Practice_Question_for_Bond

PRACTICE QUESTIONS FOR EXAM 1 1.) Find the YTM (yield-to-maturity) of a 20-year zero coupon bond that is selling for $372.50. Assume annual compounding and a maturity value of $1,000). 5.1% 8.8% 10.1% 13/4% 2.) A semi-annual bond with a 12% coupon, 10 years to maturity and selling at 88 (i.e. $880) has yield-to-maturity of: 14.29% 13.65% 12.33% Less than 12% 3.) A 10% annual pay, 20 year bond is priced at $850.61 to yield 12%; if it paid interest semiannually (rather than annually), but continued to be priced $850.61, the resulting YTM would be: Less than 12% More than 12% Less than 10% Cannot be determined 4.) Using semiannual compounding, a 15-year, zero coupon bond that has a par value of $1,000 and a required return of 8% would be priced at: $308 $315 $464 $555. 5.) If an investor’s required return is 12%, the value of a 10-year maturity zero-coupon bond (discounted semi-annually) with a maturity value of $1,000 is closest to: $312 $688 $1,000 $1,312 6.) Zello Corporation’s $1,000 par value bond sells for $960, matures in five years, and has a 7% coupon rate paid semiannually. What is the bond’s current yield' 7.0% 7.3% 8.0% Insufficient information provided 7.) The yield to maturity on a bond is: Below the coupon rate when the bond sells at a discount and above the coupon rate when the bond sells at a premium. The interest rate that makes the present value of the payments equal to the bond price. Based on the assumptions that all future payments received are reinvested at the coupon rate. Based on the assumption that all future payments received are reinvested at future market rates. 8.) Zello Corporation’s $1,000 par value bond sells for $960, matures in five years, and has a 7% coupon rate paid semiannually. What is the bond’s yield to maturity' 7.0% 7.3% 8.0% 8.1% 9.) Consider a five-year bond with a 10 percent coupon that has a YTM of 8%. If interest rates remain constant, one year from now the price of this bond will be: Higher. Lower. Same. Cannot be determined. 10.) Which of the following statements about duration characteristics are true' I. The duration of a coupon bond will always be less than its term to maturity. II. There is generally an inverse relationship between term to maturity and duration. III. There is a positive relationship between coupon and duration. IV. There is an inverse relationship between yield to maturity and duration. a) I and II only b) I and IV only c) II and III only d) III and IV only 11.) Which one of the following is an incorrect statement concerning duration' a) The higher the yield-to-maturity, the greater the duration. b) The higher the coupon, the shorter the duration. c) The difference in duration is small between 2 bonds each maturing in more than 15 years. d) For a zero coupon bond, duration is the same, or very close to, the bond’s term-to-maturity. 12). When interest rates decline, the duration of a 30-year bond selling at a premium: a) Increases b) Decreases c) Remains the same d) Increases at first, then declines 13.) A fixed income manager wants to take advantage of a forecasted decline in interest rates over the next several months. Which of the following combinations of maturity and coupon rate would most likely result in the largest increase in portfolio value' Maturity Coupon Rate a.) 2015 10% b.) 2015 12% c.) 2030 10% d.) 2030 12% 14.) Identify the bond that has the longest duration' a) Perpetual par bond with 8% coupon b) 20-year maturity with a 12% coupon c) 15-year maturity with a 0% coupon d) 15-year maturity with a 15% coupon 15.) Everything else held constant, the interest rate risk of a bond normally is: a) greater for shorter maturities b) lower for longer durations c) lower for higher coupons d) none of the above 16.) Phillip Morris has issued bonds that pay interest semi-annually with the following characteristics: Coupon Yield-to-Maturity Maturity Modified Duration 8% 8% 15 years 10 years Identify the direction of change in modified duration if the coupon of the bond were 4%, not 8% increase decrease no change cannot be determined with information given 17.) A 20-year, 7% semiannual-pay bond is currently trading at par. If interest rates rise by 50 basis points, the price of this bond will fall to $948.62; if rates fall by 50 basis points, the price will rise to $1,055.52. Based on this information, the modified duration of this bond is: a) 5.14 b) 8.65 c) 10.08 d) 10.69 18.) An analyst determines the following information about a semiannual coupon bond (Par = $1,000): Par Value $1,000 Modified Duration 10 Current Price $800 Yield to Maturity (YTM) 8% If the YTM increases to 9 percent, the predicted decrease in price, using the duration concept, is closest to: $80.00 $77.67 $76.92 $75.56 19.) A 9-year old bond has a yield-to-maturity of 10% and a modified duration of 6.54 years. If the market yield changes by 50 basis points, the bond’s expected price change is: 3.27% 3.66% 5.00% 6.54% 20). Yield-to-maturity and current yield on a bond are equal: When market interest rates begin to level off. If the bond sells at a price in excess of its par value. When the expected holding period is greater than one year. If the coupon and market interest rate are equal. ANSWER KEY 1. A 2. A 3. A 4. A 5. A 6. B 7. B 8. C 9. B 10. B 11. A 12. A 13. C 14. C 15. C 16. A 17. D 18. A 19. A 20. D