Chapter 10
Which of the following statements about bond ratings is correct?
A) The yield for an AA-rated bond is lower than for an AAA-rated bond given everything else equal.
B) A bond rated C is in default with the repayment of the principal in arrears
C) A bond rated BBB and better by Standard & Poor's is considered an investment-grade bond.
D) The credit risk for a BBB-rated bond is higher than for a BB-rated bond.
C) A bond rated BBB and better by Standard & Poor's is considered an investment-grade bond.
Which of the following statements about the yield curve is correct:
A) The yield curve shows the relationship between maturity and duration
B) The yield curve shows the relationship between forward rates and time to maturity
C) The yield curve is convex because bond prices decrease when interest rates increase
D) The yield curve shows the relationship between yield to maturity and time to maturity
D) The yield curve shows the relationship between yield to maturity and time to maturity
Which type of bond gives the issuer the right to repurchase the bond at a specified price before its maturity date?
a) Puttable bond
b) Convertible bond
c) Callable bond
d) Zero-coupon bond
c) Callable bond
For a bond selling at a premium above its par value, which of the following relationships is correct?
A) Coupon rate < Current yield < Yield to maturity
B) Coupon rate > Current yield > Yield to maturity
C) Yield to maturity > Current yield > Coupon rate
D) Current yield > Yield to maturity > Coupon rate
B) Coupon rate > Current yield > Yield to maturity
Because the bond is priced above par, and at maturity, the bondholder will receive only par value, so YTM < current yield.
The current yield (coupon/price) is less than the coupon rate (coupon/par) because the denominator (price) is larger than par.
For a zero-coupon bond, what is the relationship between its Macaulay duration and its time to maturity?
a) Duration is less than maturity.
b) Duration is greater than maturity.
c) Duration is equal to maturity.
d) Duration is unrelated to maturity.
c) Duration is equal to maturity.
A credit default swap (CDS) is best described as:
a) A high-yield bond issued by a company with a poor credit rating.
b) A provision in a bond indenture that protects bondholders from default.
c) An insurance policy that compensates the buyer if a bond issuer defaults.
d) A type of sinking fund used to retire debt early.
c) An insurance policy that compensates the buyer if a bond issuer defaults.
The yield to maturity of a bond is calculated based on which of the following assumptions?
a) The bond will be held until maturity and all coupons can be reinvested at the bond's current yield.
b) The bond will be held until maturity and all coupons can be reinvested at the bond's yield to maturity.
c) The bond's price will remain constant until maturity.
d) Market interest rates will remain constant until the bond matures.
b) The bond will be held until maturity and all coupons can be reinvested at the bond's yield to maturity.
The interest rate sensitivity of bonds will, all else equal, be greater if:
A) The maturity of the bond is shorter, and the coupon is lower
B) The maturity of the bond is shorter, and the coupon is higher
C) The maturity of the bond is longer, and the coupon is lower
D) The maturity of the bond is longer, and the coupon is higher
C) The maturity of the bond is longer, and the coupon is lower
According to Malkiel's bond pricing relationships, which of the following bonds would be MOST sensitive to a change in interest rates?
a) A 20-year bond with a 10% coupon
b) A 20-year bond with a 5% coupon
c) A 10-year bond with a 5% coupon
d) A 10-year bond with a 10% coupon
b) A 20-year bond with a 5% coupon
Let's consider a 5% coupon, 20-year bond issued by Apple with a par value of $1,000, paying 40 semiannual coupon payments of $25 each. Suppose that the current market interest rate is 5% annually, or r=2.5%r=2.5% per six-month period. What is the price of this bond?
A) $1,000
B) $1,396
C) $1,266
D) $971
In this case, the bond's coupon rate is equal to the market interest rate, so the bond should sell at its par value of $1,000.
A bond with maturity of 30 years has a coupon rate of 8% (paid annually) and a yield to maturity of 9%. Its price is $897.26, and its duration is 11.37 years. What will happen to the bond price if its yield to maturity increases to 9.1%?
A) −$9.36
B) +$9.36
C) -$11.39
D) +$11.39
ΔP = −(D*Δy) × P
−(11.37/1.09) × 0.001 × $897.26 = −$9.36
Consider an 8% coupon, 30-year-maturity bond with par value of $1,000 paying 60 semiannual coupon payments of $40 each. Suppose that the interest rate is 10% annually, or r = 5% per six-month period. Then the value of the bond comes closest to:
A) $1,000
B) $1,266
C) $810.71
D) $700
C) $810.71