Intermediate Investments Exam 3 Practice Exam

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________.

9,840.63

If the price of a $10,000 par Treasury bond is $10,237.50 the quote would be listed in the newspaper as ________.

102:12

The invoice price of a bond is the ______

stated or flat price in a quote sheet plus accrued interest

A bond pays a semi-annual coupon and the last coupon was paid 61 days ago. There are 182 days between the last coupon date and the next coupon date. If the annual coupon payment is $75, what is the accrued interest?

12\.57

Accrued Interest = (75/2) x (61/182)

A __________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specific price after a specific date

puttable

Floating rate bonds have a __________ that is adjusted with current market interest rates

Coupon Rate

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________

Eurobonds

A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar).

1,062

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________

$97

A coupon bond which pays interest of 4% annually, has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.

9\.6%

A corporate bond has a 10 year maturity and pays interest semiannually. The quoted coupon rate is 6% and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?

8\.98%

A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________.

6\.49%

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Curent Yield = 60/(1000-75.25) = 6.49%

If the coupon rate on a bond is 4.50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

4\.30%

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, one year from now the price of this bond will be

Higher

The bonds of Elbow Grease Dishwashing Company have received a rating of “C” by Moody’s. The “C” rating indicates the bonds are__

Junk Bonds

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate:

Expected decrease in inflation over time

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require ________

a higher yield on long term bonds than short term bonds

One, two and three year maturity, default-free, zero-coupon bonds have yields-to-maturity of 7%, 8% and 9% respectively. What is the implied one-year forward rate in the second year?

9\.0%

All other things equal, a bond’s duration is

lower when the coupon rate is higher

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.

Both bonds will decrease in value but bond B will decrease more the bond A

Given its time to maturity, the duration of a zero coupon bond is

The same regardless of the discount rate

A bond pays annual interest. Its coupon rate is 8%. Its value at maturity is $1,000. It matures in three years. Its yield to maturity is currently 10%. The duration of this bond is _______ years.

2\.78

Steel Pier Company has issued bonds that pay semiannually with the following characteristics:

Coupon: 10%

YTM: 10%

Maturity = 10 years

Macaulay Duration = 6.76 years.

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The modified duration for the Steel Pier bond is __

6\.15 years

Where Y = yield to maturity, the duration of a perpetuity would be ___.

(1+Y)/Y

The duration is independent on the coupon rate only for which one of the following?

Perpetuities

A bond has a yield to maturity of 8% and a duration of 9 years. If the yield to maturity falls to 7.84%, there will be a ____ in the bond’s price.

1\.33% increase

Immunization of coupon paying bonds is not a passive strategy because \n I. the portfolio must be rebalanced every time interest rates change \n II. the portfolio must be rebalanced over time even if interest rates don't change \n III. convexity implies duration based immunization strategies don't work

1 and 2 only

28\. Advantages of cash flow matching and dedicated strategies include ______. \n I. once the cash flows are matched there is no need for rebalancing \n II. cash flow matching typically earns a higher rate of return than active bond portfolio management \n III. financial institution's liabilities often exceed the maturity of available bonds, making cash matching even more desirable

1 only

An increase in the bond’s yield to maturity results in a price decline that is __ the price increase resulting from a decrease in yield of equal magnitude.

Smaller than

Because of convexity, when interest rates change, the actual bond price will ____ the bond price predicted by duration.

Always be higher than

To create a portfolio with a duration of 4 years using a 5 year zero-coupon bond and a 3 year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ____ of the portfolio value in the zero-coupon bond.

55%

Steel Pier Company has issued bonds that pay semiannually with the following characteristics:

\
Coupon = 10%

Yield to Maturity = 10%

Maturity = 10 years

Macaulay Duration = 6.76 years

\
If the yield to maturity decreases to 8.045% the expected percentage change in the price of the bond using Macauley's duration would be ____, while the expected percentage change in the price of the bond using modified duration would be ____.

12%, 12%

You have a 15 year maturity 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If interest rate were to increase 200 basis points your predicted new price for the bond (including convexity) is _________

666\.88

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You have a 25 year maturity 10% coupon, 10% yield bond with duration of 10 years and a convexity of 135.50. If interest rate were to fall 125 basis points your predicted new price for the bond (including convexity) is _________

$1,124.20

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An 8%, 30-year bond has a yield-to-maturity of 10% and a modified duration of 8.0 years. If the market yield drops by 15 basis points, there will be a __________ in the bond's price

1\.2% increase

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A bond with a 9-year duration is worth $1,080.00 and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be _________

1,094