Q&A Hero

Q: Jane needs a specific sum of money in five years. She should invest in a. high quality, 20 year Treasury bonds. b. high quality coupon bonds with a duration of five years. c. high quality coupon bonds maturing in five years. d. high credit risk bonds maturing before five years.

Q: Price risk and reinvestment risk a. offset one another to a certain extent as interest rates change. b. are two bond risks related to credit risk. c. work together to magnify the price impact of a change in interest rate. d. both have an effect on bond price.

Q: Interest rate risk is a. duration. b. the extent that coupon rates vary with time. c. the potential variability in the realized rate of return caused by changes in market rates. d. the potential variability in the bond maturity caused by changing discount rates.

Q: Which of the following statements is true? a. Bonds vary directly with interest rates. b. Bond volatility varies inversely with maturity. c. Low coupon bonds have lower bond volatility than high coupon bonds. d. Bond duration increases with maturity.

Q: Calculate the volatility of $1,000 face value 8% coupon bond whose price has varied from $1,020 to $1,050. a. $30.00 b. 5% c. 3% d. $50.00

Q: If a 7% coupon (semiannual) bond purchased at par sells 2 years later for $990, what is the realized rate of return (annualized)? a. 8% b. 6.52% c. 7.32% d. 5.75%

Q: Calculate the realized return on a $1,000 face value, 9 percent coupon bond (annual) purchased for $800 and sold one year later for $850. a. 9% b. 11.25% c. 14.5% d. 17.5%

Q: The yield to maturity measure assumes that coupon interest is reinvested at a. the yield to maturity. b. the changing market rates. c. the coupon rate. d. the treasury bond rate.

Q: A bond yield measure should capture all of the following except a. coupon payments. b. reinvestment income. c. changing coupon rate levels. d. capital gains or losses.

Q: Which of the following risks will not affect zero coupon bonds? a. price risk b. reinvestment risk c. credit risk d. default risk

Q: A $1,000 par, 8% Treasury bond maturing in three years is priced to yield 7%. Its market price (assuming semiannual compounding) is a. $974.21 b. $813.50 c. $927.50 d. $1,026.64

Q: In a fixed-rate bond, the variable which changes to determine market rate of return is a. price. b. coupon rate. c. coupon amount. d. face value.

Q: As bond maturity _________, so does the _________ and ________. a. decreases; coupon rate; market price. b. decreases; duration; face value. c. increases; duration; price variability. d. increases; risk; coupon rate.

Q: The duration of a $1000, 2-year, 7% coupon bond (interest paid annually) is _____ when market rates are 8%? a. 2.036 b. 1.934 c. 1.902 d. 1.856

Q: A $1000 2-year 10% coupon bond is priced at $1000 in the market. The duration is a. less than two years. b. more than two years. c. 10%. d. 2 years.

Q: A 3-year zero coupon bond selling at $900 and yielding 12.18 percent has a duration of a. 3 years. b. 2.78 years. c. 2.50 years. d. 2 years.

Q: Bond A has a duration of 5.6 while bond B has a duration of 6.0. Bond B a. will have greater price variability, given a change in interest rates, relative to bond A. b. will have a longer maturity than bond A. c. will have a higher coupon rate than bond A. d. will have less price variability, given a change in interest rates, relative to bond A.

Q: Duration is a measure of a. a bond's price. b. a bond's contractual maturity. c. the length of time it takes to get back the original investment. d. bond price volatility.

Q: If market interest rates fall after a bond is issued, the a. face value of the bond increases. b. investor will sell the bond. c. market value of the bond is increasing. d. market value of the bond is decreasing.

Q: A bond currently selling at a premium price above face value a. has a yield equal to its coupon rate. b. has a yield below its coupon rate. c. has a yield above its coupon rate. d. has no risk.

Q: When a bond's coupon rate is equal to the market rate of interest, the bond will sell for a. a discount. b. a premium. c. par. d. a variable rate.

Q: A $1000 bond with a coupon rate of 10%, interest paid semiannually, matures in eight years and sells for $1120. What is the yield to maturity? a. 10.8% b. 11.0% c. 7.9% d. 7.6%

Q: A $1000 bond with a coupon rate of 7% matures in eight years. The bond is now selling for $950, what is the expected yield to maturity on the bond? a. 6.5% b. 7.9% c. 9.0% d. 8.3%

Q: A $1000 bond with an 8.2% coupon rate, interest paid semiannually, and maturing in six years is currently yielding 7.6% in the market. What is the current price of the bond? a. $1,027.08 b. $1,131.19 c. $1,028.48 d. $972.00

Q: A corporate bond, paying $65 interest at the end of each year for 6 years, has a face value of $1,000. If market rates on newly issued similarly rated corporate bonds are now 7.5%, what is the current market price of this bond? a. $953.06 b. $1,000.00 c. $1,048.41 d. $936.42

Q: If a $1000 par value bond has an 8% coupon (annual payments) rate, a 4-year maturity, and similar bonds are yielding 11%, what is the price of the bond? a. $1,000.00 b. $880.22 c. $906.93 d. $910.35

Q: Judy would like to accumulate $70,000 by the time her son starts college in ten years. What amount would she need to deposit now in a deposit account earning 6%, compounded yearly, to accumulate her savings goal? a. $4,200 b. $39,513 c. $39,088 d. $125,359

Q: Tom deposits $10,000 in a savings deposit paying 4%, compounded monthly. What amount would he have at the end of seven years? a. $13,225 b. $13,159 c. $13,179 d. $13,325

Q: $5,000 invested at 6%, compounded quarterly, will be worth how much after 5 years? a. $6,691 b. $16,036 c. $6,734 d. $5,386

Q: Which of the following statements is true about bonds? a. The higher the coupon rate, the shorter the duration. b. The yield on a bond is usually fixed. c. A bond's coupon rate is equal to its face value. d. Most bonds pay interest annually.

Q: Which of the following statements is true? a. Bond prices and interest rates move together. b. Coupon rates are fixed at the time of issue. c. Short-term securities have large price swings relative to long-term securities. d. The higher the coupon, the lower the price of a bond.

Q: All else equal, the greater a security's coupon, the lower the security's price sensitivity to a change in interest rate.

Q: The duration of a bond with ten-year maturity and 10% coupon is less than ten years.

Q: Ceteris paribus, the holder of a fairly priced premium bond must expect a capital gain over their holding period.

Q: A bond with an 9% coupon and a 10% required return will sell at a premium to par.

Q: Expected yield is essentially a forecast.

Q: A zero-coupon bond bears no interest.

Q: Duration matching eliminates risk.

Q: Money has time value because of inflation.

Q: Bonds with lower coupon rates have a shorter duration than similar bonds with high coupon rates.

Q: The coupon rate varies inversely with bond prices.

Q: If the coupon rate equals the market rate, a bond is likely to be selling at a discount.

Q: The duration of a coupon bond must be shorter than its term to maturity.

Q: The duration of a zero coupon bond equals the term to maturity of the bond.

Q: Duration is a measure of interest rate volatility.

Q: Price risk is of no concern to the investor if the bond is held to maturity.

Q: Price risk is one aspect of interest rate risk.

Q: In a short-term bond price risk is not a problem, but reinvestment risk is a considerable concern.

Q: The price risk of a bond tends to offset reinvestment risk somewhat as market interest rates vary.

Q: Short-term bonds have greater price risk compared to long-term bonds.

Q: Price risk is a measure of bond volatility.

Q: The higher the coupon rate, the lower the bond price volatility.

Q: A zero coupon bond has no reinvestment risk.

Q: If market interest rates have increased since a bond was purchased, price risk will increase the price of the bond and reinvestment risk will decrease the return on the coupons.

Q: The realized yield may be influenced by coupon reinvestment rates.

Q: Yield to maturity assumes reinvestment of coupons at the same yield.

Q: The price of a bond is the present value of future payments discounted at the coupon rate.

Q: The price of a bond and the market rate of interest are inversely related.

Q: The coupon rate may be the market rate of interest for a bond.

Q: In January 2011, a Japanese investor placing money in dollar denominated assets desires a 5% real rate of return. Then international expected inflation rate is about 2.5% and the dollar is expected to decline against Japanese Yen by 10% over the investment period. What is the minimum required rate of return for this Japanese investor?

Q: You are the Chief Economist of Free Formosan Investment and are conducting research on inflation forecasting by using the information of the Treasury Inflation-Protected Securities (TIPS). The information that you have are as the following: Nominal yield on 10-year nonindexed Treasury bond is 4.5%; Real yield on 10-year TIPS is 2.25%; The market adjustment for inflation and liquidity risk is 45 basis-points. What is the expected annual inflation rate over the next decade?

Q: Sam has just lent Mary $1000 for 1 year 6%. Sam and Mary expect inflation to be 3% over the next year. If inflation turns out to have been only 2%, what is the impact upon Sam and Mary?

Q: Calculate the price of a $1000 face value bond, maturing in three years with a 9 percent coupon (paid semiannually) if current real rates of interest are 4 percent, historical inflation rates are 3 percent, and expected inflation rates are 4 percent. (Use if next chapter covered in exam)

Q: Explain why realized real rates of interest are sometimes negative, but expected real rates are always positive. Give an example.

Q: Explain how price expectations influence the level of interest rates. What impact has inflation premiums had on interest rate levels in recent years?

Q: Using loanable funds theory, discuss how changes in consumer savings, business investment, and in the money supply by the Federal Reserve System can influence the level of interest rates.

Q: If everything is equal, the most likely impact of a decrease in income tax rates on economy would be to a. Decrease the supply of loanable funds b. Increase the savings rate c. Increase interest rates d. Federal Reserve decreases in the money supply

Q: On August 7, 2011, Standard and Poors (S&P) announced a downgrade of the rating of the U.S. long-term government debt from AAA to AA+. If other things are equal, what is the impact on the yields on the Treasury securities?a. Yields increaseb.Yields decreasec.Yield unchanged

Q: You go to Finance Yahoo! Website and find that yields on all corporate and Treasury securities have increased. The yield increases may be explained by which one of the following: a. A decrease in current and expected future returns of real corporate investments b. Newly expected increase in the value of the dollar c. An increase in U.S. inflationary expectations d. Decreases in the U.S. Government budget deficit

Q: What is NOT an economic factor that cause a shift in the desired lending curve changes the equilibrium rate of interest?a. Federal Reserve increases in the money supplyb. Business savingsc. Government budget surplusesd. Consumer credit purchases

Q: An investor purchased a $1000 face value bond for $925. The bond has an 8 percent coupon rate, paid annually, and matures in five years. The investor sold the bond one year later for $965, while the price level was increasing at 5 percent. Calculate the pre-tax real realized rate of return on the investment? a. -.7% b. 8% c. 3% d. 5%

Q: An investor loaned money at 14 percent with an expected rate of inflation of 11 percent. During the year the actual rate of inflation was 8 percent. The investor's expected real rate of interest was _____ and the realized real rate for the investor was ______? a. 14 percent; 8 percent. b. 6 percent; 3 percent. c. 3 percent; 3 percent. d. 3 percent; 6 percent.

Q: Which of the following actions will reduce the interest rate risk of the lender? a. Make fixed interest rate loans. b. Make fixed interest rate, long-term loans. c. Make variable interest rate loans. d. Invest in fixed rate Treasury bonds.

Q: Interest rates represent a. allocational forces b. penalties for early consumption c. rewards for deferring consumption d. all of the above

Q: Interest rates move ______ with expected inflation; _____ with economic activity. a. directly/inversely b. inversely/inversely c. directly/directly d. inversely/directly

Q: With the real rate at 3 percent, most loans were made at 10 percent last year. This year interest rates have declined to 8 percent. What was the expected inflation rate last year?a. 5%b. 2%c. 7%d. 8%

Q: All but one of the following is associated with economies with very high inflation rates? a. Very few people who wish to borrow at a fixed rate. b. Little if any long-term debt market. c. Variable interest rate loans. d. Reliance on short-term debt contracts.

Q: Economies with very high current and expected inflation rates a. will have a significant long-term debt market. b. will have debt instruments with interest rates indexed to the inflation rate. c. will favor long-term financing over short-term. d. will have very low interest rates.

Q: An increase in income tax rates a. will decrease the savings rate. b. will decrease the supply of loanable funds. c. will increase interest rates. d. all of the above.

Q: A change from an income tax to a value added tax on consumption a. should decrease the supply of loanable funds. b. would decrease the demand for loanable funds. c. should increase the supply of loanable funds. d. should shift consumers' preferences toward consumption.