Bond Basics Missed Questions

Question 1

When the price of a bond increases, which of the following statements regarding yields are TRUE?
I	 	Yield to call increases
II	 	Yield to call decreases
III	 	Yield to maturity increases
IV	 	Yield to maturity decreases

	A. 	I and III
 		B. 	I and IV
	C. 	II and III
	D. 	II and IV

Answer 1

The best answer is D.
When the price of a bond increases, yield to maturity drops. Similarly, because the bond is more expensive, yield to call will also fall.

Question 2

Municipal dollar bonds are generally: 
		A. 	term bonds
 		B. 	series bonds
		C. 	serial bonds
 		D. 	short term maturities

Answer 2

The best answer is A.
Municipal dollar bonds (quoted on a percentage of par basis) are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds.

Question 3

A municipal dealer buys a $1,000 par 30 year, 12% bond on a 12% basis. The dealer reoffers the bond, marking it up by 40 basis points. The yield at which the dealer is reoffering the bond is: 
 		A. 	8%
 		B. 	16%
		C. 	11.60%
		D. 	12.40%

Answer 3

The best answer is C.
If the municipal dealer buys a 12% coupon bond quoted on a 12% basis, the bond is being purchased at par. To make money, the dealer must sell (reoffer) the bond at a premium to par. To reoffer the bond at a premium, the yield must be lowered, in this case by .40% = 40 basis points).

If the 12% bond is reoffered on an 11.60 basis the approximate price for the bond is found by dividing the coupon by the basis.

Coupon /Basis = 12/11.60 = 1.03448% of $1,000 par = $1,034.48
(Note that this approximation only works for long term bonds quoted on a yield basis.)

Question 4

How are corporate bonds quoted? 
 		A. 	Coupon
 		B. 	Yield to Maturity
		C. 	Whole and Fractional 
 		D. 	Decimal

Answer 4

The best answer is C.
Corporate bonds are quoted as a percentage of par value, with each “whole” point movement representing 1% of $1,000 par or $10. The minimum price increment is 1/8th of 1%, so it is a fraction of par. Thus, corporate bonds are quoted in whole and fractional points.

For example, a corporate bond quoted at 100 1/8 is priced at 100.125% of $1,000 par = $1,001.25.

Question 5

As interest rates move, which statements are TRUE regarding bond price volatility?
I The shorter the maturity, the greater the bond’s price volatility
II The longer the maturity, the greater the bond’s price volatility
III The lower the coupon rate, the greater the bond’s price volatility
IV The higher the coupon rate, the greater the bond’s price volatility

A. 	I and III
 		B. 	I and IV
	C. 	II and III
 		D. 	II and IV

Answer 5

The best answer is C.
The longer the maturity, the greater the bond’s price volatility in response to interest rate movements. The lower the coupon rate (the same as the greater the discount on the bond), the greater the bond’s price volatility in response to interest rate movements.