BFIN 420 Final

9%

$1,000 par value zero coupon bonds A - 1 Year - 6% B - 2 Year - 7.5% C - 3 Year - 8% D - 4 Year - 8.5% E - 5 Year - 10.25%

$842

$1,000 par value zero coupon bonds ( ignore liquidity premiums) A - 1 Year - 6% B - 2 Year - 7.5% C - 3 Year - 7.99% D - 4 Year - 8.49% E - 5 Year - 10.7%

3.36

A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The modified duration of this bond is ________ years.

8.12%

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is ________.

lower when the coupon rate is higher

All other things equal, a bond's duration is ________.

Mental accounting

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash earned from her year-end bonus and buys gold futures. She appears to be engaging in ______

max (0, ST - X)

At contract maturity the value of a call option is ________, where X equals the option's strike price and ST is the stock price at contract expiration.

always be higher than

Because of convexity, when interest rates change, the actual bond price will ________ the bond price predicted by duration.

Increase

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

A higher yield on long-term bonds than on short-term bonds

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________

Longer; Lower

Everything else equal, the _______ the maturity of a bond and the _______ the coupon, the greater the sensitivity of the bond's price interest rate changes.

III, I, II

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond

is the same as the performance of portfolio B

Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A ________.

5

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

4.8%

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is ________.

I, II and III

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

-1.4%

You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.

$200 loss

You purchase one MBI July 120 call contract (equaling 100 shares) for a premium of $5. You hold the option until the expiration date, when MBI stock sells for $123 per share. You will realize a ________ on the investment.