Question 1

u.S.Treasury bonds
A) carry no risk of default and are therefore not risky investments.
B) have constant yields to maturity and are therefore not risky investments.
C) have constant coupon rates and are therefore not risky investments.
D) are subject to fluctuations in their market prices and are therefore risky investments.

Accepted Answer

While U.S. Treasury bonds carry very low default risk, they are still subject to fluctuations in their market prices due to changes in interest rates, inflation expectations, and other factors. These fluctuations can result in gains or losses for investors who buy and sell bonds before their maturity date. Therefore, investing in U.S. Treasury bonds is not completely risk-free, making choice A, B, and C incorrect.

Question 2

The bid price for a bond is
A) the minimum price that you are allowed to bid for a bond that is being auctioned by the government.
B) the maximum price that you are allowed to bid for a bond that is being auctioned by the government.
C) the price that you will receive from a securities dealer if you sell the bond.
D) the price that you must pay a securities dealer to purchase a bond.

Accepted Answer

The answer of The bid price for a bond is
A)...

Question 3

If an investor is certain that market interest rates will decline in the future,which of the following will she be most likely to purchase?
A) a six-month government bill
B) a two-year government note
C) a ten-year government bond
D) a fifty-year government bond

Accepted Answer

The longer the maturity of a bond, the more its price will be sensitive to changes in interest rates. Therefore, if an investor is certain that interest rates will decline in the future, she would want to purchase a bond with a longer maturity, such as a fifty-year government bond, in order to benefit the most from the price appreciation that will occur due to the decline in interest rates.

Question 4

A corporation issues a three-year bond with a coupon of $50 and a face value of $1000.A year later,market interest rates have declined to 4%.What is the price of the bond a year after it was issued? Report your answer to the nearest dollar.

Accepted Answer

The answer of A corporation issues a three-year bond with...

Question 5

If the current price of a bond is less than its face value,
A) an investor will receive a capital gain by holding the bond until maturity.
B) the yield to maturity must be less than the current yield.
C) the coupon rate must be greater than the current yield.
D) the coupon rate must be equal to the current yield.

Accepted Answer

If the current price of a bond is less than its face value, this means that the bond is selling at a discount. Holding the bond until maturity allows the investor to receive the full face value of the bond, which is higher than the current price paid for the bond, resulting in a capital gain.

Question 6

Which of the following statements about the total rate of return is NOT correct?
A) The total rate of return may be greater or less than the current yield.
B) The total rate of return may be greater or less than the rate of capital gain.
C) The total rate of return may never be negative.
D) The total rate of return is greater than the coupon, holding everything else constant.

Accepted Answer

The total rate of return can be negative if the investor sells the asset for less than they purchased it for, resulting in a loss.

Question 7

The total rate of return is equal to
A) the coupon rate plus the rate of capital gains.
B) the coupon rate plus the current yield.
C) the current yield plus the rate of capital gains.
D) the coupon rate multiplied by the rate of capital gains.

Accepted Answer

The total rate of return includes income (coupon payments) and capital gains (change in bond's price). The current yield is the annual income (coupon payment) divided by the current price of the bond, while the rate of capital gains is the change in price over a given period of time. Therefore, adding the current yield to the rate of capital gains gives the total rate of return.

Question 8

If the current price of a bond is equal to its face value,
A) there is no capital gain or loss from holding the bond until maturity.
B) the yield to maturity must be greater than the current yield.
C) the current yield must be greater than the coupon rate.
D) the coupon rate must be greater than the yield to maturity.

Accepted Answer

If the current price of a bond is equal to its face value, there is no difference between the coupon rate and the yield to maturity. Therefore, there will be no capital gain or loss from holding the bond until maturity.

Question 9

The total rate of return is equal to the
A) sum of the coupon rate and the current yield.
B) yield to maturity.
C) sum of the current yield and the actual rate of capital gain or loss.
D) sum of the current yield and the expected rate of capital gain.

Accepted Answer

The total rate of return is the sum of the current yield and the actual rate of capital gain or loss. The coupon rate and yield to maturity only factor in the income generated from the bond, while the expected rate of capital gain in option D is subjective and not guaranteed.

Question 10

With respect to U.S.Treasury bills,
A) the bid price is always greater than the asked price.
B) the asked price is always greater than the bid price.
C) the bid price is only greater than the asked price if investors expect interest rates to decline in the future.
D) the asked price is only greater than the bid price if investors expect interest rates to decline in the future.

Accepted Answer

The asked price is always greater than the bid price for U.S. Treasury bills. This is because the asked price is the price at which sellers are willing to sell the security, while the bid price is the price at which buyers are willing to buy the security. Since sellers are generally looking to receive a higher price for their securities, the asked price will be higher than the bid price. This is true regardless of expectations about future interest rates.

Question 11

An speculator who buys a fifty-year corporate bond
A) must be expecting to still be alive in fifty years.
B) is subject to substantial reinvestment risk.
C) is probably expecting market interest rates to increase in the future.
D) is probably expecting market interest rates to decrease in the future.

Accepted Answer

Speculators who buy long-term bonds, like a fifty-year corporate bond, generally do so with the expectation that market interest rates will decrease in the future. When interest rates decrease, the value of existing bonds with higher interest rates increases, potentially allowing the speculator to sell the bond at a profit before maturity.

Question 12

A corporation issues a three year bond with a coupon of $50 and a face value of $1000.Immediately after being issued,market interest rates decline to 4%.What is the price of the bond? Report your answer to the nearest dollar.

Accepted Answer

The answer of A corporation issues a three year bond...

Question 13

A capital gain occurs when the
A) coupon rate increases.
B) current yield increases.
C) price of an asset increases.
D) yield to maturity increases.

Accepted Answer

A capital gain occurs when the price of an asset increases. This means the investor can sell the asset for a higher price than they initially paid for it, resulting in a profit. A capital gain is not related to changes in coupon rate, current yield, or yield to maturity.

Question 14

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill,we can say that the yield to maturity
A) will always be greater than the yield on a discount basis.
B) will always be less than the yield on a discount basis.
C) will always be equal to the yield on a discount basis, provided the holding period is the same as the number of years to maturity.
D) rises whenever the yield on a discount basis falls.

Accepted Answer

The yield to maturity on a Treasury bill takes into account the compounding effect over the period until maturity, while the yield on a discount basis does not. This results in the yield to maturity being always greater than the yield on a discount basis, as it reflects the true earnings on the investment over time.

Question 15

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to:
A) rising yields in secondary markets which led to a decline in the price of mortgage-backed securities.
B) falling yields in secondary markets which led to a decline in the price of mortgage-backed securities.
C) their inability to issue new mortgages.
D) more rapid pre-payment of mortgages.

Accepted Answer

During the financial crisis of 2007-2009, rising yields in secondary markets led to a decline in the price of mortgage-backed securities. This decline in price meant that the value of these securities held by banks decreased significantly, causing substantial financial losses.

Question 16

What is the yield on a discount basis for a U.S.Treasury bill that has a face value of $10,000,has a price of $9500,and will mature in 180 days?
A) 5.00%
B) 5.25%
C) 10.00%
D) 10.67%

Accepted Answer

The answer of What is the yield on a discount...

Question 17

If,while you are holding a coupon bond,the interest rates on other similar bonds fall,you can be sure that
A) the coupon payments on your bond will fall.
B) the market price of your bond will rise.
C) the market price of your bond will fall.
D) the par value of your bond will rise.

Accepted Answer

When interest rates on other similar bonds fall, the market price of your bond will rise. This is because your bond with a higher coupon rate becomes more attractive to investors compared to other bonds with lower coupon rates, increasing demand for your bond and driving its market price up.

Question 18

For a specific change in the yield to maturity
A) the shorter the time until a bond matures, the greater will be the change in its price.
B) the longer the time until a bond matures, the greater will be the change in its price.
C) the longer the time until a bond matures, the greater will be the change in its par value.
D) the shorter the time until a bond matures, the greater will be the change in its coupon rate.

Accepted Answer

The longer the time until a bond matures, the more sensitive its price is to changes in yield to maturity. This is because there are more future cash flows (coupon payments and the final principal repayment) that are discounted at the new yield, leading to a greater change in present value or price.

Question 19

What is the total rate of return on a bond with a coupon of $55 that was purchased for $900 and sold one year later for $950?
A) 5.56%
B) 6.11%
C) 11.67%
D) 12.43%

Accepted Answer

The coupon payment is irrelevant for calculating the total rate of return, since it is included in the purchase price. Instead, we need to use the formula:
Total Rate of Return = [(Ending Price - Beginning Price) + Income] / Beginning Price

Plugging in the given values, we get:
Total Rate of Return = [(950 - 900) + 55] / 900
Total Rate of Return = 105 / 900
Total Rate of Return = 0.1167 or 11.67%

Therefore, the correct answer is C.

Question 20

If,while you are holding a coupon bond,its market price falls,you can be sure that
A) the coupon payment you are receiving must have been reduced.
B) the interest rate on other similar bonds must have fallen.
C) the interest rate on other similar bonds must have risen.
D) the par value of the bond must have declined.

Accepted Answer

As the market price of the coupon bond falls, it implies that the interest rate on other similar bonds must have risen. This is because coupon bonds pay fixed interest rates, and as interest rates rise, the fixed interest payments of the bond become less attractive compared to other bonds that offer higher yields. Therefore, investors demand a higher yield on the bond, which results in its market price falling.

Quiz 3: Interest Rates and Rates of Return

u.S.Treasury bonds

The bid price for a bond is

If an investor is certain that market interest rates will decline in the future,which of the following will she be most likely to purchase?

A corporation issues a three-year bond with a coupon of $50 and a face value of $1000.A year later,market interest rates have declined to 4%.What is the price of the bond a year after it was issued? Report your answer to the nearest dollar.

If the current price of a bond is less than its face value,

Which of the following statements about the total rate of return is NOT correct?

The total rate of return is equal to

If the current price of a bond is equal to its face value,

The total rate of return is equal to the

With respect to U.S.Treasury bills,

An speculator who buys a fifty-year corporate bond

A corporation issues a three year bond with a coupon of $50 and a face value of $1000.Immediately after being issued,market interest rates decline to 4%.What is the price of the bond? Report your answer to the nearest dollar.

A capital gain occurs when the

In comparing the yield to maturity on a Treasury bill with the yield on a discount basis on the same bill,we can say that the yield to maturity

Banks who held mortgage-backed securities "took a bath" during the financial crisis of 2007-2009 due to:

What is the yield on a discount basis for a U.S.Treasury bill that has a face value of $10,000,has a price of $9500,and will mature in 180 days?

If,while you are holding a coupon bond,the interest rates on other similar bonds fall,you can be sure that

For a specific change in the yield to maturity

What is the total rate of return on a bond with a coupon of $55 that was purchased for $900 and sold one year later for $950?

If,while you are holding a coupon bond,its market price falls,you can be sure that