Financial Markets and Institutions

A bond’s price will likely fall because of any of the following events except

A. the Federal Reserve conducting quantitative easing

Consider a $1,000 face value and 3-year maturity bond with a coupon rate of 5%. The
bond pays coupon once a year. Assume the market interest rate is 5% and coupons may
be re-invested at this rate. How much would you be willing to pay for this bond?

B. $1,000

Holding other features of a bond and the market interest rate constant, the higher the
coupon rate is, the higher the bond price would be

True

Holding the cash flow structure of a bond constant, the higher the market interest rate is,
the lower the bond price would be

True

Holding everything else constant, a bond's price will go up if the return rate for cash flow
reinvestment goes up.

False

If the coupon rate of a bond equals the market interest rate, the bond will be selling at a
discount.

False

The realized yield of a bond may be influenced by coupon reinvestment rates.

True

The duration of a zero-coupon bond is equal to its maturity.

True

Short-term bonds have a greater exposure to interest rate risk compared to long-term bonds.

False

Bonds with higher coupon frequencies have shorter durations.

True

An important difference between “yield to maturity (YTM)” and “expected yield” is that

YTM assumes that the investor holds the bond to maturity while expected yield assumes that the investor sells the bond before maturity

All the following bonds are issued at the same time with the same maturity by the same issuer. The market interest rate is now higher than coupon rates of all the following bonds. Assume that coupons may be re-invested at the market rate. Which of the following bonds should trade at the largest discount from par?

zero coupon bond

Suppose a U.S Treasury note with a 10-year maturity yields 2 percent. An AA rated corporate bond with the same maturity yields 3 percent.  Their difference in yield is likely because of

C. default risk

Use the below interest rate data to answer the following questions

90-day   Treasury bills    8.36 percent 180-day   Treasury bills    8.48 percent

                             2-year                            Treasury notes                                              9.10 percent

3-year   Treasury notes    9.25 percent 90-day   commercial paper   9.15 percent

                             3-year                           corporate bonds (AA)                                  10.10 percent

              3-year                            municipal (AA)                                     7.07 percent

D. 90-day commercial paper 

A bank depositor must choose between purchasing a one-year CD paying 5% annually and a twoyear CD paying 5.5% annually.  If the depositor is indifferent between the two, the depositor must expect the one-year interest rate for CDs one year from now to be

C. 6.0%

Which of the following statements about callable bonds is NOT true?

Call options usually benefit the bond investor

A 3-year zero coupon bond selling at $900 with a yield-to-maturity of 12.18 percent has a duration of

A.    3 years  

As bond maturity _________, so do the _________ and ________

C. increases; duration; price volatility

All else equal, callable bonds pay a higher yield because

the call option increases the bondholder’s return risk

The value of a conversion option from a bond to a stock should rise when 

interest rates are more uncertain