Q&A Hero

Q: If an N year security recovered the same percentage of its cost in PV terms each year the duration would be A. N. B. 0. C. sum of the years/N. D. N!/N2. E. none of the above.

Q: An annual payment bond with a $1,000 par has a 5% quoted coupon rate, a 6% promised ytm, and 6 years to maturity. What is the bond's duration? A. 5.31 years B. 5.25 years C. 4.76 years D. 4.16 years E. 3.19 years

Q: A semiannual payment bond with a $1,000 par has a 7% quoted coupon rate, a 7% promised ytm, and 10 years to maturity. What is the bond's duration? A. 10.00 years B. 8.39 years C. 6.45 years D. 5.20 years E. 7.35 years

Q: A corporate bond returns 12% of its cost (in PV terms) in the first year, 11% in the second year, 10% in the third year and the remainder in the fourth year. What is the bond's duration in years? A. 3.68 years B. 2.50 years C. 4.00 years D. 3.75 years E. 3.32 years

Q: Corporate Bond A returns 5% of its cost in PV terms in each of the first five years and 75% of its value in the sixth year. Corporate Bond B returns 8% of its cost in PV terms in each of the first five years and 60% of its cost in the sixth year. If A and B have the same required return, which of the following is/are true? I. Bond A has a bigger coupon than Bond B. II. Bond A has a longer duration than Bond B. III. Bond A is less price-volatile than Bond B. IV. Bond B has a higher FPV than Bond A. A. III only B. I, III, and IV only C. I, II, and IV only D. II and IV only E. I, II, III, and IV

Q: A 6-year annual payment corporate bond has a required return of 9.5% and an 8% coupon. Its market value is $20 over its PV. What is the bond's Err? A. 8.00% B. 10.21% C. 9.98% D. 9.03% E. 3.53%

Q: An 8-year annual payment 7% coupon Treasury bond has a price of $1,075. The bond's annual Err must be A. 13.49% B. 5.80% C. 7.00% D. 1.69% E. 4.25%

Q: A 10-year annual payment corporate coupon bond has an expected return of 11% and a required return of 10%. The bond's market price is A. greater than its PV. B. less than par. C. less than its Err. D. less than its PV. E. $1000.00.

Q: A corporate bond has a coupon rate of 10% and a required return of 10%. This bond's price is A. $924.18 B. $1000.00 C. $879.68 D. $1124.83 E. not possible to determine from the information given

Q: A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised ytm is 5.5%? A. $1261.32 B. $1253.12 C. $1250.94 D. $1263.45 E. $1264.79

Q: An 8-year corporate bond has a 7% coupon rate. What should be the bond's price if the required return is 6% and the bond pays interest semiannually? A. $1062.81 B. $1062.10 C. $1053.45 D. $1052.99 E. $1049.49

Q: A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7%. By how much is the bond mispriced? A. $0.00 B. Overpriced by $7.29 C. Underpriced by $7.29 D. Overpriced by $4.43 E. Underpriced by $4.43

Q: You would want to purchase a security if P ____________ PV or Err ____________ rrr.A. ≥; ≤B. ≥; ≥C. ≤; ≥D. ≤; ≤

Q: A bond that you held to maturity had a realized return of 8%, but when you bought it, it had an expected return of 6%. If no default occurred, which one of the following must be true? A. The bond was purchased at a premium to par. B. The coupon rate was 8%. C. The required return was greater than 6%. D. The coupons were reinvested at a higher rate than expected. E. The bond must have been a zero coupon bond.

Q: A security has an expected return less than its required return. This security is A. selling at a premium to par. B. selling at a discount to par. C. selling for more than its PV. D. selling for less than its PV. E. a zero coupon bond.

Q: The interest rate used to find the present value of a financial security is the A. expected rate of return. B. required rate of return. C. realized rate of return. D. realized yield to maturity. E. current yield.

Q: Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. ytm IV. Payment frequency A. II and IV only B. I and III only C. II and III only D. II only E. II, III, and IV only

Q: Duration is A. the elasticity of a security's value to small coupon changes. B. the weighted average time to maturity of the bond's cash flows. C. the time until the investor recovers the price of the bond in today's dollars. D. greater than maturity for deep discount bonds and less than maturity for premium bonds. E. the second derivative of the bond price formula with respect to the ytm.

Q: The required rate of return on a bond is A. the interest rate that equates the current market price of the bond with the present value of all future cash flows received. B. equivalent to the current yield for non par bonds. C. less than the Err for discount bonds and greater than the Err for premium bonds. D. inversely related to a bond's risk and coupon. E. none of the above.

Q: Ignoring default risk, if a bond's expected return is greater than its required return, then the bond's market price must be greater than the present value of the bond's cash flows.

Q: A ten-year maturity zero coupon bond will have lower price volatility than a ten-year bond with a 10% coupon.

Q: Higher interest rates lead to lower bond convexity, ceteris paribus.

Q: The higher a bond's coupon, the lower the bond's price volatility.

Q: The lower the level of interest rates, the greater a bond's price sensitivity to interest rate changes.

Q: A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.

Q: Any security that returns a greater percentage of the price sooner is less price-volatile.

Q: For a given interest rate change, a 20-year bond's price change will be twice that of a 10-year bond's price change.

Q: The greater a security's coupon, the lower the security's price sensitivity to an interest rate change, ceteris paribus.

Q: The longer the time to maturity, the lower the security's price sensitivity to an interest rate change, ceteris paribus.

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

Q: All else equal, the holder of a fairly priced premium bond must expect a capital loss over the holding period.

Q: A fairly priced bond with a coupon less than the expected return must sell at a discount from par.

Q: A bond with an 11% coupon and a 9% required return will sell at a premium to par.

Q: Suppose two bonds of equivalent risk and maturity have different prices such that one is a premium bond and one is a discount bond. The premium bond must have a greater expected return than the discount bond.

Q: If a security's realized return is negative, it must have been true that the expected return was greater than the required return.

Q: At equilibrium a security's required rate of return will be less than its expected rate of return.

Q: If interest rates increase, the value of a fixed income contract decreases and vice versa.

Q: Explain the market segmentation theory of the term structure.

Q: Explain the logic of the liquidity premium theory of the term structure.

Q: The one-year spot rate is currently 4%; the one-year spot rate one year from now will be 3%; and the one-year spot rate two years from now will be 6%. Under the unbiased expectations theory, what must today's three-year spot rate be? Suppose the three-year spot rate is actually 3.75%, how could you take advantage of this? Explain.

Q: According to current projections, Social Security and other entitlement programs will soon be severely underfunded. If the government decides to cut social security benefits to future retirees and raise social security taxes on all workers, what will probably happen to the supply of funds available to the capital markets? What will be the effect on interest rates?

Q: Who are the major suppliers and demanders of funds in the United States and what is their typical position?

Q: Would you expect the demand curve for businesses to be steeper than the demand curve for funds by the federal government? Explain.

Q: A foreign investor placing money in dollar denominated assets desires a 4% real rate of return. Global inflation is running about 3% and the dollar is expected to decline against her home currency by 1.5% over the investment period. What is her minimum required rate of return? Explain

Q: In October 1987 stock prices fell 22% in one day and bond rates fell also. Use the loanable funds theory to explain what happened.

Q: Can the actual real rate of interest be negative? When? Can the expected real rate be negative?

Q: What is the difference between the expected real interest rate and the real rate of interest actually earned?

Q: What is the loanable funds theory of interest rates?

Q: Suppose you borrow $15,000 and then repay the loan by making 12 monthly payments of $1,297.92 each. What rate will you be quoted on the loan? What is the effective annual rate you are paying?

Q: YIELD CURVE FOR ZERO COUPON BONDS RATED AA Assume that there are no liquidity premiums.According to the unbiased expectations theory,A. markets are segmented and buyers stay in their own segmentB. liquidity premiums are negative and time varyingC. the term structure will most often be upward slopingD. the long-term spot rate is an average of the current and expected future short-term interest ratesE. forward rates are less than the expected future spot rates

Q: YIELD CURVE FOR ZERO COUPON BONDS RATED AAAssume that there are no liquidity premiums.To the nearest basis point, what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today?A. 10.41%B. 10.05%C. 9.16%D. 10.56%E. 9.96%

Q: You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following: A. a decrease in U.S. inflationary expectations B. newly expected decline in the value of the dollar C. an increase in current and expected future returns of real corporate investments D. decreased Japanese purchases of U.S. Treasury Bills/Bonds E. increases in the U.S. government budget deficit

Q: An annuity and an annuity due with the same number of payments have the same future value if r = 10%. Which one has the higher payment? A. They both must have the same payment since the future values are the same B. There is no way to tell which has the higher payment C. An annuity and an annuity due cannot have the same future value D. The annuity has the higher payment E. The annuity due has the higher payment

Q: If M > 1 and you solve the following equation to find i: PV * (1 + (i/M))M*N= FV, the i you get will be A. the bond equivalent yield B. the EAR C. the TOE D. the EYE E. the rate per compounding period

Q: You borrow $95 today for six and a half weeks. You must repay $100 at loan maturity. What is the effective annual rate on this loan? A. 50.73% B. 40.00% C. 32.33% D. 27.95% E. 37.93%

Q: An insurance company is trying to sell you a retirement annuity. The annuity will give you 20 payments with the first payment in 12 years when you retire. The insurance firm is asking you to pay $50,000 today. If this is a fair deal, what must the payment amount be (to the dollar) if the interest rate is 8%? A. $5,093 B. $12,824 C. $9,472 D. $11,874 E. $10,422

Q: An investment pays $400 in one year, X amount of dollars in two years, and $500 in 3 years. The total present value of all the cash flows (including X) is equal to $1500. If i is 6%, what is X? A. $702.83 B. $822.41 C. $789.70 D. $749.67 E. $600.00

Q: According to the market segmentation theory short-term investors will not normally switch to intermediate- or long-term investments.

Q: The traditional liquidity premium theory states that long-term interest rates are greater than the average of expected future interest rates.

Q: The unbiased expectations hypothesis of the term structure posits that long-term interest rates are unrelated to expected future short-term rates.

Q: The term structure of interest rates is the relationship between interest rates on bonds similar in terms except for maturity.

Q: Everything else equal, the interest rate required on a callable bond will be less than the interest rate on a convertible bond.

Q: We expect liquidity premiums to move inversely with interest rate volatility.

Q: Convertible bonds will normally have lower promised yields than straight bonds of similar terms and quality.

Q: The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

Q: An improvement in economic conditions would likely shift the supply curve down and to the right and shift the demand curve for funds up and to the right.

Q: When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve.

Q: An increase in the marginal tax rates for all U.S. taxpayers would probably result in reduced supply of funds by households.

Q: An increase in the perceived riskiness of investments would cause a movement up along the supply curve.

Q: Households generally supply more funds to the markets as their income and wealth increase, ceteris paribus.

Q: With a zero interest rate both the present value and the future value of an N payment annuity would equal N x payment.

Q: For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows and the future value of the same annuity will be greater than the sum of the cash flows.

Q: Earning a 5% interest rate with annual compounding is better than earning a 4.95% interest rate with semiannual compounding.

Q: An investor earned a 5% nominal rate of return over the year. However, over the year, prices increased by 2%. The investor's real rate of return was less than his nominal rate of return.

Q: Simple interest calculations assume that interest earned is never reinvested.

Q: If you earn 0.5% a month in your bank account, this would be the same as earning a 6% annual interest rate with annual compounding.

Q: The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption.

Q: Explain how the credit crunch originating in the mortgage markets hurt financial intermediaries' attempts to use diversification and monitoring to limit the riskiness of their loans and investments while offering more liquid claims to savers.

Q: What determines the price of financial instruments? Which are riskier, capital market instruments or money market instruments? Why?

Q: Discuss the major macro benefits of financial intermediaries. What role does the government have in the credit allocation process?