Investments Exam 3

Where Y = yield to maturity, the duration of a perpetuity would be _________.

(1+Y)/Y

One, two and three year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate in the second year?

9%

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

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

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

Always be higher than

If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

At premium, YTM < Coupon Rate

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.

Both bonds will decrease in value but bond B will decrease more than bond A

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be _________.

Higher

Immunization of coupon paying bonds is not a passive strategy because: I. the portfolio must be rebalanced every time interest rates change. II. the portfolio must be rebalanced over time even if interest rates don't change. III. convexity implies duration-based immunization strategies do not work.

I and II only

Advantages of cash flow matching and dedicated strategies include ______. I. once the cash flows are matched there is no need for rebalancing. II. cash flow matching typically earns a higher rate of return than active bond portfolio management. III. financial institution's liabilities often exceed the maturity of available bonds, making cash matching even more desirable.

I only

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

Lower when the coupon rate is higher

. The duration is independent of the coupon rate only for which one of the following?

Perpetuities

An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude.

Smaller than

Given its time to maturity the duration of a zero coupon bond is _________.

The same regardless of the discount rate

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

coupon rate

bonds issued in the currency of the issuer's country but sold in other national markets

eurobonds

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate __________________.

expected increases in inflation over time

The bonds of Elbow Grease Dishwashing Company have received a rating of "C" by Moody's. The "C" rating indicates the bonds are _________.

junk bonds

A bond where the bondholder has the right to cash in before maturity at a specific price after a specific date

puttable bond

The invoice price of a bond is the ______.

stated or flat price in a quote sheet plus accrued interest