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released: Nov 12, 2010 10:00 PM Question 1 Which of the following statements is CORRECT? 1) 2) The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates. 4 / 4 points

You hold a 10-year, zero coupon, bond and a 10-year bond that has a 6% annual 3) coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. 4) The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.

You hold a 10-year, zero coupon, bond and a 10-year bond that has a 6% annual 5) coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline. Question 2 4 / 4 points Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds will have the largest percentage increase in price? 1) A 10-year zero coupon bond. 2) A 3-year bond with a 10% coupon. 3) A 1-year bond with a 15% coupon. 4) A 10-year bond with a 10% coupon. 5) An 8-year bond with a 9% coupon. Question 3 4 / 4 points A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? 1) The bond is currently selling at a price below its par value. 2) The bond should currently be selling at its par value. 3) 4) If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.

5) If market interest rates decline, the price of the bond will also decline. Question 4 4 / 4 points A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Both bonds have the same yield to maturity. If the yields to maturity of both bonds increase by the same amount, which of the following statements is CORRECT? 1) The prices of both bonds will decrease by the same amount.

2)

Both bonds will decline in price, but the 10-year bond will have a greater percentage decline in price than the 8-year bond.

3) One bonds price will increase, while the other bond's price decreases. 4) The prices of the two bonds will remain the same. 5) The prices of both bonds will increase by the same amount. Question 5 Which of the following statements is CORRECT? 1) All else equal, if a bond's yield to maturity increases, its current yield will fall. 2) 3) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. If a bond's required rate of return exceeds its coupon rate, the bond will sell at a premium. 4 / 4 points

4) All else equal, if a bond's yield to maturity increases, its price will fall. 5) If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. Question 6 4 / 4 points A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT? 1) The bond's current yield exceeds its yield to maturity. 2) The bond's current yield is equal to its coupon rate. 3) The bond's coupon rate exceeds its current yield. 4) The bond's yield to maturity is greater than its coupon rate. 5) If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850. 0 / 4 points

Question 7 Which of the following statements is CORRECT? 1)

A discount bond's price declines each year until it matures, when its value equals its par value.

Assuming that both bonds are held to maturity and are of equal risk, a bond selling for 2) more than par with 10 years to maturity will have a lower current yield and higher capital gain relative to a bond that sells at par. 3) A bond's current yield must always be between its yield to maturity and its coupon rate. 4) If a bond sells at par, then its current yield will be less than its yield to maturity. 5) If a bond sells for less than par, then its yield to maturity is less than its coupon rate. Question 8 4 / 4 points Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

1) 2) 3) 4) 5) View Feedback

6.25% 6.35% 6.15% 5.95% 6.05%

Question 9 0 / 4 points Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT? 1) If inflation is expected to decline, there can be no maturity risk premium. 2) If the expectations theory holds, the corporate yield curve must be downward sloping. 3) The expectations theory cannot hold if inflation is decreasing. 4) If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.

5) If the expectations theory holds, the Treasury yield curve must be downward sloping. Question 10 4 / 4 points If the Treasury yield curve is downward sloping, how would the yield to maturity on a 10-year Treasury coupon bond compare to that on a 1-year T-bill? 1) The yield on a 10-year bond would be less than that on a 1-year bill. 2) The yields on the two securities would be equal. 3) It is impossible to tell without knowing the coupon rates of the bonds. 4) It is impossible to tell without knowing the relative risks of the two securities. 5) Question 11 The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. 0 / 8 points

A 12-year bond has a 9 percent annual coupon, a yield to maturity of 8 percent, and a face value of $1,000. What is the price of the bond?
1075.36 This question has not been graded. The correct answer is not displayed for Long Answer type questions. Hide Feedback

Enter the following input data in the calculator:N = 12; I = 8; PMT = 90; FV = 1000; and then solve for PV = $1,075.36. VB $1,075.
Question 12 0 / 8 points

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond?
1115.57 This question has not been graded. The correct answer is not displayed for Long Answer type questions. Hide Feedback

N = 10*4 = 40; I = 12/4 = 3; PMT = $35; FV = $1000; PV = ?; $1,115.57.

Question 13 0 / 8 points

A bond matures in 12 years and pays an 8 percent annual coupon. The bond has a face value of $1,000 and currently sells for $985. What is the bond's current yield and yield to maturity?
CY=.0812, YTM=.0819 This question has not been graded. The correct answer is not displayed for Long Answer type questions. Hide Feedback

Current yield is calculated as: $80/$985 = 8.12%. N = 12; PV = -985; PMT = 80; FV = 1000; and then solve for I/YR (YTM) = 8.20%.
Question 14 0 / 8 points

A bond with 12 years to maturity has a 7 percent semiannual coupon and a face value of $1,000. (That is, the bond pays a $35 coupon every six months.) The bond currently sells for $1,000. What should be the price of a bond with the same risk and maturity that pays a 7 percent annual coupon and has a face value of $1,000?
1000 This question has not been graded. The correct answer is not displayed for Long Answer type questions. Hide Feedback

On the first bond, since the bond is selling at par, its coupon rate is the nominal annual rate charged in the market. However, this is for semiannual coupon bonds. So, this needs to be converted into an effective rate for annual coupon bonds. Step 1: Enter the following data as inputs in your calculator:NOM% = 7; P/YR = 2; and then solve for EFF% = 7.1225%. Step 2: Use the effective rate calculated

above to solve for the price of the second bond, which is an annual coupon bond:N = 12; I = 7.1225; PMT = 0.07 1,000 = 70; FV = 1000; and then solve for PV = -$990.33. VB = $990.33.
Question 15 0 / 8 points

A 15-year, $1,000 par value, 10% semiannual coupon bond has a price of $1,250 and it is callable in 5 years at a call price of $1,050. What is the bond's nominal yield to maturity?
7.24% This question has not been graded. The correct answer is not displayed for Long Answer type questions. Hide Feedback

N = 30; PV = -1250; PMT = 50; FV = 1000; I/YR =? 3.62%;The nominal YTM is 3.62% x 2 = 7.24%.
Question 16 0 / 8 points

A 15-year, $1,000 par value, 10% semiannual coupon bond has a price of $1,250 and it is callable in 5 years at a call price of $1,100. What is the bond's nominal yield to call?
5.9% This question has not been graded. The correct answer is not displayed for Long Answer type questions. Hide Feedback

N = 10; PV = -1250; PMT = 50; FV = 1100; I/YR =?2.9508%;The nominal YTC is 2.9508% x 2 = 5.90%.
Question 17 0 / 8 points

Walker Industries has a bond outstanding with 12 years to maturity, a 9% coupon paid semiannually, and a $1,000 par value. The bond has a 7% nominal yield to maturity, but it can be called in 3 years at a price of $1,045. What is the bond's nominal yield to call?
4.62% This question has not been graded. The correct answer is not displayed for Long Answer type questions. Hide Feedback

N = 12x2 = 24; I/Y = 7/2 = 3.5; PMT = 90/2 = 45; FV = 1000; PV =? -1160.58 N = 3 x 2 = 6; PV = -1160.58; PMT = 45; FV = 1045; I/Y = 2.31; YTC = 2.31% x 2 = 4.62%
Question 18 0 / 8 points

One-year Treasury securities yield 5 percent, 2-year Treasury securities yield 5.5 percent, and 3year Treasury securities yield 6 percent. Assume that the expectations theory holds. What does the market expect will be the yield on 1-year Treasury securities two years from now?
6.54% This question has not been graded.

The correct answer is not displayed for Long Answer type questions. Hide Feedback

(1+0.06)3 = (1+0.055)2 x (1+i); i = (1.191016 / 1.113025) 1 = 7%.