Upgrade to remove ads
Only $35.99/year

INVESTMENTS FINAL 2/10 - bonds and bond valuation (20 questions)

Terms in this set (20)

You observe that a corporate bond has a yield-to-maturity of 50% in the market.

A) 50% is the rate of return you will earn on investing in this bond

B) the issuer of the bonds is most likely already in default, or has a high probability of defaulting on the bonds

C) A and B

D) none of the above
B) the issuer of the bonds is most likely already in default, or has a high probability of defaulting on the bonds
The relationship between bond price and yield-to-maturity is:

A) inverse

B) convex

C) (A) and (B)

D) none of the above
C) both (A) and (B)
Consider a 7-year bond with a 9% coupon and a current yield to maturity of 12%. If YTM remains constant, the holding period return of this bond over the next year will be:

A) less than 9%

B) 9%

C) higher than 12%

D) 12%
D) 12%
The yield to maturity on a bond is __________.

A) above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium

B) the discount rate that will set the present value of the payments equal to the bond price

C) equal to the actual return on investment only if all coupon payments are received and re-invested at the yield to maturity

D) all of the above
A) above the coupon rate when the bond sells at a discount, and below the coupon rate when the bond sells at a premium
A bond will sell at a price greater than face value when __________.

A) its coupon rate is greater than its yield to maturity

B) its coupon rate is less than its yield to maturity

C) the market level of interest rates rises

D) all of the above
A) its coupon rate is greater than its yield to maturity
FINANCIAL CALCULATOR
A bond has a 6% annual coupon rate paid out semi-annually, a face value of $1,000 and 3 years to maturity. If the current price of the bond is $1,045 then the annualized YTM is:

A) 2.19%

B) 4.38%

C) 7.32%

D) 6.00%
B) 4.38%
A callable bond:

A) allows the issuer of the bond to buy the bond back from investors prior to the maturity of the bond

B) allows the investor to convert bond holdings into shares of stock

C) is a bond with a floating coupon rate

D) pays no coupons during the life of the bond. The only cash flow is the payment of face value at maturity.
A) allows the issuer of the bond to buy the bond back from investors prior to the maturity of the bond
Which of the following can explain a negative yield on a bond:

A) the rate of inflation is negative

B) the bond has mostly foreign investors who are expecting the currency of the bond to decrease in value.

C) both (A) and (B) are correct.

D) none of the above
A) the rate of inflation is negative
A sudden increase in the yield on a Treasury bond can be caused by:

A) an unexpected rise in inflation

B) expectation that the Federal Reserve will increase rates

C) many large investors trying to sell their bonds at the same time

D) all of the above
D) all of the above
???? MIGHT TAKE THE L HERE

You purchased a 5-year annual interest coupon bond one year ago. Its coupon interest rate was 6% and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been __________.

A) 5.00%

B) 5.51%

C) 7.61%

D) 8.95%
C) 7.61%


(60+60/3%(1-1/1.03^4)+1000/1.03^4) / (60/4%(1-1/1.04^5)+1000/1.04^5) - 1 = 7.61%
When discussing bonds, convexity relates to the ________.

A) shape of the bond price curve

B) shape of the yield curve

C) slope of the yield curve

D) shape of the bond dealer
A) shape of the bond price curve
A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

A) $458.00

B) $641.00

C) $789.00

D) $1,100.00
A) $458.00


1000/1.05^16 = 458.111
The yield-to-maturity (YTM) on a bond is exactly what the investor will earn when buying and holding the bond to maturity:

A) if there is no default on the bond, and coupons are re-invested back into the market at the YTM

B) if there yield curve of rates remains upward-sloping instead of becoming inverted

C) if interest rates in the economy decline steadily while the investor is holding the bond

D) none of the above
A) if there is no default on the bond, and coupons are re-invested back into the market at the YTM
An investor is likely to exercise his/her rights on a convertible bond if:

A) the YTM on the bond increases

B) the stock price of the bond issuer increases significantly

C) inflation increases in the economy

D) there is default on the bond
B) the stock price of the bond issuer increases significantly
A zero-coupon bond:

A) typically trades at a discount to face value

B) would trade at a premium to face value in the rare circumstances that the bond has a negative yield

C) both (A) and (B) are true

D) none of the above
A) typically trades at a discount to face value
An investor is likely to exercise his/her rights on a puttable bond if:

A) the YTM on the bond increases

B) the stock price of the bond issuer decreases significantly

C) there is default on the bond

D) all of the above
D) all the above
An investor is likely to see the issuer of the bond exercise its rights on a callable bond if:

A) the YTM on the bond decreases

B) inflation increases in the economy

C) there is default on the bond

D) all of the above
A) the YTM on the bond decreases
Bond A has a lower YTM than bond B. This could be because:

A) Bond A has a greater probability of default

B) Bond A is more liquid than bond B

C) Bond A has more time to maturity than B

D) Inflation in the economy is relatively high
B) Bond A is more liquid than bond B
Consider a 7-year bond with a 9% coupon and a current yield to maturity of 12%. If an investor buys this bond and holds it all the way to maturity:

A) the price of the bond will generally decline over time until it reaches the face value at maturity

B) the price of the bond will generally decrease over the first six years, but then increase in the final year to maturity

C) the price of the bond will generally increase over time until it reaches the face value at maturity

D) the price of the bond will generally increase over the first six years, but then decrease in the final year to maturity
C) the price of the bond will generally increase over time until it reaches the face value at maturity
The main reason why an investor's return on a bond typically does not match YTM exactly is:

A) bonds commonly end up in default

B) bond prices change over time as they get closer to maturity

C) YTM itself is typically not constant over time

D) bond prices are especially volatile, much more so than stocks
C) YTM itself is typically not constant over time
Sets with similar terms