# Quiz 5: Bond Prices and Interest Rate Risk

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Q 6Q 6

If market interest rates have increased since a bond was purchased, price risk will increase the price of the bond and reinvestment risk will decrease the return on the coupons.

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True False

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Q 11Q 11

The price risk of a bond tends to offset reinvestment risk somewhat as market interest rates vary.

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Q 12Q 12

In a short-term bond price risk is not a problem, but reinvestment risk is a considerable concern.

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Q 20Q 20

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

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True False

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Q 26Q 26

Ceteris paribus, the holder of a fairly priced premium bond must expect a capital gain over their holding period.

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True False

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Q 28Q 28

All else equal, the greater a security's coupon, the lower the security's price sensitivity to a change in interest rate.

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True False

Q 29Q 29

Which of the following statements is true?
A) Bond prices and interest rates move together.
B) Coupon rates are fixed at the time of issue.
C) Short-term securities have large price swings relative to long-term securities.
D) The higher the coupon, the lower the price of a bond.

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Multiple Choice

Q 30Q 30

Which of the following statements is true about bonds?
A) The higher the coupon rate, the shorter the duration.
B) The yield on a bond is usually fixed.
C) A bond's coupon rate is equal to its face value.
D) Most bonds pay interest annually.

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Multiple Choice

Q 31Q 31

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

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Multiple Choice

Q 32Q 32

Tom deposits $10,000 in a savings deposit paying 4%, compounded monthly. What amount would 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 33Q 33

Judy would like to accumulate $70,000 by the time her son starts college in ten years. What amount would she need to deposit now in a deposit account earning 6%, compounded yearly, to accumulate her savings goal?
A) $4,200
B) $39,513
C) $39,088
D) $125,359

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Multiple Choice

Q 34Q 34

If a $1000 par value bond has an 8% coupon (annual payments) rate, a 4-year maturity, and similar bonds are yielding 11%, what is the price of the bond?
A) $1,000.00
B) $880.22
C) $906.93
D) $910.35

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Multiple Choice

Q 35Q 35

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 36Q 36

A $1000 bond with an 8.2% coupon rate, interest 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 37Q 37

A $1000 bond with a coupon rate of 7% matures in eight years. The bond is now selling for $950, what is the expected yield to maturity on the bond?
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 $1120. What is the yield to maturity?
A) 10.8%
B) 11.0%
C) 7.9%
D) 7.6%

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Multiple Choice

Q 39Q 39

When a bond's coupon rate is equal to the market rate of interest, the bond will sell for
A) a discount.
B) a premium.
C) par.
D) a variable rate.

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Multiple Choice

Q 40Q 40

A bond currently selling at a premium price above face value
A) has a yield equal to its coupon rate.
B) has a yield below its coupon rate.
C) has a yield above its coupon rate.
D) has no risk.

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Multiple Choice

Q 41Q 41

If market interest rates fall after a bond is issued, the
A) face value of the bond increases.
B) investor will sell the bond.
C) market value of the bond is increasing.
D) market value of the bond is decreasing.

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Multiple Choice

Q 42Q 42

Duration is a measure of
A) a bond's price.
B) a bond's contractual maturity.
C) the length of time it takes to get back the original investment.
D) bond price volatility.

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Multiple Choice

Q 43Q 43

Bond A has a duration of 5.6 while bond B has a duration of 6.0. Bond B
A) will have greater price variability, given a change in interest rates, relative to bond A.
B) will have a longer maturity than bond A.
C) will have a higher coupon rate than bond A.
D) will have less price variability, given a change in interest rates, relative to bond A.

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Multiple Choice

Q 44Q 44

A 3-year zero coupon bond selling at $900 and yielding 12.18 percent 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 45Q 45

A $1000 2-year 10% coupon bond is priced at $1000 in the market. 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 46Q 46

The duration of a $1000, 2-year, 7% coupon bond (interest paid annually) is _____ when market rates are 8%?
A) 2.036
B) 1.934
C) 1.902
D) 1.856

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Multiple Choice

Q 47Q 47

As bond maturity _________, so does the _________ and ________.
A) decreases; coupon rate; market price.
B) decreases; duration; face value.
C) increases; duration; price variability.
D) increases; risk; coupon rate.

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Multiple Choice

Q 48Q 48

In a fixed-rate bond, the variable which changes to determine market rate of return is
A) price.
B) coupon rate.
C) coupon amount.
D) face value.

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Multiple Choice

Q 49Q 49

A $1,000 par, 8% Treasury bond maturing in three years is priced to yield 7%. Its market price (assuming semiannual compounding) is
A) $974.21
B) $813.50
C) $927.50
D) $1,026.64

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Multiple Choice

Q 50Q 50

Which of the following risks will not affect zero coupon bonds?
A) price risk
B) reinvestment risk
C) credit risk
D) default risk

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Multiple Choice

Q 51Q 51

A bond yield measure should capture all of the following except
A) coupon payments.
B) reinvestment income.
C) changing coupon rate levels.
D) capital gains or losses.

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Multiple Choice

Q 52Q 52

The yield to maturity measure assumes that coupon interest is reinvested at
A) the yield to maturity.
B) the changing market rates.
C) the coupon rate.
D) the treasury bond rate.

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Multiple Choice

Q 53Q 53

Calculate the realized return on a $1,000 face value, 9 percent coupon bond (annual) purchased for $800 and sold one year later for $850.
A) 9%
B) 11.25%
C) 14.5%
D) 17.5%

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Multiple Choice

Q 54Q 54

If a 7% coupon (semiannual) bond purchased at par sells 2 years later for $990, what is the realized rate of return (annualized)?
A) 8%
B) 6.52%
C) 7.32%
D) 5.75%

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Multiple Choice

Q 55Q 55

Calculate the volatility of $1,000 face value 8% coupon bond whose price has varied from $1,020 to $1,050.
A) $30.00
B) 5%
C) 3%
D) $50.00

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Multiple Choice

Q 56Q 56

Which of the following statements is true?
A) Bonds vary directly with interest rates.
B) Bond volatility varies inversely with maturity.
C) Low coupon bonds have lower bond volatility than high coupon bonds.
D) Bond duration increases with maturity.

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Multiple Choice

Q 57Q 57

Interest rate risk is
A) duration.
B) the extent that coupon rates vary with time.
C) the potential variability in the realized rate of return caused by changes in market rates.
D) the potential variability in the bond maturity caused by changing discount rates.

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Multiple Choice

Q 58Q 58

Price risk and reinvestment risk
A) offset one another to a certain extent as interest rates change.
B) are two bond risks related to credit risk.
C) work together to magnify the price impact of a change in interest rate.
D) both have an effect on bond price.

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Multiple Choice

Q 59Q 59

Jane needs a specific sum of money in five years. She should invest in
A) high quality, 20 year Treasury bonds.
B) high quality coupon bonds with a duration of five years.
C) high quality coupon bonds maturing in five years.
D) high credit risk bonds maturing before five years.

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Multiple Choice

Q 60Q 60

Which of the following statements about duration is true?
A) Duration is the length of time necessary to pay back the investor's original investment.
B) The duration of a bond is some time longer than the maturity of the bond.
C) Duration is the investment period necessary to offset price risk and reinvestment risk.
D) A bond sold at the duration point will always be priced at $1,000.

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Multiple Choice

Q 61Q 61

What is the price of a $1,000 face value bond with a 10% coupon if the market rate is 10%?
A) more than $1,000
B) $1,000
C) less than $1,000
D) cannot ascertain

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Multiple Choice

Q 62Q 62

What is the price of the bond in the above question, if the market rate rises to 12% and the bond matures in 5 years? (Assume semiannual compounding).
A) $829.60
B) $1,000.00
C) $926.40
D) $1,040.80

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Multiple Choice

Q 63Q 63

Tom purchased a bond last year for $1240, received $60 in interest return, and sold the bond for $1300 one year later. What is Tom's realized annual rate of return?
A) 4.8%
B) 9.7%
C) 9.2%
D) More than 10%.

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Multiple Choice

Q 64Q 64

The bond yield to maturity calculation is
A) the guaranteed rate of return to an investor.
B) the same as the coupon rate.
C) the expected rate of return on the bond.
D) the realized rate of return on the bond.

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Multiple Choice

Q 65Q 65

An investor worried about interest rate risk should
A) not purchase coupon bonds.
B) select bonds whose maturity matches the investor's investment holding period.
C) select bonds whose duration matches the investor's investment holding period.
D) invest only in U.S. Treasury bonds.

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Multiple Choice

Q 66Q 66

An investor who selects coupon bond maturities matching his/her holding period
A) has eliminated price risk, but not reinvestment risk.
B) has eliminated just one part of interest rate risk.
C) cannot precisely predict the rate of return on the bond.
D) All of the above.

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Multiple Choice

Q 67Q 67

Reinvestment risk is the variability of return associated with
A) the variability of bond maturities.
B) the variability of bond coupon payments.
C) the variability of rates of return on reinvested coupons.
D) the variability of the market price on the bond.

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Multiple Choice

Q 68Q 68

There is generally a _______ relationship between term to maturity and duration.
A) positive
B) favorable
C) inverse
D) large

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Multiple Choice

Q 69Q 69

Bonds with _______ coupon rates have a ________ duration than bonds with ________ coupons of the same maturity.
A) higher; shorter; smaller
B) lower; longer; smaller
C) higher; longer; larger
D) higher; shorter; larger

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Multiple Choice

Q 70Q 70

The _______ the interest rate and the ________ the number of compounding periods in a year, the _________ the rate of return on a present sum.
A) lower, greater, lower
B) higher, fewer, higher
C) higher, greater, higher
D) lower, lower, higher

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Multiple Choice

Q 71Q 71

If a bond investor receives all the coupon payments on time and the face value on the contract maturity date, investor's return could still vary because of
A) default risk
B) price risk
C) liquidity risk
D) reinvestment risk.

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Multiple Choice

Q 72Q 72

Two factors that affect interest rate risk are
A) default risk and reinvestment risk.
B) liquidity risk and reinvestment risk.
C) price risk and political risk.
D) price risk and reinvestment risk.

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Multiple Choice

Q 73Q 73

The sum of time weighted discounted cash flows divided by the price of the security is the
A) volatility of the security.
C) duration of the security.
D) always greater than the maturity of the security.
D) present value of the security cash flows.

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Multiple Choice

Q 74Q 74

An increase in the supply of bonds in the bond market will
A) be associated with a decrease in interest rates.
B) always be matched by an increased demand for securities.
C) be associated with an increase in bond interest rates.
D) not affect interest rates, only security prices.

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Multiple Choice

Q 75Q 75

An increase in the demand for securities
A) will be associated with an increase in interest rates.
B) will be associated with a decrease in interest rates.
C) will have no affect on interest rates.
D) will be matched with an increase in the supply of securities.

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Multiple Choice

Q 76Q 76

In a fixed rate bond, the variable which changes to provide the current market rate of return to investors is
A) face value
B) coupon rate
C) maturity
D) price

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Multiple Choice

Q 77Q 77

All of the following are contractually fixed except
A) par value
B) yield
C) maturity
D) coupon

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Multiple Choice

Q 78Q 78

The duration of any financial instrument
A) cannot exceed the instrument's term to maturity
B) is a proxy for the instrument's default risk
C) must exceed the instrument's term to maturity
D) must be calculated before yield to maturity can be accurately determined

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Multiple Choice

Q 79Q 79

An 16 year corporate bond pays has a 3.5% coupon rate. What should be the bond's price if the required return is 3% and the bond pays interest annually?
A) $1060.44
B) $1062.81
C) $1065.45
D) $1072.99
A 10-year semiannual payment bond with a par value of $1,000 has a 7% coupon annual rate. Currently this bond is a par bond in market. Use the above information to answer the following three questions.

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Multiple Choice

Q 80Q 80

What is the duration of this par bond?
A) 10.00 years
B) 8.392 years
C) 8.452 years
D) 7.355 years

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Multiple Choice

Q 81Q 81

Name and discuss the variables that determine the price or value of a fixed-rate coupon bond.

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Q 82Q 82

Name and discuss the factors that must be considered when calculating the realized rate of return on a bond.

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Q 84Q 84

Define and discuss interest rate risk. What are the two risk components of interest rate risk and how do these interact with each other?

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Q 85Q 85

What is bond duration and what are the implications of holding a bond to its duration versus holding the bond to maturity?

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Q 86Q 86

Formosan Independence Co. issues a 9-year semiannual payment bond with a par value of $1,000 a 10% coupon annual rate. The bond's credit rating is AA. Currently, this bond is a par bond in market.
a. What is the duration of this par bond?
b. If Standard and Poors unexpectedly downgrades the U.S. government bond rating. The market interest rates increase. This bond's annual YTM increases by 2%. What is the impact on bond's interest rate risk? Please use duration to explain.

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