# Quiz 6: Bond Prices and Interest Rate Risk

Business

Q 1Q 1

If a bond does not pay the full value of coupons during the holding period,its realized yield is calculated using lower coupons than the ones stipulated in the bond contract.

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True False

True

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True False

False

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True False

False

Q 4Q 4

For most bonds,the coupon rate,the par value and the term to maturity are fixed over the life of the bond contract.

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True False

Q 5Q 5

The realised yield on a bond is influenced by the market interest rate at the time of the resale of the bond before maturity date.

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True False

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True False

Q 7Q 7

The calculation of the yield to maturity on a bond requires knowing the current market interest rates.

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True False

Q 8Q 8

The higher the coupon rate,the smaller the bond price change in reaction to a change in market interest rates.

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True False

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True False

Q 10Q 10

A bond sells at a discount when the market rate of interest is above the bond's fixed coupon rate.

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True False

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True False

Q 12Q 12

Bond price volatility is the percentage change in bond price for a given change in bond maturity.

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True False

Q 13Q 13

The risk of interest rate changes causing the market price of a bond to rise or fall,and resulting in capital gains or losses for investors,is known as reinvestment risk.

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True False

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True False

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True False

Q 16Q 16

The promised yield is the return earned on a bond given the cash flows actually received by the investor and assuming that the coupon payments are reinvested at that promised rate.

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True False

Q 17Q 17

Bonds with lower coupon rates have a longer duration than similar bonds with high coupon rates.

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True False

Q 18Q 18

The realised return on a bond at the end of the holding period is based on predictions made from interest rate forecasts.

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True False

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True False

Q 20Q 20

The amount $5,000 invested at 6%,compounded quarterly,will be worth after 5 years:
A)$6,691
B)$16,036
C)$6,734
D)$5,386

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Multiple Choice

Q 21Q 21

John deposits $10,000 in a savings deposit account paying 4%,compounded monthly.What amount will he have at the end of seven years?
A)$13,225
B)$13,159
C)$13,179
D)$13,325

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Multiple Choice

Q 22Q 22

If you invest $20 000 today for five years at 8% pa compounded quarterly how much will you have at the end of five years?
A)$28 000.00
B)$22 081.62
C)$29 718.95
D)$29 680.55

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Multiple Choice

Q 23Q 23

What is the present value of $10 000 to be received in 5 years from now if the annual discount rate is 10% and the compounding frequency is annual?
A)$5000.00
B)$16105.10
C)$6666.67
D)$6209.21

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Multiple Choice

Q 24Q 24

If John borrowed $30 000 from his mother at a rate of 5% p.a.compounded quarterly for 5 years,what is the dollar value of the interest on the loan?
A)$ 8 461.12
B)$38 461.12
C)$ 7 500.00
D)$ 8 288.45
Feedback; ????=30,0001+0.054
The interest is the future value of the loan minus the initial amount that was borrowed.

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Multiple Choice

Q 25Q 25

Which of the following statements is NOT correct?
A)Bond prices and interest rates move in opposite directions.
B)Coupon rates are fixed for the life of the bond.
C)A bond's price is equal to the present value of its future cashflows.
D)The coupon rate affects a bond price through the discounting factor.

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Multiple Choice

Q 26Q 26

$1000 face value bond has an 8% coupon,with coupons paid and compounded annually,and a 4-year maturity.With similar bonds yielding 11%,what is the current market price of the bond?
A)$1,099.36
B)$880.22
C)$906.93
D)$910.35

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Multiple Choice

Q 27Q 27

A corporate bond,paying $65 interest at the end of each year for 6 years,has a face value of $1,000.If market rates on newly issued similarly rated corporate bonds are now 7.5%,what is the current market price of this bond?
A)$953.06
B)$1,000.00
C)$1,048.41
D)$936.42

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Multiple Choice

Q 28Q 28

A $1000 bond with an 8.2% coupon rate,coupons paid semiannually,and maturing in six years is currently yielding 7.6% in the market.What is the current price of the bond?
A)$1,027.08
B)$1,131.19
C)$1,028.48
D)$972.00

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Multiple Choice

Q 29Q 29

A $1,000 par,8% Treasury bond maturing in three years compounded semiannually is priced to yield 7%.What is its current market price?
A)$974.21
B)$813.50
C)$927.50
D)$1,026.64

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Multiple Choice

Q 30Q 30

The present value PV of a bond with a $1000 face value,5% coupon rate paid annually and 2 years to maturity at the interest rate p.a.6% is
A)$981.67
B)$937.17
C)$934.50
D)$1093.40

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Multiple Choice

Q 31Q 31

The price of a bond with a $100 face value,5% coupon rate paid annually and 2 years to maturity at the interest rate p.a.6% is:
A)$109.34
B)$93.72
C)$93.45
D)$98.17

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Multiple Choice

Q 32Q 32

Par bonds sell at a price equal to:
A)future value.
B)face value.
C)real value.
D)coupon value.

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Multiple Choice

Q 33Q 33

Premium bonds sell at a price:
A)equal to their future value.
B)below their face value.
C)above their face value.
D)above their future value.

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Multiple Choice

Q 34Q 34

Which of the following statements is NOT correct? Premium bonds:
A)make a capital loss when held to maturity.
B)sell above their face value.
C)are priced above their par value.
D)are subject to price risk when held to maturity.

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Multiple Choice

Q 35Q 35

Which of the following statements is NOT correct? Discount bonds:
A)make a capital gain when held to maturity.
B)sell below their face value.
C)have a price equal to their face value.
D)are subject to price risk when sold before maturity.

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Multiple Choice

Q 36Q 36

Which of the following statements is correct?
A)The higher the coupon rate,the higher the bond's yield to maturity.
B)The yield to maturity on a bond is fixed for the life of the bond.
C)A bond's yield to maturity is always equal to its coupon rate.
D)Premium bonds have a yield to maturity higher than their coupon rate.

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Multiple Choice

Q 37Q 37

A $1000 bond with a coupon rate of 7% (paid annually)matures in eight years.The bond is now selling for $948.08.What is its yield to maturity?
A)6.5%
B)7.9%
C)9.0%
D)8.3%

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Multiple Choice

Q 38Q 38

A $1000 bond with a coupon rate of 10%,interest paid semiannually,matures in eight years and sells for $1122.80.What is its yield to maturity?
A)10.8%
B)11.0%
C)7.9%
D)7.6%

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Multiple Choice

Q 39Q 39

The yield to maturity measure assumes that the coupon payments are reinvested at
A)the yield to maturity.
B)the market interest rate.
C)the coupon rate.
D)the Treasury bond rate.

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Multiple Choice

Q 40Q 40

Calculate the realised yield on a $1,000 face value,9 per cent coupon bond (with annual payments of coupons)purchased for $800 and sold one year later for $850 (after a payment of coupon).
A)9%
B)11.25%
C)14.5%
D)17.5%

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Multiple Choice

Q 41Q 41

7% coupon bond with a $1000 face value and coupons paid semiannually is purchased at par and sells 2 years later for $990 after a coupon payment.What is its realised yield (annualised)?
A)8%
B)6.52%
C)7.32%
D)5.75%

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Multiple Choice

Q 42Q 42

The bond's yield to maturity is
A)the guaranteed yield.
B)the expected yield.
C)the promised yield.
D)the realised yield on the bond.

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Multiple Choice

Q 43Q 43

Which of the following is NOT an assumption made for the calculation of the yield to maturity of a bond?
A)The bond is held to maturity.
B)The coupons are reinvested at the yield to maturity.
C)The coupons and face value are paid as stipulated in the contract.
D)The bond is purchased at par.

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Multiple Choice

Q 44Q 44

Which of the following statements is NOT correct? If there are two future payments made at different dates,the calculation of a bond's yield to maturity:
A)cannot be done manually.
B)must be done by trial and error.
C)requires several iterations.
D)cannot be done algebraically.

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Multiple Choice

Q 45Q 45

Which of the following statements is NOT correct? The calculation of a bond's realised yield requires knowing:
A)the purchase price of the bond at the beginning of the investment period.
B)the forecast of the future level of interest rate prevailing at the end of the investment period.
C)the selling price of the bond at the end of the investment period.
D)the actual coupon payments during the investment period.

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Multiple Choice

Q 46Q 46

Which of the following statements is NOT correct? The calculation of a bond's expected yield over an investment period requires knowing:
A)the purchase price of the bond at the beginning of the investment period.
B)the expected future level of interest rate prevailing at the end of the investment period.
C)the actual selling price of the bond at the end of the investment period.
D)the expected coupon payments during the investment period.

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Multiple Choice

Q 47Q 47

If market interest rates fall after a bond is issued:
A)the face value of the bond increases.
B)the present value of the bond decreases.
C)the market value of the bond increases.
D)the coupons of the bond decrease.

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Multiple Choice

Q 48Q 48

What is the percentage change in price of a $1,000 face value 8% coupon bond whose price has varied from $1,020 to $1,050?
A)$30.00
B)2.9%
C)2.94%
D)$50.00

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Multiple Choice

Q 49Q 49

Price risk and reinvestment risk partly offset each other because when interest rates decline:
A)the bond records a capital gain but the gain is partly offset by lower coupon reinvestment income.
B)the bond suffers a capital loss but the loss is partly offset by higher coupon reinvestment income.
C)the bond records a capital gain but the gain is partly offset by higher coupon reinvestment income.
D)the bond suffers a capital loss but the loss is partly offset by lower coupon reinvestment income.

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Multiple Choice

Q 50Q 50

Which of the following statements is NOT correct? Interest rate risk on bonds can take the form of:
A)price risk.
B)default risk.
C)reinvestment risk.
D)capital risk.

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Multiple Choice

Q 51Q 51

When market interest rates increase,existing bonds:
A)are more likely to default on coupons.
B)pay higher coupons.
C)have a higher income generated by coupons.
D)record capital gains.

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Multiple Choice

Q 52Q 52

Price risk and reinvestment risk:
A)relate to interest rate risk.
B)relate to credit risk.
C)work together to magnify the price impact of a change in interest rate.
D)have both an effect on bond price.

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Multiple Choice

Q 53Q 53

Duration is a measure of:
A)a bond's yield sensitivity.
B)a bond's term to maturity.
C)the length of time it takes to get back the original investment.
D)the bond price sensitivity to a change in interest rate.

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Multiple Choice

Q 54Q 54

Bond A has a duration of 5.6 while bond B has a duration of 6.0.Bond B:
A)would record a greater price variation,given a change in interest rates,relative to bond A.
B)has a longer term to maturity than bond A.
C)has a shorter term to maturity than bond A.
D)would record a lower price variation,given a change in interest rates,relative to bond A.

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Multiple Choice

Q 55Q 55

A 3-year zero coupon bond with a 12 per cent yield has a duration of:
A)3 years.
B)2.78 years.
C)2.50 years.
D)2 years.

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Multiple Choice

Q 56Q 56

A $1000 2-year 10% coupon bond is priced at $1000 in the market.The coupons are paid annually.The duration is:
A)less than two years.
B)more than two years.
C)10%.
D)2 years.

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Multiple Choice

Q 57Q 57

Which of the following risks does NOT affect zero coupon bonds?
A)Price risk
B)Reinvestment risk
C)Credit risk
D)Default risk

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Multiple Choice

Q 58Q 58

One way of eliminating both price risk and reinvestment risk is to structure a bond investment so that the duration of the bond or the bond portfolio equals:
A)the holding period.
B)the maturity period.
C)the duration period.
D)price of the bond.

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Multiple Choice

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Essay

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Essay

Q 62Q 62

Explain what is bond duration? What is the difference between holding a bond to duration versus holding the bond to maturity?

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Essay

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Essay