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)