Survey Test 3

A 1% increase in yields will have the least effect on the price of a bond with a ________. 10-year maturity, selling at 80 20-year maturity, selling at 80 20-year maturity, selling at 100 10-year maturity, selling at 100

10 year maturity selling at 100

The duration of a 5-year zero-coupon bond is ________ years.

5

Bonds rated ________ or worse by Standard & Poor's are considered non-investment grade.

BB+

Convexity implies that duration predictions:I. Underestimate the percentage increase in bond price when the yield falls.II. Underestimate the percentage decrease in bond price when the yield rises.III. Overestimate the percentage increase in bond price when the yield falls.IV. Overestimate the percentage decrease in bond price when the yield rises. II and IV only I and IV only II and III only I and III only

I and IV only

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if:I. Interest rates increase.II. Interest rates stay the same.III. Interest rates fall. II only I, II, and III I and II only I only

I, II, and III

To earn a high rating from the bond rating agencies, a company would want to have:I. A high EBITDA/Interest coverage ratioII. A low debt-to-equity ratioIII. A high quick ratioIV. A high net debt / EBITDA ratio

I,II, and III

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive:I. 9% coupon, 20-year maturity par bondII. 8% coupon, 20-year maturity par bondIII. Zero-coupon 20-year maturity bond

III, II, I

Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? Switch from high-duration to low-duration bonds. Switch from low-duration to high-duration bonds. Switch from low-coupon to high-coupon bonds. Switch from high-grade to low-grade bonds.

Switch from high-duration to low-duration bonds.

Which of the following is not a true statement regarding municipal bonds? A municipal bond is a debt obligation that is not guaranteed by the federal government and thereby is subject to default risk. A municipal bond is a debt obligation issued by state or local governments. The interest income from a municipal bond is exempt from federal income taxation. The interest income from a municipal bond that was issued by a local municipality operating in the state in which you live is exempt from federal but not from state tax.

The interest income from a municipal bond that was issued by a local municipality operating in the state in which you live is exempt from federal but not from state tax.

Yield to maturity is equal to 10%. All other things equal, which of the following has the longest duration? a 30-year bond with a 9% coupon a 10-year zero-coupon bond a 30-year zero coupon bond a 20-year bond with a 9% coupon

a 30-year zero coupon bond

You are working on your tax return for last year. If you purchased a discount bond in the past, you must expect a(n) ________ each year until maturity. If you purchased a premium bond in the past, you must expect a(n) ________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) ammortization item; accretion item accretion item; amortization item capital loss; capital gain capital gain; capital loss

accretion item; amortization item

You pay $1,092 for a 10yr bond today with a semi-annual coupon of 6%. You re-invest all coupon payments at an annual rate of 5%. After a period of 5 years you have a sudden need for cash and are forced to sell the bond. The 5-yr market rate at that point is equal to 4%. What was the effective annual yield that you have earned over the holding period of 5 years? (note semi annual coupon pmts) .Why was your holding period yield so much higher than the yield to maturity (YTM) at the time of purchase?

because you have re-invested coupons at a rate higher than the initial YTM and you gained from a move lower in the market interest rate

The primary difference between Treasury notes and Treasury bonds is ________.

bond term (maturity) at time of issue

An investor in a T-bill earns a return by ________. converting the T-bill at maturity into a higher-valued T-note receiving interest payments every 30 days (i.e. monthly) buying the bill at a discount from face value (FV) receiving dividend payments every 30 days

buying the bill at a discount from face value (FV)

A ________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

callable

You hold a preferred stock in a firm. In the event of bankruptcy, which of the following will be paid off after you have been paid?

common stock

In the context of managing interest rate risk of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at an investment time horizon that is equal to the ________. average of the shortest duration and longest duration of the bonds in the portfolio duration of the portfolio average bond maturity in the portfolio difference between the shortest duration and longest duration of the individual bonds in the portfolio

duration of the portfolio

t/f If bond A ranks pari-passu with bond B that means that in bankruptcy bond B will be paid before bond A.

false

t/f The terms Default Premium and Credit Spread are synonyms for the differential in yield between corporate and Treasury bonds.

false

t/f Longer maturity bonds are less sensitive to changes in the market interest rate than shorter maturity bonds, all else equal.

false, Longer maturity bonds are more sensitive to interest rate changes than short maturity bonds.

t/f Mercedes-Benz issuing a bond denominated in USD to U.S. based investors residing inside the United States territory would be called a Eurobond and would not be considered a foreign bond and would not be nicknamed a Yankee.

false, This bond would be considered a foreign bond and would be nicknamed a Yankee.

t/f The Liquidity Preference Hypothesis of the yield curve says that forward rates implied by the shape of the yield curve are the truly expected future interest rates investors expect to prevail and at which investors expect to be able to invest or borrow money.

false, that would be the pure expectation hypothesis. The LP hypothesis assumes there to be a premium built in today over and above the rates we expect to prevail in future.

t/f The quoted coupon on a TIPS security represents the Nominal Rate of return, the CPI adjustment the real rate of return

false, the coupn is the real rate, the CPI adjustment makes it a zero real rate return, only the coupos adds real return.

Bond convexity implies that an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. The answer cannot be determined from the information given. greater than equivalent to smaller than

greater than

Consider the pure expectations theory of the term structure of interest rates. If the yield curve is upward-sloping, this indicates that investors expect short-term interest rates to ________ in the future.

increase

A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's financial position is at risk if ________. the price of all fixed-income securities rises credit spreads fall interest rates rise interest rates fall

interest rates rise

The bonds of Dunder Mifflin Paper Company have received a rating of Baa by Moody's. The Moody's Baa rating indicates that the bonds are ________. high grade investment grade in default non-investment grade bonds

investment grade

The clean price of a bond is the ________. average of the bid and ask price of a bond price at which the bond was purchased plus accrued interest. dirty price at which the bond was purchased + accrued interest. invoice price being the total cost at which the bond was purchased minus accrued interest.

invoice price being the total cost at which the bond was purchased minus accrued interest.

You can be sure that a bond will sell at a discount to par when ________.

its coupon rate is less than its yield to maturity

Pension fund managers can typically best bring about an effective reduction in interest rate risk by holding ________. short-maturity bonds long-duration bonds long-maturity bonds short-duration bonds

long-duration bonds

Consider a 7-year bond with an 8% coupon and a yield to maturity of 5.50%. If interest rates remain constant, 1 year from now the price of this bond will be ________.

lower

Yields on municipal bonds are generally_____ than yields on similar corporate bonds because of differences in ________. lower; credit rating lower; call protection higher; default risk lower; taxation higher; risk

lower, taxation

Banks and other financial institutions can best manage interest rate risk by ________. matching the durations of their assets and liabilities matching the maturities of their assets and liabilities minimizing the duration of assets and maximizing the duration of liabilities maximizing the duration of assets and minimizing the duration of liabilities

matching the durations of their assets and liabilities

invtestment grade bonds are rated as

moodys- Baa and above S&p, Fitch- BBB or above

Everything else equal, the ________ the maturity of a bond and the ________ the coupon, the lower the sensitivity of the bond's price to interest rate changes.

shorter, higher

t/f A Yen-denominated corporate bond, issued by Caterpillar and sold to investors outside of Japan, would be called a Eurobond and would not be nicknamed a Samurai.

true

t/f Bonds issued by subsidiaries that are Senior obligations could be considerded structurally subordinated if the issue is not fully guaranteed by the Holding Company.

true

t/f Bonds rated as Investment Grade typically have a relatively high interest coverage ratio.

true

t/f For a bond selling at a discount, its Current Yield is higher than the Coupon Rate.

true

t/f If the Liquidity Preference hypothesis of the term structure of interest rates is correct then a totally flat yield curve (horzontal) will signal falling short term interest rates in future.

true

t/f Interest on U.S. Treasury bonds is taxable at the federal level but non-taxable at the State level.

true

t/f The Negative Pledge debt covenant serves the purpose of protecting the buyers of the current debt issue, by restricting the company to pledge away assets to future debt issues.

true

t/f The yield differential between a 5-year BBB corporate bond and a 5-year Treasury bond would be referred to as the 5-year BBB credit spread.

true

t/f Unlike a commercial bank, a pension fund typically has liabilities with high duration and needs to find high duration assets if the goal is to immunize against interest rate risk

true

t/f The coupon rate on a newly issued TIPS security is equal to the real rate of return on the TIPS

true, the TIPS principal gets adjusted by the CPI inflation rate and the coupon is paid in cash for a total return of CPI + Coupon.

A debenture is ________.

unsecured debt