Question 1

Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)

Accepted Answer

A)   $1,037
B)   $1,085
C)   $861
D)   $923

Question 2

Which one of the following statements is NOT true?

Accepted Answer

A)   Interest rate risk is the risk that bond prices will change as interest rates change.
B)   Interest rate changes and bond prices are inversely related.
C)   As interest rates increase, bond prices increase.
D)   Long-term bonds are more price volatile than short-term bonds of similar risk.

Question 3

Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity.

Accepted Answer

A) True 
 B)False

Question 4

Marketability is the ability of an investor

Accepted Answer

A)   to sell a security quickly, at a low transaction cost, and at a price close to its fair market value.
B)   to sell at a profit under all circumstances.
C)   to sell the security above its par value.
D)   None of the above.

Question 5

All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

Accepted Answer

A) True 
 B)False

Question 6

Convertible bonds can be converted into ordinary shares at some predetermined ratio at the discretion of the bondholder.

Accepted Answer

A) True 
 B)False

Question 7

Realised yield: Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sold the bond today, what would be his realised yield? (Round to the nearest percent.)

Accepted Answer

A)   12%
B)   10%
C)   11%
D)   9%

Question 8

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Accepted Answer

A) True 
 B)False

Question 9

Yield to maturity: Jane Almeda is interested in a 10-year bond issued by Roberts Company that pays a coupon of 10 percent annually. The current price of this bond is $1,174.45. What is the yield that Jane would earn by buying it at this price and holding it to maturity? (Round to the closest answer.)

Accepted Answer

A)   7%
B)   7.5%
C)   8%
D)   8.5%

Question 10

If market prices reflect all relevant information about securities at a particular point in time, it is called operational efficiency.

Accepted Answer

A) True 
 B)False

Question 11

Which ONE of the following statements is true?

Accepted Answer

A)   The largest investors in corporate bonds are life insurance companies and superannuation funds.
B)   The market for corporate bonds is thin.
C)   Prices in the corporate bond market also tend to be more volatile.
D)   All of the above are true.

Question 12

Yield to maturity: Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond?

Accepted Answer

A)   7.6%
B)   8.6%
C)   9.6%
D)   10.6%

Question 13

Semi-strong market efficiency implies that only public information that is available to all investors is reflected in a security's market price.

Accepted Answer

A) True 
 B)False

Question 14

Zero coupon bonds: The Australian Treasury has issued 10-year zero coupon bonds with a face value of $1,000. Assume that coupon payments are normally semiannual. What will be the current market price of these bonds if the opportunity cost for similar investments in the market is 6.75 percent? (Round to the nearest dollar.)

Accepted Answer

A)   $684
B)   $860
C)   $515
D)   $604

Question 15

Which one of the following statements is NOT true?

Accepted Answer

A)   The realised yield is the return earned on a bond given the cash flows actually received by the investor.
B)   The realised yield is equal to the yield to maturity even if the bond is sold prior to maturity.
C)   It is the interest rate at which the present value of the actual cash flows generated by the investment equals the bond's price at the time of sale of the bond.
D)   All of the above are true.

Question 16

If investors believe inflation will be increasing in the future, the prevailing yield will be downward sloping.

Accepted Answer

A) True 
 B)False

Question 17

Public share markets in developed countries like Australia have strong-form of market efficiency.

Accepted Answer

A) True 
 B)False

Question 18

If a market is strong-form market efficient, one would be able to beat the market with inside information.

Accepted Answer

A) True 
 B)False

Question 19

Which ONE of the following statements is true?

Accepted Answer

A)   Zero coupon bonds have no coupon payments over its life and only offer a single payment at maturity.
B)   Zero coupon bonds sell well below their face value (at a deep discount)  because they offer no coupons.
C)   Zero coupon bonds must sell for less than similar bonds that make coupon payments before maturity.
D)   All of the above are true.

Question 20

Which one of the following statements about bond price is NOT true?

Accepted Answer

A)   To calculate a bond's price, one needs to calculate the present value of the bond's expected cash flows.
B)   The value, or price, of any asset is the future value of its cash flows.
C)   The required rate of return, or discount rate, for a bond is the market interest rate called the bond's yield to maturity
D)   Estimate the expected future cash flows using the coupons that the bond will pay and the maturity value to be received.

Exam 8: Bond Valuation and the Structure of Interest Rates

Realised yield: Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sold the bond today, what would be his realised yield? (Round to the nearest percent.)

Correct Answer
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Correct Answer
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If a market is strong-form market efficient, one would be able to beat the market with inside information.

Correct Answer
verified

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Correct Answer
verified

Which ONE of the following statements is true?

Correct Answer
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Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)

Correct Answer
verified

Convertible bonds can be converted into ordinary shares at some predetermined ratio at the discretion of the bondholder.

Correct Answer
verified

Which ONE of the following statements is true?

Correct Answer
verified

Which one of the following statements is NOT true?

Correct Answer
verified

If investors believe inflation will be increasing in the future, the prevailing yield will be downward sloping.

Correct Answer
verified

If market prices reflect all relevant information about securities at a particular point in time, it is called operational efficiency.

Correct Answer
verified

Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity.

Correct Answer
verified

Public share markets in developed countries like Australia have strong-form of market efficiency.

Correct Answer
verified

Which one of the following statements about bond price is NOT true?

Correct Answer
verified

Correct Answer
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Marketability is the ability of an investor

Correct Answer
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All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

Correct Answer
verified

Which one of the following statements is NOT true?

Correct Answer
verified

Semi-strong market efficiency implies that only public information that is available to all investors is reflected in a security's market price.

Correct Answer
verified

Yield to maturity: Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond?

Correct Answer
verified

Exam 8: Bond Valuation and the Structure of Interest Rates

Realised yield: Jorge Cabrera paid $980 for a 15-year bond 10 years ago. The bond pays a coupon of 10 percent semiannually. Today, the bond is priced at $1,054.36. If he sold the bond today, what would be his realised yield? (Round to the nearest percent.)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a market is strong-form market efficient, one would be able to beat the market with inside information.

Correct AnswerverifiedShow Answer

Prices in the corporate bond market tend to be more volatile than securities sold in markets with greater trading volumes.

Correct AnswerverifiedShow Answer

Which ONE of the following statements is true?

Correct AnswerverifiedShow Answer

Bond price: Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Round to the nearest dollar.)

Correct AnswerverifiedShow Answer

Convertible bonds can be converted into ordinary shares at some predetermined ratio at the discretion of the bondholder.

Correct AnswerverifiedShow Answer

Which ONE of the following statements is true?

Correct AnswerverifiedShow Answer

Which one of the following statements is NOT true?

Correct AnswerverifiedShow Answer

If investors believe inflation will be increasing in the future, the prevailing yield will be downward sloping.

Correct AnswerverifiedShow Answer

If market prices reflect all relevant information about securities at a particular point in time, it is called operational efficiency.

Correct AnswerverifiedShow Answer

Vanilla bonds have coupon payments that are fixed for the life of the bond, with the principal being repaid at maturity.

Correct AnswerverifiedShow Answer

Public share markets in developed countries like Australia have strong-form of market efficiency.

Correct AnswerverifiedShow Answer

Which one of the following statements about bond price is NOT true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Marketability is the ability of an investor

Correct AnswerverifiedShow Answer

All other things being equal, a given change in the interest rates will have a greater impact on the price of a low-coupon bond than a higher-coupon bond with the same maturity.

Correct AnswerverifiedShow Answer

Which one of the following statements is NOT true?

Correct AnswerverifiedShow Answer

Semi-strong market efficiency implies that only public information that is available to all investors is reflected in a security's market price.

Correct AnswerverifiedShow Answer

Yield to maturity: Huan Zhang bought a 10-year bond that pays 8.25 percent semiannually for $911.10. What is the yield to maturity on this bond?

Correct AnswerverifiedShow Answer

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