FIN 303 Ch 8 HW 2

Bonds sell at a discount when the market rate of interest is: - less than the bond's coupon rate. - greater than the bond's coupon rate. - equal to the bond's coupon rate. - none of the above is true.

greater than the bond's coupon rate.

In regard to interest rate risk, short-term bonds: - and longer-term bonds have no interest rate risk because their coupon interest rates are fixed. - and longer-term bonds have the same amount of interest rate risk because their coupon interest rates are fixed. - have less interest rate risk than longer-term bonds. - have more interest rate risk than longer-term bonds.

have less interest rate risk than longer-term bonds.

A benefit of a callable bond is the: - issuer may replace it with a bond that has a lower coupon rate. - issuer may sell it for a higher price. - issuer may replace it with a bond that has a higher coupon rate. - bondholder may sell it for a higher price.

issuer may replace it with a bond that has a lower coupon rate.

Bonds sell at a premium when the market rate of interest is: - less than the bond's coupon rate. - greater than the bond's coupon rate. - equal to the bond's coupon rate. - none of the above is true.

less than the bond's coupon rate.

Which of the following theorem explains the relationship between interest rates and bond prices? - Bond prices are directly related to interest rate movements. - For a given change in interest rates, the prices of higher-coupon bonds will change more drastically than the prices of lower-coupon bonds. - For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds. - For a given change in interest rates, the prices of short-term bonds will change more drastically than the prices of long-term bonds.

For a given change in interest rates, the prices of long-term bonds will change more drastically than the prices of short-term bonds

Which of the following statements is true? - The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the highest at the bottom of a recession. - If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping. - The longer the maturity of a security, the greater its interest rate risk. - The interest rate risk premium always adds a downward bias to the slope of the yield curve.

The longer the maturity of a security, the greater its interest rate risk.

Which one of the following statements about bond is NOT true? - The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity. - The expected future cash flows are estimated using the coupons that the bond will pay and the maturity value to be received. - To compute a bond's price, one needs to calculate the present value of the bond's expected cash flows. - The value, or price, of any asset is the future value of its cash flows.

The value, or price, of any asset is the future value of its cash flows.

A bond pays a coupon interest rate of 7.5 percent. The market rate on similar bonds is 8.4 percent. The bond will sell at _____. - a premium - par - a discount - book value

a discount

Which of the following statements is true of zero coupon bonds? - Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity. - Zero coupon bonds sell well below their face value (at a deep discount) because they offer no coupons. - The most frequent and regular issuer of zero coupon securities is the U.S. Treasury Department. - All of the above are true.

All of the above are true.

Which one of the following statements is true of a bond's yield to maturity? - The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond. - It is the annual yield that the investor earns if the bond is held to maturity, and all the coupon and principal payments are made as promised. - A bond's yield to maturity changes daily as interest rates increase or decrease. - All of the above are true.

All of the above are true.

Which of the following statements is true? - Interest rate risk decreases as maturity increases. - All other things being equal, short-term bonds are riskier than long-term bonds. - Long-term bonds have lower price volatility than short-term bonds of similar risk. - As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.

As interest rates decline, the prices of bonds rise; and as interest rates rise, the prices of bonds decline.