Chapter 8

Question 1

What is the primary purpose of bond valuation?

Answer 1

To determine the fair value of a bond based on its expected future cash flows.

Question 2

True or False: The price of a bond is equal to the present value of its future cash flows.

Answer 2

True

Question 3

Fill in the blank: The two main components of a bond’s cash flows are _____ and _____ payments.

Answer 3

coupon, principal

Question 4

What does ‘current yield’ measure?

Answer 4

The annual coupon payment divided by the bond’s current market price.

Question 5

What is the formula for calculating the present value of a bond?

Answer 5

PV = C/(1+r)^1 + C/(1+r)^2 + … + (F + C)/(1+r)^n

Question 6

What does ‘yield to maturity’ (YTM) represent?

Answer 6

The total return anticipated on a bond if held until it matures.

Question 7

True or False: A bond’s price and its yield to maturity move in the same direction.

Answer 7

False

Question 8

What is a ‘discount bond’?

Answer 8

A bond that is sold for less than its face value.

Question 9

What does the term ‘interest rate risk’ refer to?

Answer 9

The risk of a bond’s price changing due to fluctuations in interest rates.

Question 10

Multiple Choice: Which of the following is NOT a type of bond? A) Corporate B) Treasury C) Equity D) Municipal

Answer 10

C) Equity

Question 11

Fill in the blank: The _____ rate is the interest rate used to discount future cash flows.

Answer 11

discount

Question 12

What is the relationship between bond prices and interest rates?

Answer 12

Bond prices decrease when interest rates increase, and vice versa.

Question 13

True or False: Zero-coupon bonds do not pay periodic interest.

Answer 13

True

Question 14

What is a ‘callable bond’?

Answer 14

A bond that can be redeemed by the issuer before its maturity date.

Question 15

What is ‘credit risk’?

Answer 15

The risk that a bond issuer will default on its payment obligations.

Question 16

Multiple Choice: Which factor does NOT affect bond yield? A) Time to maturity B) Credit rating C) Market demand D) Company profits

Answer 16

D) Company profits

Question 17

Fill in the blank: The _____ curve shows the relationship between interest rates and different maturities.

Answer 17

yield

Question 18

What is ‘duration’ in bond valuation?

Answer 18

A measure of the sensitivity of a bond’s price to changes in interest rates.

Question 19

True or False: Longer-term bonds typically have higher yield than shorter-term bonds.

Answer 19

True

Question 20

What is the ‘coupon rate’ of a bond?

Answer 20

The annual interest payment expressed as a percentage of the bond’s face value.

Question 21

What is a ‘premium bond’?

Answer 21

A bond that is sold for more than its face value.

Question 22

Multiple Choice: Which term describes the bondholder’s right to convert a bond into shares? A) Callable B) Convertible C) Puttable D) Redeemable

Answer 22

B) Convertible

Question 23

Fill in the blank: A bond’s _____ is the amount paid back to the bondholder at maturity.

Answer 23

face value

Question 24

What does ‘putable bond’ mean?

Answer 24

A bond that allows the bondholder to sell it back to the issuer at a predetermined price.

Question 25

True or False: Inflation can erode the purchasing power of a bond's future cash flows.

Answer 25

True

Question 26

What is 'market risk' in relation to bonds?

Answer 26

The risk of losses due to factors that affect the overall performance of the bond market.

Question 27

What is the significance of the 'bond rating'?

Answer 27

It indicates the credit quality and risk level of a bond.

Question 28

Multiple Choice: Which agency is known for providing bond ratings? A) SEC B) S&P C) NASDAQ D) NYSE

Answer 28

B) S&P

Question 29

Fill in the blank: An increase in interest rates will typically lead to a _____ in bond prices.

Answer 29

decrease

Question 30

What does 'interest expense' refer to for a bond issuer?

Answer 30

The cost incurred by the issuer for paying interest to bondholders.

Question 31

True or False: Bonds are generally considered lower risk than stocks.

Answer 31

True

Question 32

What is 'reinvestment risk'?

Answer 32

The risk that future cash flows will have to be reinvested at lower rates.

Question 33

What is the 'yield curve'?

Answer 33

A graph that plots the interest rates of bonds with different maturities.

Question 34

Multiple Choice: What type of yield curve typically indicates a recession? A) Normal B) Inverted C) Flat D) Steep

Answer 34

B) Inverted

Question 35

Fill in the blank: The _____ yield reflects the total return of a bond if held to maturity.

Answer 35

yield to maturity

Question 36

What is a 'sinking fund provision'?

Answer 36

A requirement for the issuer to set aside funds to repay bondholders at maturity.

Question 37

True or False: Floating rate bonds have fixed interest payments.

Answer 37

False

Question 38

What is 'convexity' in bond valuation?

Answer 38

A measure of the curvature in the relationship between bond prices and yields.

Question 39

Multiple Choice: Which of the following is a type of risk associated with bonds? A) Liquidity B) Default C) Interest Rate D) All of the above

Answer 39

D) All of the above

Question 40

Fill in the blank: The _____ rate is the rate of return required by investors to hold a bond.

Answer 40

required

Question 41

What is 'systematic risk' in the context of bonds?

Answer 41

The risk inherent to the entire market or market segment affecting all bonds.

Question 42

True or False: Bonds can be sold in the secondary market.

Answer 42

True

Question 43

What is the 'effective yield'?

Answer 43

The yield of a bond that takes into account the effects of compounding.

Question 44

Multiple Choice: Which of the following factors does NOT typically affect bond pricing? A) Market interest rates B) Economic conditions C) Weather patterns D) Credit ratings

Answer 44

C) Weather patterns

Question 45

Fill in the blank: The _____ of a bond is the legal agreement between the bond issuer and the bondholders.

Answer 45

indenture

Question 46

What is 'liquidity risk'?

Answer 46

The risk that a bondholder may not be able to sell a bond quickly enough in the market.