Chapter 17

BOND YIELDS AND PRICES

Multiple Choice Questions
Bon Yiels
1. One percentage point of a bond yield represents:
a. 1 basis point
b. 10 basis points
c. 100 basis points
d. 1000 basis points
2. Subtracting the inflation rate from the market interest rate results in an
approximate:
a. inflation-adjusted rate of interest
b. real risk-free rate of interest
c. real risky rate of interest
d. inflation-adjusted yield
. !or risk-free securities" the nominal interest rate is a function of:
a. actual and expected inflation rates
b. expected inflation rate and expected return
c. real rate of interest and expected inflation rate
d. market rate of return and real rate of interest
#. $nder the !isher hypothesis" if a one point increase in the inflation rate is
anticipated:
a. nominal rates on short-term securities %ould rise by one point.
b. nominal rates on short-term securities %ould fall by one point.
c. nominal rates on short-term securities %ould fall by less than one point.
d. nominal rates on short-term securities %ould rise by less than one point.
&. 'hich of the follo%ing regarding the current yield on a bond is not true(
a. )he current yield is superior to the coupon rate because it uses market
price instead of face *alue.
b. )he current yield is reported daily in The Wall Street Journal.
c. )he current yield does not account for difference bet%een purchase price
and redemption *alue.
d. )he current yield sho%s the bond+s expected rate of return if held to
maturity.
,hapter -ight
.ond /ields and 0rices
21&
1. )he yield to maturity consists solely of interest income if:
a. the bond is a 2ero coupon bond.
b. the bond %as purchased at par.
c. the bond %as purchased abo*e par.
d. the bond %as purchased belo% par.
3. 4n order to ha*e a yield to maturity greater than the coupon rate" the bond
must be:
a. selling at a discount.
b. selling at par.
c. selling at a premium.
d. a 2ero coupon bond.
5. )ypically" a yield to call calculation %ill use:
a. market interest rates rate than the coupon rate.
b. current market price rather than the maturity *alue.
c. the end of the deferred call period rather than remaining years on the term.
d. all of the abo*e %ill be used.
6. 'hen interest rates rise"
a. bond prices rise.
b. bond prices fall.
c. prices of ne%ly issued bonds are lo%ered.
d. interest rates of existing bonds are raised.
10. 4f a bond is callable" this means:
a. the issuer may change the coupon rate.
b. the in*estor may con*ert the bond into stock.
c. the issuer may redeem the bond early.
d. the in*estor may cash in the bond at any time.
11. )he /)7 calculation assumes:
a. rein*estment of interest is at the coupon rate.
b. no rein*estment of interest.
c. rein*estment of interest is at /)7 rate.
d. rein*estment of interest is at the risk-free rate.
12. )he face *alue of most bonds is:
a. 8100
b. 8&00
c. 81000
,hapter -ight
.ond /ields and 0rices
211
d. 810"000
1. )he !isher hypothesis is an approximation of the
a. risk-free interest rate.
b. real risk-free interest rate.
c. inflation rate.
d. risk premium.
1#. .onds %ith deferred call features

a. can be retired at any time prior to maturity on condition that the issuer
gi*es notice.
b. can only be retired after a specified period follo%ing the date of issue.
c. can be retired at any time" but the issuer %ill ha*e to pay an additional
premium..
d. generally ha*e no call premium.
1&. 'hen calculating the yield-to-call on a bond" the stream of interest
payments is 9999999999 and the par *alue is replaced by the 9999999999.
a. lengthened to the call period . . . call price.
b. shortened to the call period . . . call price.
c. not used in the calculation . . . current market price.
d. shortened to the call period . . . current market price.
11. :n increase in rein*estment rate risk
a. is caused by an increase in interest rates.
b. leads to a decline in coupon rates.
c. results from a decline in interest rates.
d. results from an increase in inflation.
13. )he yield-to-call is like the yield-to-maturity except for the
a. coupon payments and maturity *alue.
b. number of periods to maturity and maturity *alue.
c. number of periods to maturity and inflation premium.
d. coupon rate and coupon payments.
15. )he yield to maturity is 5 percent. 4f the yield increases by &0 basis
points" the ne% yield is :
a. 5.00& percent.
b. 5.0&0 percent.
c. 5.&00 percent.
d. 1.000 percent.
16. : bond is selling at a discount if the:
,hapter -ight
.ond /ields and 0rices
213
a. yield-to-maturity is greater than the coupon rate.
b. yield-to-maturity is less than the coupon rate.
c. market price is greater than the par *alue.
d. yield-to-call is less than the coupon rate.
20. )he real rate of interest is almost al%ays:
a. the opportunity cost of foregoing consumption.
b. greater than the nominal rate of interest.
c. e;ual to the nominal rate of interest.
d. easily affected by risk factors.
21. )he 9999999999 e;uates the present *alue of the total future dollars
expected to be a*ailable at the end of a specific time period" gi*en certain
assumptions" to the price of the bond.
a. hori2on return
b. promised return
c. expected return
d. coupon return
22. !ind the price of a 10 percent coupon bond %ith three years to maturity if
the yield to maturity is no% 12 percent. $se semiannual discounting.
a. 81161.30 Solution: $se 1 percent and 1 periods
b. 86&0.5& 0rice < &0=#.613> ? 1000=0.30&>
c. 86&2.20 < 6&0.5&
d. 8666.50
2. )he /)7 for a 2ero-coupon bond %ith 10 years to maturity and selling for
8#&0 is
a. 6.00 percent. Solution: /)7 < @7AB0C
1B2n
- 1
b. 5.1& percent. < @1000B#&0C
1B20
D 1
c. 2.22 percent. < 0.0#3 per half year
d. #.03 percent. /)7 < 0.0#3=2> < 0.051&
2#. 4f bond in*estors do not rein*est the coupons recei*ed during the life of
the bond" then the
a. E,/ %ill be less than the /)7.
b. E,/ %ill exceed the /)7.
c. nominal yield %ill be greater than the /)7.
d. current yield %ill e;ual the /)7.
2&. Eein*estment rate risk increases %ith a 99999999 coupon rate and a
99999999 term to maturity.
,hapter -ight
.ond /ields and 0rices
215
a. lo% . . . short
b. lo% . . . long
c. high . . . long
d. 2ero . . . short
21. 'hich of the follo%ing statements regarding the reali2ed compound yield
=E,/> is true(
a. )he E/, %ill al%ays be higher than the /)7.
b. )he E/, %ill al%ays be lo%er than the /)7.
c. )he E/, does not assume coupons are rein*ested at the /)7.
d. )he E/, assumes price is belo% par.
Bon Prices
23. 'hich of the follo%ing statements regarding changes in bond prices
relati*e to changes in market yields is true(
a. Short-term bond prices %ill increase more than long-term bond prices if
market yields increase.
b. Short-term bond prices %ill increase less than long-term bond prices if
market yields decrease.
c. Short-term bond prices %ill increase more than long-term bond prices if
market yields decrease.
d. Short-term bond prices %ill remain constant and long-term bond prices
%ill increase if market yields decrease.
25. 'hich of the follo%ing bonds %ould you expect to ha*e the greatest price
*olatility(
a. 10F" 10 year bond
b. 10F" & year bond
c. &F" 10 year bond
d. &F" & year bond
26. 'hich of the follo%ing statements about the risk premium affecting
market interest rates is !:GS-( )he risk premium
a. is often referred to as the yield differential.
b. is the compensation re;uired for the risk in*ol*ed.
c. can be 2ero.
d. is not associated %ith the issuerHs o%n particular situation.
Bon Price Chan!es
0. :ll other factors constant" the -------------- of a bond" the shorter the
duration.
a. longer the term
,hapter -ight
.ond /ields and 0rices
216
b. higher the coupon rate
c. higher the risk
d. higher the rating
1. Iuration can be used to:
a. minimi2e default risk
b. minimi2e rein*estment risk.
c. minimi2e interest rate risk.
d. maximi2e return.
2. )he duration of a 2ero coupon bond:
a. is less than its term.
b. is e;ual to its term.
c. is greater than its term.
d. is impossible to determine.
. Iuration is based upon:
a. future *alue concepts.
b. compound interest.
c. present *alue concepts.
d. the !isher hypothesis.
#. 'hich of the follo%ing statements about bond prices is !:GS-(
a. .ond price *olatility and time to maturity are directly related.
b. : decrease in yields raises prices more than an increase in yields lo%ers
prices.
c. .ond price fluctuations and bond coupons are directly related.
d. .ond prices mo*e in*ersely to bond yields.
&. 7aturity constant" increases in interest rates 999 bond prices by
proportionately 99 amounts than decreases in rates 999 bond prices.
a. increase . . . smaller . . . increase
b. decrease . . . smaller . . . increase
c. decrease . . . larger . . . increase
d. increase . . . larger . . . decrease
1. ,on*exity is important in bond analysis because
a. the price-yield relationship is imprecise.
b. the relationship bet%een bond maturity and interest rate changes is
con*ex.
c. the relationship bet%een bond price changes and duration is an
approximation.
d. bonds ha*e a con*ex relationship %ith duration.
,hapter -ight
.ond /ields and 0rices
220
3. ,on*exity is largest for bonds %ith 999999999 coupons" 99999999
maturities" and 99999999 yields to maturity.
a. lo% . . . long . . . lo%
b. high . . . long . . . lo%
c. lo% . . . short . . . lo%
d. high . . . short . . . high
5. 'hich of the follo%ing bond relationships is JO) in*erse(
a. ,oupon and duration
b. Iuration and yield to maturity
c. 4nterest rate changes and bond prices
d. Iuration and maturity
6. Iuration tells us the
a. actual price *olatility from a bond.
b. stated life of a bond.
c. %eighted a*erage maturity of a bond.
d. true rate of return to be earned on a bond.
#0. !or all bonds paying coupons" duration is
a. less than maturity.
b. greater than maturity.
c. about e;ual to maturity.
d. not related to maturity.
#1. 'ith regard to duration" choose the 4J,OEE-,) statement.
a. Iuration expands %ith time to maturity but at a decreasing rate.
b. /ield to maturity is directly related to duration.
c. ,oupon is in*ersely related to duration.
d. Iuration is a measure of bond price sensiti*ity to interest rate mo*ements.
"rue#$alse Questions
Bon Yiels
1. )reasury bonds are typically used a proxy for the short-term riskless rate.
2. )he real risk-free rate of interest is the rate that must be offered to
persuade indi*iduals to in*est rather than sa*e.
. 4f the current yield is abo*e the coupon rate" the bond is selling at a
premium.
,hapter -ight
.ond /ields and 0rices
221
#. 4f t%o bonds ha*e the same coupon rate and the same term" they %ill ha*e
the same intrinsic *alue.
&. )he hori2on return is the bond return to be earned based on assumptions
about rein*estment rates.
Bon Prices
1. 4n bond *aluation" the appropriate discount rate is the re;uired yield.
3. )he higher the discount rate used in bond *aluation" the lo%er the bond+s
intrinsic *alue.
Bon Price Chan!es
5. Iuration measures the %eighted a*erage maturity of a noncallable bond+s
cash flo%s on a present *alue basis.
6. Iuration expands %ith time to maturity at an increasing rate.
10. )he term used to describe the degree to %hich duration changes as the
yield to maturity changes is linearity.
,hapter -ight
.ond /ields and 0rices
222