FN 10

A bond is ______ if the issuer has the right to buy it back before it matures.

callable

True or false: All else equal, the price of a discount bond will decline over time as it approaches maturity.

False

True or false: An investor is guaranteed to earn at least the YTM.

False

True or false: Callable bonds always have a call price equal to par value. True false question.

False

True or false: The uncertainty about future portfolio value that results from the need to reinvest bond coupons at yields not known in advance is called price risk. True false question.

False

The yield value of a 32nd is equal to the change in yield to maturity that would equal a 1/ ________ change in bond price.

32

True or false: Two bonds with the same maturity will also have the same duration.

False

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

The quoted price for a bond is the ________ (clean/dirty) price, and the price you actually pay is the ________ (clean/dirty) price.

clean, dirty

A bond with a YTM of 10% and a coupon rate of 8% will trade at (a) _______.

discount

The coupon rate is the bond's annual coupon _____, whereas the current yield is the bond's annual coupon divided 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

The change in bond price resulting from a change in yield to maturity of one basis point is the ________. Multiple choice question.

dollar value of an 01

A bond's ______ is a measure of its sensitivity to changes in bond yields.

duration

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. Multiple choice question.

duration

The strategy of periodically rebalancing a dedicated bond portfolio to maintain a portfolio duration matched to a specific target date is called _____ immunization.

dynamic

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.

fixed sum of money

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

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. Multiple choice question.

higher

_________(Low/High) coupon bonds are more sensitive to changes in interest rates.

low

The bond's annual coupon divided by its ______ value is called the coupon rate. (Enter one word per blank.)

par

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. Multiple choice question.

reinvestment rate

All else equal, the higher a bond's coupon, the ______ (shorter/longer) its duration.

shorter

The most common type of bond is the so-called _______ bond.

straight

True or false: If interest rates rise, bond prices will fall.

True

True or false: Modified duration is a variation of Macaulay duration.

True

True or false: Price risk and reinvestment risk tend move in opposite directions, meaning they tend to offset each other.

True

True or false: The dirty price is generally higher than the clean price.

True

True or false: Two bonds with the same maturity will also have the same duration. True false question.

False

True or false: The dirty price is generally higher than the clean price. True false question.

True

True or false: The longer a bond's maturity, the longer is its duration.

True

The equation for the modified duration is as follows: Multiple choice question.

Macaulay duration/(1 + YTM/2)

True or false: The price of a bond is the present value of its coupons and par value.

True

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.

YTM