FIN 371 EXAM 2 - Ch. 8

The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is a. -0.67. b. -0.55. c. -0.44. d. 0.67. e. -0.36.

a. -0.67

Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is ________ years. a. 1.73 b. 1.71 c. 1.90 d. None of these choices are correct.

a. 1.73

Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $100 million. In one year, it expects to receive $11,000,000 in coupon payments. The bond portfolio today is worth $102 million. What is the forecasted return of this bond portfolio? a. 8.82 percent b. 4.32 percent c. 10 percent d. -8.81 percent e. None of these choices are correct.

a. 8.82 percent

Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return. a. True b. False

a. True

Duration is a measure of bond price sensitivity. a. True b. False

a. True

If bonds are held to maturity, the return to the bondholder is known with certainty. a. True b. False

a. True

International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements. a. True b. False

a. True

The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit. a. True b. False

a. True

The market price of a bond is partly determined by the timing of the payments made to bondholders. a. True b. False

a. True

Assume that the value of a financial institution's liabilities equals that of its assets. If the durations of its asset portfolio are ____ than the durations of its liability portfolio, then the market value of the assets is ____ interest-rate sensitive than the market value of the liabilities. a. greater; more b. greater; equally c. greater; less d. less; equally e. B and D

a. greater; more

An expected ____ in economic growth tends to place ____ pressure on bond prices. a. increase; downward b. increase; upward c. decrease; downward d. none of the above

a. increase; downward

If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

a. increase; increase

Martin Morece, a private investor, is contemplating the purchase of a $1,000 par value bond that pays semiannual interest. The bond has a coupon rate of 14 percent, and the yield to maturity on the bond is 12 percent. Furthermore, the bond has twenty years remaining to maturity. How much did Mr. Morece pay for the bond? a. $1,114.70 b. $1,150.46 c. $1.149.39 d. $1,000.00 e. None of these choices are correct.

b. $1150.46 N = 40 I/Y = 6% PV = ? PMT = 70 FV = 1000

Julia Roberts just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Ms. Roberts pay for the bond? a. $1,000 b. $939.25 c. $1,063.40 d. None of these choices are correct.

b. $939.25 N= 4 I/Y = 12 PV = ? PMT = 100 FV = 1000

A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. If the bond yield would decrease by 0.3 percentage points, the estimated percentage change in price of the bond would be ________%. a. +0.38 b. +0.97 c. -0.97 d. +0.40 e. None of these choices are correct.

b. +0.97

A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for a. $880.22. b. $1,081.11. c. $1,000.00. d. $798.70. e. None of these choices are correct.

b. 1081.11 N = 10 I/Y = 4 PV = ? PMT = 50 FV = 1000

A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ________ years. a. 1.27 b. 3.24 c. 1.31 d. 1.33 e. None of these choices are correct.

b. 3.24

An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase. a. True b. False

b. False

If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value. a. True b. False

b. False

In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses. a. True b. False

b. False

In general, most bonds have annual payments. a. True b. False

b. False

The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value. a. coupon rate; required rate of return; discount b. required rate of return; coupon rate; discount c. required rate of return; coupon rate; premium d. none of the above

b. required rate of return; coupon rate; discount

Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ________ years. a. 1.50 b. 1.92 c. 1.90 d. None of these choices are correct.

c. 1.90

Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bond will be ____ its par value. a. above; above b. above; below c. below; below d. below; above

c. below; above

As interest rates increase, long-term bond prices a. increase by a greater degree than short-term bond prices. b. increase by an equal degree as short-term bond prices. c. decrease by a greater degree than short-term bond prices. d. decrease by an equal degree as short-term bond prices. e. decrease by a smaller degree than short-term bond prices.

c. decrease by a greater degree than short-term bond prices.

Assume that the Federal Reserve just announced that it intends to increase money supply growth. Thus, interest rates will definitely a. decrease. b. increase. c. either increase or decrease. d. remain constant. e. None of these choices are correct

c. either increase or decrease

An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in four years is 9 percent, what will the market value of the bonds be then? a. $52,115,093 b. $55,341,216 c. $55,000,000 d. $56,935,022

d. $56,935,022

Bonds A, B, and C are in a portfolio currently valued at $1,000,000. $300,000 are invested in bond A, $300,000 are invested in bond B, and the remainder is invested in bond C. Bond A has a duration of 2 years, bond B has a duration of 1.7 years, and bond C has a duration of 2.5 years. What is the duration of the portfolio of bonds? a. 2.03 years b. 2.28 years c. 2.31 years d. 2.11 years e. None of these choices are correct.

d. 2.11 years

A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's duration is ________ years. a. 1.44 b. 1.40 c. 2.00 d. 3.56 e. None of these choices are correct.

d. 3.56

A bond with a 10 percent coupon rate pays interest semiannually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond? a. $1,021 b. $1,000 c. $981 d. $951 e. none of the above

d. 951

In the ________ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. a. interest rate b. matching c. laddered d. barbell e. None of these choices are correct.

d. barbell

If analysts expect that the demand for loanable funds will decrease and the supply of loanable funds will increase, they would most likely expect interest rates to ____ and prices of existing bonds to ____ a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

d. decrease; increase

Many financial institutions rely heavily on debt to fund their operations, and they are interconnected by virtue of financing each other's debt positions. Therefore, if one institution cannot pay its debts, it may create cash flow problems for several other institutions. The risk created by this situation is known as a. lending risk. b. repayment risk c. interest rate risk. d. systemic risk.

d. systemic risk