Bond Valuation, Bond Theorems, Convexity
Check your understanding of bond features, theories, bond price, interest rate effect, yield, duration, convexity, immunization.
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Which of the following would cause the required return on a bond to increase, everything else held equal?
The bond is senior to the issuer’s other bonds.
The borrower is subject to dividend restrictions.
The bond’s rating changes from B to BB.
The bond is callable.
R’s 9% coupon is paid once per year. The bond’s yield to maturity is 12% and its duration is 15 years. What will be the percentage change in bond R’s price if its yield to maturity increases by 20 basis points?
Interest rates and bond prices
move in the same direction.
move in opposite directions.
sometimes move in the same direction, sometimes in opposite directions.
have no relationship with each other (i.e., they are independent).
The contract between a bond issuer and a bondholder is called:
a general obligation.
When interest rates decrease, the duration of a 30-year coupon bond normally:
the answer cannot be determined without more information.
may increase or decrease, depending on whether the bond sells at a premium or discount
In the United States, most bonds pay interest_______ a year, while many European bonds pay interest________a year.
What is the purchase price of a bond that has 5 years and 6 months until it matures? The face value of the bond is $2000 and the coupon rate is 6.2% compounded semi-annually. The yield rate is 7.5% compounded semi-annually.
Which of the following might be found in a bond indenture?
A sinking fund clause.
A subordination clause.
A dividend restriction clause.
All of the above.
Which of the following bonds will have the longest duration?
10-year maturity and a 15% coupon.
15-year maturity and a 12% coupon.
20-year maturity and an 8% coupon.
20-year maturity and a 12% coupon.
When the market's required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:
cannot be determined without more information.
If a bond sells at a high premium, then which of the following relationships hold true? (P0 represents the price of a bond and YTM is the bond's yield to maturity.)
P0 < par and YTM > the coupon rate.
P0 > par and YTM > the coupon rate.
P0 > par and YTM < the coupon rate.
P0 < par and YTM < the coupon rate.
An investor who expects increasing interest rates should purchase a bond that has a _____ coupon and a _____ term to maturity.
The expected rate of return on a bond if bought at its current market price and held to maturity.
yield to maturity
capital gains yield
What's the value to you of a $1,000 face-value bond with an 8% coupon rate when your required rate of return is 15 percent?
More than its face value.
Less than its face value.
Same as face Value
If an investor may have to sell a bond prior to maturity and interest rates have risen since the bond was purchased, the investor is exposed to
the coupon effect.
interest rate risk.
an indefinite maturity.
Which of the following terms describes strategies designed to ensure that the market values of assets always exceed the market values of liabilities by a specified amount?
Duration matching immunization.
Which of the following causes a lower required return on a bond?
The bond is callable.
The bond is convertible.
The bond’s rating changes from AA to A.
Both the first and third option.
Bonds rated double A and higher are called:
investment grade bonds.
speculative grade bonds.
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