sexy questions before the final

Question 1

The stated yield to maturity and realized compound yield to maturity of a (default-free) zero-coupon bond always will be equal. Why?

Answer 1

Zero-coupon bonds provide no coupons to be reinvested. Therefore, the investor’s proceeds from the bond are independent of the rate at which coupons could be reinvested (if they were paid). There is no reinvestment rate uncertainty with zeros.

Question 2

name one shortcoming for the current yield, YTM, and realized compound yield

Answer 2

(i) Current yield does not account for capital gains or losses on bonds bought at prices other than par value. It also does not account for reinvestment income on coupon payments.
(ii) Yield to maturity assumes the bond is held until maturity and that all coupon income can be reinvested at a rate equal to the yield to maturity.
(iii) Realized compound yield is affected by the forecast of reinvestment rates, holding period, and yield of the bond at the end of the investor’s holding period.

Question 3

When interest rates decline, the duration of a 30-year bond selling at a premium

i. Increases
ii. Decreases
iii. Remains the same
iv. Increases at first, then declines

Answer 3

i. Increases

Question 4

If a bond manager swaps a bond for one that is identical in terms of coupon rate, maturity, and credit quality but offers a higher yield to maturity, the swap is

i. A substitution swap
ii. An interest rate anticipation swap
iii. A tax swap
iv. An intermarket spread swap

Answer 4

i. A substitution swap

Question 5

Which bond has the longest duration?

i. 8-year maturity, 6 percent coupon
ii. 8-year maturity, 11 percent coupon
iii. 15-year maturity, 6 percent coupon
iv. 15-year maturity, 11 percent coupon

Answer 5

iii. 15-year maturity, 6 percent coupon

Question 6

The market risk of an AAA-rated preferred stock relative to an AAA-rated bond is

i. Lower
ii. Higher
iii. Equal
iv. Unknown

Answer 6

ii. Higher

Question 7

A bond with a call feature

i. Is attractive because the immediate receipt of principal plus premium produces a high return
ii. Is more apt to be called when interest rates are high because the interest saving will be greater
iii. Will usually have a higher yield than a similar noncallable bond
iv. None of the above

Answer 7

iii. Will usually have a higher yield than a similar noncallable bond

Question 8

Consider a five-year bond with a 10 percent coupon that has a present yield to maturity of 8 percent. If interest rates remain constant, one year from now the price of this bond will be

i. Higher
ii. Lower
iii. The same
iv. Par

Answer 8

ii. Lower

Question 9

All else being equal, which one of the following bonds would be most likely to sell at the highest yield?

i. Callable debenture
ii. Puttable mortgage bond
iii. Callable mortgage bond
iv. Puttable debentures

Answer 9

iv. Puttable debentures

Question 10

Yields on nonconvertible preferred stock usually are lower than yields on bonds of the same company because of differences in

i. Marketability
ii. Risk
iii. Taxation
iv. Call protection

Answer 10

iii. Taxation

Question 11

truth or false

call options for common stocks are issued by companies and warrants are issued too?

Answer 11

naaaah false

call options for common stocks are NOT issued by companies

warrants are issued by companies tho thats facts