Question 1

Cash in your possession today:

Accepted Answer

A)   is worth less than the same amount of cash received in the future.
B)   is worth more than the same amount of cash received in the future.
C)   Is worth the same as the same amount of cash to be received in the future.
D)   may be worth more or less than the same amount of cash received in the future depending on the market interest rate.
E)   may be worth more or less than the same amount of cash received in the future depending on the type of investment made.

Question 2

A bond that has an annual coupon rate of 15% has two years to maturity. If the current discount rate is 8%, what is the bond's Macaulay's duration?

Accepted Answer

A)   2.00 years
B)   1.99 years
C)   1.88 years
D)   1.77 years
E)   1.66 years

Question 3

Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

Accepted Answer

A)   A 25-year 11% coupon bond.
B)   A 25-year 7.5% coupon bond.
C)   A 25-year zero-coupon bond.
D)   A 3-year zero coupon bond.
E)   A 3-year bond with a 7.5% coupon.

Question 4

Why might a security be worth more if its cash flows are "stripped "?

Accepted Answer

A security might be worth more if its ca...

Question 5

A bond's Macaulay duration is 7.95 years. If the current annual interest rate is 7%, what is the modified duration of this bond?

Accepted Answer

A)   7.00 years
B)   7.88 years
C)   7.43 years
D)   7.95 years
E)   8.51 years

Question 6

The duration of any security with interim cash flows will be less than the security's maturity.

Accepted Answer

A) True 
 B)False

Question 7

The Macaulay's duration of a 10-year, 10% bond with a face value of $1,000 and a market rate of 8%, compounded annually is:

Accepted Answer

A)   10 years
B)   11 years
C)   12 years
D)   13 years
E)   None of the above

Question 8

If the holder of a bond can demand redemption of the bond at a predetermined price at a set time in the future, the bond has a(n)  ______________ option.

Accepted Answer

A)   call
B)   put
C)   conversion
D)   extension
E)   exchange

Question 9

A bank quotes you a rate of 7% on a CD, compounded quarterly. What is the effective annual rate?

Accepted Answer

A)   6.79%
B)   6.81%
C)   6.87%
D)   7.13%
E)   7.19%

Question 10

A bond that has an annual coupon rate of 11% has three years to maturity. If the current discount rate is 16%, what is the bond's Macaulay's duration?

Accepted Answer

A)   3.00 years
B)   2.991. years
C)   2.89 years
D)   2.79 years
E)   2.69 years

Question 11

Bond prices and interest rates move in the same direction.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is false?

Accepted Answer

A)   As interest rates rise, bond prices rise, everything else the same.
B)   Given an absolute change in interest rates, the percentage increase in a bond's price will be greater than the percentage decrease, everything else the same.
C)   Long-term bonds change proportionately more in price than short-term bonds for a given rate change, everything else the same.
D)   A bond with a lower coupon will change more in price than a bond with a higher coupon, everything else the same.
E)   A bond's duration is a measure of its price elasticity.

Question 13

The greater the compounding frequency, the higher the present value, everything else the same.

Accepted Answer

A) True 
 B)False

Question 14

Two bonds with different coupon amounts are priced to yield the same yield to maturity. For a given change in market rate:

Accepted Answer

A)   the bond with the lower coupon will always change more in price than the bond with the higher coupon.
B)   the bond with the higher coupon will always change more in price than the bond with the lower coupon.
C)   the bond with the lower coupon rate will only change more in price than the bond with the higher coupon rate if the market rate decreases.
D)   The bond with the higher coupon rate will only change more in price than the bond with the lower coupon rate if the market rate increases.
E)   the price change will be the same for both bonds.

Question 15

A three-year 9% bond is trading at par of $5,000. If you buy the bond expecting to hold it to maturity and believe you can reinvest the $225 semi-annual coupon payments at a 3.5% semi-annual rate through maturity. The total return on this investment is _____ annually.

Accepted Answer

A)   3.50%
B)   4.50%
C)   7.00%
D)   8.80%
E)   9.00%

Question 16

For a given absolute change in interest rates, the percentage increase in an option free bond's price will be less than the percentage decrease.

Accepted Answer

A) True 
 B)False

Question 17

If $1,500 is invested today, the initial investment plus interest will be worth $2,700 in seven years. What is the annual interest rate on the investment?

Accepted Answer

A)   6.51%
B)   8.05%.
C)   8.76%.
D)   9.12%.
E)   10.43%

Question 18

The effective annual interest rate will never be less than the simple interest rate.

Accepted Answer

A) True 
 B)False

Question 19

If the holder of a bond can demand that the issuer convert the bond into common stock of a different company at a predetermined price at a set time in the future, the bond has a(n)  ______________ option.

Accepted Answer

A)   call
B)   put
C)   conversion
D)   extension
E)   exchange

Question 20

If a bond is a discount bond, then:

Accepted Answer

A)   the yield to maturity is less than the coupon rate.
B)   the yield to maturity is greater than the coupon rate.
C)   the yield to maturity is equal to the coupon rate.
D)   its duration must be greater than its maturity.
E)   its duration must be equal to its maturity.

Exam 6: Pricing Fixed-Income Securities

Bond prices and interest rates move in the same direction.

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A three-year 9% bond is trading at par of $5,000. If you buy the bond expecting to hold it to maturity and believe you can reinvest the $225 semi-annual coupon payments at a 3.5% semi-annual rate through maturity. The total return on this investment is _____ annually.

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If $1,500 is invested today, the initial investment plus interest will be worth $2,700 in seven years. What is the annual interest rate on the investment?

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The greater the compounding frequency, the higher the present value, everything else the same.

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If the holder of a bond can demand redemption of the bond at a predetermined price at a set time in the future, the bond has a(n) ______________ option.

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A bond that has an annual coupon rate of 11% has three years to maturity. If the current discount rate is 16%, what is the bond's Macaulay's duration?

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The duration of any security with interim cash flows will be less than the security's maturity.

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Why might a security be worth more if its cash flows are "stripped "?

Correct AnswerAnswered by ExamLex AIA security might be worth more if its ca...View AnswerShow Answer

A bond's Macaulay duration is 7.95 years. If the current annual interest rate is 7%, what is the modified duration of this bond?

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For a given absolute change in interest rates, the percentage increase in an option free bond's price will be less than the percentage decrease.

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A bond that has an annual coupon rate of 15% has two years to maturity. If the current discount rate is 8%, what is the bond's Macaulay's duration?

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Cash in your possession today:

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Which of the following is false?

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If a bond is a discount bond, then:

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Two bonds with different coupon amounts are priced to yield the same yield to maturity. For a given change in market rate:

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If the holder of a bond can demand that the issuer convert the bond into common stock of a different company at a predetermined price at a set time in the future, the bond has a(n) ______________ option.

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The effective annual interest rate will never be less than the simple interest rate.

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The Macaulay's duration of a 10-year, 10% bond with a face value of $1,000 and a market rate of 8%, compounded annually is:

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Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?

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A bank quotes you a rate of 7% on a CD, compounded quarterly. What is the effective annual rate?

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A security might be worth more if its ca...
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