Question 1

An 8-year annual payment 7% coupon Treasury bond has a price of $1,075. The bond's annual Err must be

Accepted Answer

The bond's price is higher than its face value, indicating that the yield to maturity (Err) is lower than the coupon rate of 7%. The closest lower rate among the options is 5.80%.

Question 2

You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?

Accepted Answer

Using the formula:
45 = 2 x PVIFA (rr%, 3) + 47 x (PVIF (rr%, 3))
Solving for rr%, we get rr% = 8.51%. Therefore, the annual compound rate of return is 8.51%.

Question 3

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised ytm is 5.5%?

Accepted Answer

The bond's price is calculated using the present value of annuity formula for the interest payments and the present value of a lump sum for the face value. The semi-annual interest rate is 2.75% (5.5% annual YTM divided by 2), and there are 30 periods (15 years times 2). The correct calculation results in a bond price of $1261.32.

Question 4

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7%. By how much is the bond mispriced?

Accepted Answer

The answer of A 12-year annual payment corporate bond has...

Question 5

The ___________ the coupon and the ______________ the maturity; the __________ the duration of a bond, ceteris paribus.

Accepted Answer

The answer of The ___________ the coupon and the ______________...

Question 6

An annual payment bond with a $1,000 par has a 5% quoted coupon rate, a 6% promised ytm, and 6 years to maturity. What is the bond's duration?

Accepted Answer

The bond's duration is calculated using the formula for Macaulay duration, which considers the present value of cash flows. Given the bond's coupon rate, yield to maturity, and time to maturity, the duration is approximately 5.31 years.

Question 7

A corporate bond returns 12% of its cost (in PV terms) in the first year, 11% in the second year, 10% in the third year and the remainder in the fourth year. What is the bond's duration in years?

Accepted Answer

The bond's duration is calculated as the weighted average time until cash flows are received. The weights are the present value of the cash flows as a percentage of the total present value. The calculation provided in choice E is correct.

Question 8

A bond that you held to maturity had a realized return of 8%, but when you bought it, it had an expected return of 6%. If no default occurred, which one of the following must be true?

Accepted Answer

The realized return being higher than the expected return suggests that the coupons were reinvested at a higher rate than initially anticipated.

Question 9

A security has an expected return less than its required return. This security is

Accepted Answer

The answer of A security has an expected return less...

Question 10

A 10-year annual payment corporate coupon bond has an expected return of 11% and a required return of 10%. The bond's market price is

Accepted Answer

The answer of A 10-year annual payment corporate coupon bond...

Question 11

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9%. By how much is the bond mispriced?

Accepted Answer

To find out if a bond is mispriced, we need to calculate its fair value using its cash flows and the required rate of return. In this case, the bond pays annual interest of $100 for 10 years and returns its face value of $1,000 at maturity. Using a financial calculator or Excel, we can find that the fair value of the bond is $1,064.18. Since the market price is only $1,050, the bond is underpriced by $14.18. Therefore, the answer is C, underpriced by $14.18.

Question 12

You would want to purchase a security if P ____________ PV or Err ____________ rrr.

Accepted Answer

The equation P ≥ PV means that the current market price of the security (P) is greater than or equal to its present value (PV). This suggests that the security is currently undervalued, and is likely to rise in price in the future.

The equation Err ≥ rrr means that the expected rate of return (Err) on the security is greater than or equal to the required rate of return (rrr). This suggests that the security is expected to provide a good return relative to the amount of risk involved.

Therefore, you would want to purchase a security if either P ≥ PV or Err ≥ rrr. Only choice C includes both of these conditions, making it the best answer.

Question 13

A semiannual payment bond with a $1,000 par has a 7% quoted coupon rate, a 7% promised ytm, and 10 years to maturity. What is the bond's duration?

Accepted Answer

The answer of A semiannual payment bond with a $1,000...

Question 14

If an N year security recovered the same percentage of its cost in PV terms each year the duration would be

Accepted Answer

The answer of If an N year security recovered the...

Question 15

A 6-year annual payment corporate bond has a required return of 9.5% and an 8% coupon. Its market value is $20 over its PV. What is the bond's Err?

Accepted Answer

The answer of A 6-year annual payment corporate bond has...

Question 16

A 4-year maturity 0% coupon corporate bond with a required rate of return of 12% has an annual duration of _______________ years.

Accepted Answer

A zero-coupon bond's duration is equal to its maturity because it pays no interim cash flows. Therefore, the duration of a 4-year zero-coupon bond is 4 years.

Question 17

A corporate bond has a coupon rate of 10% and a required return of 10%. This bond's price is

Accepted Answer

When the coupon rate and required return are equal, the bond will be priced at par value. Therefore, the bond's price is $1000.00.

Question 18

An 8-year corporate bond has a 7% coupon rate. What should be the bond's price if the required return is 6% and the bond pays interest semiannually?

Accepted Answer

The bond's price is calculated using the present value of its cash flows, which include semiannual coupon payments and the face value at maturity. With a 7% annual coupon rate, the semiannual coupon is $35. The required return is 6% annually, or 3% semiannually. Using the present value formulas for annuities and lump sums, the bond's price is approximately $1062.81.

Question 19

The interest rate used to find the present value of a financial security is the

Accepted Answer

The required rate of return is the minimum rate of return that an investor expects to earn from an investment. It is used to discount future cash flows to their present value in order to determine the fair value or intrinsic value of the investment.

Question 20

Which of the following bond terms are generally positively related to bond price volatility?
I. Coupon rate
II. Maturity
III. ytm
IV. Payment frequency

Accepted Answer

Bond price volatility is generally positively related to maturity, meaning longer maturity bonds tend to have higher price volatility. Coupon rate and yield to maturity (ytm) are inversely related to price volatility, and payment frequency does not have a direct positive relationship with price volatility.

Quiz 3: Interest Rates and Security Valuation