A bond is _____ if the issuer has the right to buy it back before it matures.
callable
The quoted price for a bond is the _________(clean/dirty) price, and the price you actually pay is the ________(clean/dirty) price.
clean; dirty
The number of common stock shares acquired in exchange for each converted bond is called the _______.
conversion ratio
An issuer would typically call bonds after a(n) ______ in market interest rates. A) decrease B) increase
decrease
The coupon rate is the bond's annual coupon ______, whereas the current yield is the bond's annual coupon divided by its market price. A) divided by its par value B) multiplied by its par value C) plus the EAR D) multiplied 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
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 specific target date is called ________ immunization.
dynamic
t/f: a debenture has a specific asset pledged as security for the loan.
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. A) fixed sum of money B) penalty amount C) reduced annuity D) coupon rate
fixed sum of money
All else equal, the higher a bond's coupon, the ______ (shorter/longer) its duration.
shorter -Properties of Macaulay duration for straight bonds: 1) all else the same, the longer a bond's maturity, the longer is its duration 2) all else the same, a bond's duration increases at a decreasing rate as maturity lengthens 3) all else the same, the higher a bond's coupon, the shorter is duration 4) all else the same, a higher yield to maturity implies a shorter duration
The most common type of bond is the so-called __________ bond.
straight
t/f: most corporate bonds contain a call feature.
true
t/f: price risk and reinvestment risk tend move in opposite directions, meaning they tend to offset each other.
true
T/F: the Macaulay duration of a zero coupon bond is equal to its maturity.
true; all cash flows come at maturity
T/F: Modified duration is a variation of Macaulay duration.
true; modified duration = Macaulay duration/(1+YTM/2)