CHAPTER 6

Question 1

Bonds are a securities sold by governments and corporations to raise money
from investors today in exchange for promised future payments.

Answer 1

YES

Question 2

The time remaining until the repayment date is known as the term of the bond.

Answer 2

YES

Question 3

By convention the coupon rate is expressed as an effective annual rate.

Answer 3

NO

Question 4

Bonds typically make two types of payments to their holders.

Answer 4

YES

Question 5

The bond certificate indicates the amounts and dates of all payments to be made.

Answer 5

YES

Question 6

The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.

Answer 6

NO

Question 7

The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.

Answer 7

YES

Question 8

Usually the face value of a bond is repaid at maturity.

Answer 8

YES

Question 9

Treasury bills are zero-coupon bonds.

Answer 9

YES

Question 10

Bond traders typically quote bond prices rather than bond yields.

Answer 10

NO

Question 11

The yield to maturity is typically stated as an annual rate by multiplying the
calculated YTM by the number of coupon payment per year, thereby converting
it to an APR.

Answer 11

YES

Question 12

Zero-coupon bonds always trade at a discount.

Answer 12

YES

Question 13

Because we can convert any bond price into a yield, and vice versa, bond prices
and yields are often used interchangeably.

Answer 13

YES

Question 14

The IRR of an investment in a bond is given a special name, the yield to maturity
(YTM).

Answer 14

YES

Question 15

Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no
simple formula to solve for the yield to maturity directly.

Answer 15

NO

Question 16

One advantage of quoting the yield to maturity rather than the price is that the
yield is independent of the face value of the bond.

Answer 16

YES

Question 17

The IRR of an investment opportunity is the discount rate at which the NPV of
the investment opportunity is equal to zero.

Answer 17

YES

Question 18

The yield to maturity for a zero-coupon bond is the return you will earn as an
investor from holding the bond to maturity and receiving the promised face
value payment.

Answer 18

YES

Question 19

When prices are quoted in the bond market, they are conventionally quoted in
increments of $1000.

Answer 19

NO

Question 20

Zero-coupon bonds are also called pure discount bonds.

Answer 20

YES

Question 21

Coupon bonds always trade for a discount.

Answer 21

NO

Question 22

If the bond trades at a discount, and investor who buys the bond will earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond.

Answer 22

YES

Question 23

At any point in time, changes in market interest rates affect a bond’s yield to maturity and its price.

Answer 23

YES

Question 24

Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par.

Answer 24

YES

Question 25

If a coupon bond's yield to maturity exceeds its coupon rate, the present value of its cash flows at the yield to maturity will be greater than its face value.

Answer 25

NO

Question 26

The price of the bond will drop by the amount of the coupon immediately after the coupon is paid.

Answer 26

YES

Question 27

A bond trades at par when its coupon rate is equal to its yield to maturity.

Answer 27

YES

Question 28

The clean price of a bond is adjusted for accrued interest.

Answer 28

YES

Question 29

If a bond trades at a premium, its yield to maturity will exceed its coupon rate.

Answer 29

NO

Question 30

When a coupon-paying bond is trading at a premium, an investor's return from the coupons is diminished by receiving a face value less than the price paid for the bond.

Answer 30

YES

Question 31

Holding fixed the bond's yield to maturity, for a bond not trading at par, the present value of the bond's remaining cash flows changes as the time to maturity decreases.

Answer 31

YES

Question 32

A bond that trades at a premium is said to trade above par.

Answer 32

YES

Question 33

Prices of bonds with lower durations are more sensitive to interest rate changes.

Answer 33

NO

Question 34

Coupon bonds may trade at a discount, at a premium, or at par.

Answer 34

YES

Question 35

The sensitivity of a bond's price changes in interest rates is the bond's duration.

Answer 35

YES

Question 36

When a bond is trading at a discount, the price increase between coupons will exceed the drop when a coupon is paid, so the bond's price will rise and its discount will decline as time passes.

Answer 36

YES

Question 37

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the current yield.

Answer 37

NO

Question 38

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the zero coupon yield.

Answer 38

NO

Question 39

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the yield to maturity.

Answer 39

YES

Question 40

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called the discount yield.

Answer 40

NO

Question 41

By convention, practitioners always plot the yield of the most senior issued bonds, termed the on-the-run-bonds.

Answer 41

NO

Question 42

We can determine the no-arbitrage price of a coupon bond by discounting its cash flows using the zero-coupon yields.

Answer 42

YES

Question 43

The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds.

Answer 43

YES

Question 44

If the zero coupon yield curve is upward sloping, the resulting yield to maturity decreases with the coupon rate of the bond.

Answer 44

YES

Question 45

When the yield curve is flat, all zero-coupon and coupon-paying bonds will have the same yield, independent of their maturities and coupon rates.

Answer 45

YES

Question 46

Given the spot interest rates, we can determine the price and yield of any other default-free bond.

Answer 46

YES

Question 47

As the coupon increases, earlier cash flows become relatively less important than later cash flows in the calculation of the present value.

Answer 47

NO

Question 48

When U.S. bond traders refer to "the yield curve," they are often referring to the coupon-paying Treasury yield curve.

Answer 48

YES

Question 49

A corporate bond which receives a BBB rating from Standard and Poor's is considered an investment grade bond.

Answer 49

YES

Question 50

Because the cash flows promised by the bond are the most that bondholders can hope to receive, the cash flows that a purchaser of a bond with credit risk expects to receive may be less than that amount.

Answer 50

YES

Question 51

A higher yield to maturity does not necessarily imply that a bond's expected return is higher.

Answer 51

YES

Question 52

By consulting bond ratings, investors can assess the credit-worthiness of a particular bond issue.

Answer 52

YES

Question 53

Because the yield to maturity for a bond is calculated using the promised cash flows, the yield of bond’s with credit risk will be lower than that of otherwise identical default-free bonds.

Answer 53

NO

Question 54

A bond’s rating depends on the risk of bankruptcy as well as the bondholder's ability to lay claim to the firm’s assets in the event of a bankruptcy.

Answer 54

YES

Question 55

Bonds in the top four categories are often referred to as investment grade bonds.

Answer 55

YES

Question 56

Bond ratings encourage widespread investor participation and relatively liquid markets.

Answer 56

YES

Question 57

Debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same company that have a higher priority in bankruptcy.

Answer 57

NO

Question 58

Sovereign debt is always riskless.

Answer 58

NO

Question 59

Sovereign debt is debt denominated in soverreigns.

Answer 59

NO

Question 60

Sovereign debt is debt issued by national governments.

Answer 60

YES

Question 61

A key difference between sovereign default and corporate bonds is that unlike corporate debt, sovereign debt prices are not inverse to yields.

Answer 61

NO

Question 62

A key difference between sovereign default and corporate bonds is that unlike a corporation, a country facing difficulty meeting its financial obligations typically has the option to print more currency.

Answer 62

YES

Question 63

A key difference between sovereign default and corporate bonds is that unlike a corporation, any country can turn to the EMU to pay off its debts.

Answer 63

NO

Question 64

A key difference between sovereign default and corporate bonds is that unlike a corporation, a country facing difficulty meeting its financial obligations is can not default.

Answer 64

NO

Question 65

Forward interest rates tend to be biased downward as predictors of future spot rates when the yield curve is upward sloping.

Answer 65

NO

Question 66

Forward interest rates tend to be biased upward as predictors of future spot rates when the yield curve is downward sloping.

Answer 66

NO

Question 67

Forward interest rates tend not to be good predictors of future spot rates.

Answer 67

YES

Question 68

Forward interest rates accurately predict future spots rates because of the law of one price.

Answer 68

NO

Question 69

If investors did not care about risk, then they would be indifferent between investing in a two-year bond and investing in a one-year bond and rolling over the money in one-year.

Answer 69

YES

Question 70

In general, the expected future spot interest rate will reflect investor's preferences toward the risk of future interest rate fluctuations.

Answer 70

YES

Question 71

When we refer to the one-year forward rate for year 5, we mean the rate available today on a one-year investment that begins four years from today and is repaid five years from today.

Answer 71

YES

Question 72

In general, we can compute the forward rate for year n by comparing an investment in an n-year, zero-coupon bond to an investment in an (n + 1) year, zero-coupon bond, with the interest rate earned in the nth year being guaranteed through an interest rate forward contract.

Answer 72

NO