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Exam 18: The Analysis and Valuation of Bonds

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Question 51

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For a given change in yield bond price volatility is directly related to duration.

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Question 52

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A graph of a bond's Price-Yield curve reveals all of the following except

A) Price moves inverse to yield
B) The bond sells at a premium when the yield is below the coupon rate
C) The bond sells at a discount when the yield is above the coupon rate
D) The Price-Yield curve in concave
E) All of the above are characteristics of the Price-Yield curve

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Question 53

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The realized yield measures the expected rate of return of a bond that you expect to sell prior to its maturity.

Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity?

Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6% coupon and a yield to maturity of 8%. Interest is paid annually.

Exhibit 18.2 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7% coupon rate. Interest is paid annually and the required rate of return is 6 percent for these bonds. -Refer to Exhibit 18.2. What is the Modified duration of the Talmart corporate bonds?

When there are no embedded options, ____ duration can be used to provide an approximation of the interest rate sensitivity of the bond.

If you expected interest rates to fall, you would prefer to own bonds with

According to the expectations hypothesis a rising yield curve indicates that investors expect

The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted at a value

What is the current price of a zero coupon bond with a 6% yield to maturity that matures in 15 years?

Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the bond's yield to call? Interest is paid annually.

____ measures the expected rate of return of a bond assuming that you sell it prior to its maturity.

Estimating forward rates from the spot rate curve is based on the assumption that the ____ hypothesis accurately describes the shape of the yield curve.

Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.

Exhibit 18.3 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A $1000 par value bond with 4 years to maturity and a 5% coupon has a yield to maturity of 6%. Interest is paid annually. -Refer to Exhibit 18.3. Estimate the percentage price change for this 4-year $1,000 par value bond, with annual 5% coupon, if the yield falls from 6% to 5.5%.

Which of the four major yield spreads defines the difference in yields between pure government agency bonds and corporate bonds?

Exhibit 19.11 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider two bonds, both pay semiannual interest. Bond X has a coupon of 7% per year, maturity of 20 years, yield to maturity of 8% per year, and a face value of $1000. Bond Y has a coupon of 7% per year, maturity of 20 years, yield to maturity of 8.5% per year, and a face value of $1000. -The expectations hypothesis is also known as both the institutional theory and the hedging pressure theory.

Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years at $1,100, what is the bond's yield to call? Interest is paid semiannually.

Assume that you purchase a 10-year $1,000 par value bond, with a 12% coupon, and a yield of 9%. Immediately after you purchase the bond, yields fall to 8% and remain at that level to maturity. Calculate the realized horizon yield, if you hold the bond for 5 years and then sell. Interest is paid annually.