Final Exam- Finance 307 Flashcards
- All other things equal (YTM = 10%), which of the following has the longest duration?
A. a 30-year bond with a 5% coupon
B. a 20-year bond with a 9% coupon
C. a 20-year bond with a 5% coupon
D. a 30-year zero-coupon bond
D. a 30-year zero-coupon bond
- All other things equal (YTM = 10%), which of the following has the shortest duration?
A. a 10-year bond with a 9% coupon
B. a 20-year bond with a 9% coupon
C. a 20-year bond with a 7% coupon
D. a 20-year zero-coupon bond
A. a 10-year bond with a 9% coupon
- A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the year after that. If the discount rate is 8%, what is the duration of this set of payments?
A.2 years
B.2.15 years
C. 2.29 years
D. 2.53 years
C. 2.29 years
- All other things equal, which of the following has the longest duration?
A. a 20-year bond with a 10% coupon yielding 10%
B. a 20-year bond with a 10% coupon yielding 11%
C. a 20-year zero-coupon bond yielding 10%
D. a 20-year zero-coupon bond yielding 11%
C. a 20-year zero-coupon bond yielding 10%
- The duration of a 5-year zero-coupon bond is ____ years.
A. 4.5
B.5
C. 5.5
D. 3.5
B.5
- You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.
A. +1.4%
B.-1.4%
C. -2.51%
D. +2.51%
B.-1.4%
- Given its time to maturity, the duration of a zero-coupon bond is _________.
A.higher when the discount rate is higher
B.higher when the discount rate is lower
C. lowest when the discount rate is equal to the risk-free rate
D. the same regardless of the discount rate
D. the same regardless of the discount rate
- All other things equal, a bond’s duration is _________.
A.higher when the yield to maturity is higher
B.lower when the yield to maturity is higher
C. the same at all yield rates
D. indeterminable when the yield to maturity is high
B.lower when the yield to maturity is higher
- All other things equal, a bond’s duration is _________.
A.higher when the coupon rate is higher
B.lower when the coupon rate is higher
C. the same when the coupon rate is higher
D. indeterminable when the coupon rate is high
B.lower when the coupon rate is higher
- Banks and other financial institutions can best manage interest rate risk by _____________.
A.maximizing the duration of assets and minimizing the duration of liabilities
B.minimizing the duration of assets and maximizing the duration of liabilities
C. matching the durations of their assets and liabilities
D.matching the maturities of their assets and liabilities
C. matching the durations of their assets and liabilities
- A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is _________.years.
A.7.46
B.8.08
C. 9.02
D. 10.11
B.8.08
- A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond is _________.
A.4.32
B.4
C. 3.25
D. 3.75
B.4
- A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%.
A.7
B.9
C. 9.39
D. 12.11
D. 12.11
- A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately _________.
A.$1,035
B.$1,036
C. $1,094
D. $1,124
C. $1,094
- The duration of a bond normally increases with an increase in:
I. Term to maturity
II. Yield to maturity
III. Coupon rate
A.I only
B.I and II only
C. II and III only
D. I, II, and III
A.I only
16. Which of the following set of conditions will result in a bond with the greatest price volatility? A. a high coupon and a short maturity B. a high coupon and a long maturity C. a low coupon and a short maturity D. a low coupon and a long maturity
D. a low coupon and a long maturity
- An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a _________ coupon and a _________ term to maturity.
A.low; long
B.high; short
C. high; long
D. zero; long
D. zero; long
18.. If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct?
I. You will have no interest rate risk on this bond.
II. In the absence of default, you can be sure you will earn the promised yield rate.
III. The duration of your bond is less than the time to your investment horizon.
A.I only
B.I and II only
C. II and III only
D. I, II, and III
B.I and II only
- A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond?
A.6.7 years
B.8 years
C. 10 years
D. 13 years
D. 13 years
- Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________.
A. the dollar amount of the investment received in year t
B. the percentage of the future value of the investment received in year t
C. the present value of the dollar amount of the investment received in year t
D. the percentage of the total present value of the investment received in year t
C. the present value of the dollar amount of the investment received in year t
21. The duration is independent of the coupon rate only for which one of the following? A. discount bonds B. premium bonds C. perpetuities D. short-term bonds
C. perpetuities
- Sinking funds are commonly viewed as protecting the _______ of the bond.
A.issuer
B.underwriter
C. holder
D. dealer
C. holder
- If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)
A.capital gain; capital loss
B.capital gain; capital gain
C. capital loss; capital gain
D. capital loss; capital loss
C. capital loss; capital gain
- TIPS offer investors inflation protection by ______________ by the inflation rate each year.
A.increasing only the coupon rate
B.increasing only the par value
C. increasing both the par value and the coupon payment
D. increasing the promised yield to maturity
C. increasing both the par value and the coupon payment
- To earn a high rating from the bond rating agencies, a company would want to have:
I. A low times-interest-earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio
A.I only
B.II and III only
C. I and III only
D. I, II, and III
B.II and III only
- A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.
A. callable
B.coupon
C. puttable
D.Treasury
C. puttable
- Bonds rated _____ or better by Standard & Poor’s are considered investment grade.
A.AA
B. BBB
C. BB
D.CCC
B. BBB
7. You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following? A. mortgage bonds B. senior debentures C. preferred stock D. equipment obligation bonds
C. preferred stock
- A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.
A. callable
B.coupon
C. puttable
D.Treasury
A. callable
- Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?
A. callable feature
B. convertible feature
C. subordination clause
D. sinking fund
D. sinking fund
10. In an era of particularly low interest rates, which of the following bonds is most likely to be called? A. zero-coupon bonds B. coupon bonds selling at a discount C. coupon bonds selling at a premium D. floating-rate bonds
C. coupon bonds selling at a premium
- A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.
A.6%
B..23%
C. 8.12%
D. 9.45%
C. 8.12%
- A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.5 discount from par value. The current yield on this bond is _________.
A.6%
B.6.49%
C. 6.3%
D.%
B.6.49%
- A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.
A.$856.04
B.$891.86
C. $926.4
D. $1,000
B.$891.86
- A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.
A.$458.11
B.$641.11
C. $89.11
D. $1,100.11
A.$458.11
- You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond’s yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________.
A.5%
B.5.5%
C. .6%
D. 8.9%
C. .6%
- You can be sure that a bond will sell at a premium to par when _________.
A.its coupon rate is greater than its yield to maturity
B.its coupon rate is less than its yield to maturity
C. its coupon rate is equal to its yield to maturity
D. its coupon rate is less than its conversion value
A.its coupon rate is greater than its yield to maturity
- Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.
A.$97.22
B.$104.49
C. $364.08
D. $32.14
A.$97.22
- A 3.209% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is (Assume 182 days in the 6-month period.) _______.
A.$581.9
B.$1,163.93
C. $2,32.8
D. $3,000
B.$1,163.93
- A bond pays a semiannual coupon, and the last coupon was paid 91 days ago. If the annual coupon payment is $50, what is the accrued interest? (Assume 182 days in the 6-month period.)
A.$13.21
B.$12.5
C. $15.44
D. $16.32
B.$12.5
- A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?
A.$999.55
B.$1,002.01
C. $1,00.45
D. $1,012.13
B.$1,002.01
- If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.
A.$9,828.12
B.$9,925
C. $9,934.3
D. $9,955.43
B.$9,925
- A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? (Assume 182 days in the 6-month period.)
A.$4.81
B.$14.24
C. $25
D. $50
A.$4.81
- You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.
A. .61%
B.-5.39%
C. 1.28%
D. -3.25%
A. .61%