Question 1

A one-year bond offers a 12.5% yield to maturity and a two-year bond offers an 11% yield to maturity.Which of the following is true?

Accepted Answer

A)   The term structure is upward sloping.
B)   The term structure is flat.
C)   The term structure is downward sloping.
D)   The term structure cannot be determined.E) A) and B)
F) B) and C)

Question 2

Which one of the following ratios is the most correlated to default risk?

Accepted Answer

A)   Account receivables collection period
B)   Inventory collection period
C)   Debt to equity ratio
D)   Profit marginE) B) and D)
F) None of the above

Question 3

What is the YTM of a four-year semi-annual pay bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $932.35?

Accepted Answer

A)   2.96%
B)   5.92%
C)   5.95%
D)   11.90%E) None of the above
F) A) and D)

Question 4

Which one of the following increases the sensitivity of the bond prices?

Accepted Answer

A)   Increase in maturity
B)   Decrease in maturity
C)   Decrease in yield to maturity
D)   Increase in coupon paymentE) A) and D)
F) None of the above

Question 5

The convex shape of the bond price-yield curve shows:

Accepted Answer

A)   I, III are correct, II is incorrect.
B)   I is incorrect, II, III are correct.
C)   I, II and III are correct.
D)   I and II are correct, III is incorrect.I.For a given change in interest rates,bond prices will increase more when rates decrease than they will decrease when rates increase.II.The curve is steeper for higher interest rates.III.The curve is always downward sloping.E) A) and B)
F) B) and C)

Question 6

Suppose you observed that one-year T-bills are trading at a YTM of 4.35 percent.The yield spread between AAA- and BBB-rated corporate bonds is 150 basis points.The maturity yield differential between the one-year T-bills and the five-year government bonds is 65 basis points.What yield would you expect to observe on BBB-rated corporate bonds with a five-year maturity?

Accepted Answer

A)   5.00%
B)   5.20%
C)   5.85%
D)   6.50%E) A) and C)
F) A) and D)

Question 7

Suppose you observed that one-year T-bills are trading with a YTM of 4.75 percent.The yield spread between AAA- and BB-rated corporate bonds is 130 basis points.The maturity yield differential between the one-year T-bills and three-year government bonds is 45 basis points.
A) What is the market yield you would expect on a three-year BB-rated corporate bond that pays a 7.25 annual coupon?
B) How much would you pay for this three-year BB-rated corporate bond if its coupon rate was 7.25%?

Accepted Answer

A)kb = 1-yr T-bill r...

Question 8

The risk premium of a company would increase with:

Accepted Answer

A)   An increase in the debt to equity ratio
B)   An increase in the current ratio
C)   A stable interest coverage ratio
D)   An increase in earningsE) A) and B)
F) B) and C)

Question 9

Suppose Canadian interest rates are presently 4.5 percent on one-year Canadian T-bills.Suppose that the U.S.dollar is quoted at US$1 = C$1.0695 and that the interest rate on one-year T-bills in the U.S.is 4.9 percent.What should the one-year forward exchange rate (C$/US$) be?

Accepted Answer

A)   1.0783
B)   1.0736
C)   1.0692
D)   1.0654E) A) and C)
F) C) and D)

Question 10

What is the term structure of interest rates and the yield curve?

Accepted Answer

The term structure of interest rates ref...

Question 11

Which of the following is not a correct statement of the interest rate parity (IRP) theory?

Accepted Answer

A)   It states the relationship between inflation and interest rates.
B)   It states that forward currency contracts can be used to eliminate foreign exchange risk.
C)   It demonstrates how differences in interest rates across countries are offset by expected changes in exchange rates.
D)   It describes the relationship between interest rates and currency levels by using forward currency exchange rates.E) B) and C)
F) C) and D)

Question 12

Explain the difference between nominal and real interest rates.

Accepted Answer

Nominal interest rates are the rates charged for lending today's dollars in return for getting dollars back in the future,without taking into account the purchasing power of those future dollars.
Real interest rates are measured as the difference between the ongoing expected inflation rate and the level of nominal interest rates.

Question 13

Explain the difference between the coupon rate and the current yield.

Accepted Answer

The coupon rate is the stated interest rate,on an annual basis,on the original debt contract in relation to the face value of the debt,and this determines the amount of the periodic interest payment.
The current yield is defined as the ratio of the annual coupon interest divided by the current market price.

Question 14

Briefly describe three theories of the term structure of interest rates.

Accepted Answer

1. The liquidity preference theory sugge...

Question 15

The nominal interest rate is:

Accepted Answer

A)   the difference between the real rate and expected inflation.
B)   low when expected inflation is low and high when expected inflation is high.
C)   high when expected inflation is low and low when expected inflation is high.
D)   None of the aboveE) All of the above
F) A) and C)

Question 16

Which of the following statements is TRUE?

Accepted Answer

A)   The quoted price of a bond is the actual price an investor pays for the bond whenever the bond is sold at a date other than the date of a coupon payment.
B)   The quoted price of a bond is the actual price an investor pays for the bond when the bond is sold on the date of a coupon payment.
C)   A bond purchaser must pay the bond seller the cash price plus the accrued interest on the bond.
D)   The cash price plus the accrued interest on the bond is the quoted price of the bond.E) A) and C)
F) B) and C)

Question 17

Bonds that are classified as unsecured obligations are called:

Accepted Answer

A)   callable bond.
B)   treasury bond.
C)   debenture.
D)   all of the above.E) B) and D)
F) All of the above

Question 18

Which of the following is (are) needed to price a bond?

Accepted Answer

A)   The coupon rate.
B)   The face value amount.
C)   The yield to maturity.
D)   All of the above.E) A) and D)
F) C) and D) D

Question 19

Explain the implication of an increase in expected inflation.

Accepted Answer

Nominal interest rates include...

Question 20

Explain the term "yield to maturity."

Accepted Answer

The yield to maturity is the discount ra...

Exam 6: Bond Valuation and Interest Rates

A one-year bond offers a 12.5% yield to maturity and a two-year bond offers an 11% yield to maturity.Which of the following is true?

Correct Answer
verified

Which one of the following ratios is the most correlated to default risk?

Correct Answer
verified

What is the YTM of a four-year semi-annual pay bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $932.35?

Correct Answer
verified

Which one of the following increases the sensitivity of the bond prices?

Correct Answer
verified

The convex shape of the bond price-yield curve shows:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
A)kb = 1-yr T-bill r...
View Answer

The risk premium of a company would increase with:

Correct Answer
verified

Suppose Canadian interest rates are presently 4.5 percent on one-year Canadian T-bills.Suppose that the U.S.dollar is quoted at US$1 = C$1.0695 and that the interest rate on one-year T-bills in the U.S.is 4.9 percent.What should the one-year forward exchange rate (C$/US$) be?

Correct Answer
verified

What is the term structure of interest rates and the yield curve?

Correct Answer
verified
The term structure of interest rates ref...
View Answer

Which of the following is not a correct statement of the interest rate parity (IRP) theory?

Correct Answer
verified

Explain the difference between nominal and real interest rates.

Explain the difference between the coupon rate and the current yield.

Briefly describe three theories of the term structure of interest rates.

Correct Answer
verified
1. The liquidity preference theory sugge...
View Answer

The nominal interest rate is:

Correct Answer
verified

Which of the following statements is TRUE?

Correct Answer
verified

Bonds that are classified as unsecured obligations are called:

Correct Answer
verified

Which of the following is (are) needed to price a bond?

Correct Answer
verified
D

Explain the implication of an increase in expected inflation.

Correct Answer
verified
Nominal interest rates include...
View Answer

Explain the term "yield to maturity."

Correct Answer
verified
The yield to maturity is the discount ra...
View Answer

Exam 6: Bond Valuation and Interest Rates

A one-year bond offers a 12.5% yield to maturity and a two-year bond offers an 11% yield to maturity.Which of the following is true?

Correct AnswerverifiedShow Answer

Which one of the following ratios is the most correlated to default risk?

Correct AnswerverifiedShow Answer

What is the YTM of a four-year semi-annual pay bond with a par value of $1,000 and a 4 percent coupon rate when the bond is priced at $932.35?

Correct AnswerverifiedShow Answer

Which one of the following increases the sensitivity of the bond prices?

Correct AnswerverifiedShow Answer

The convex shape of the bond price-yield curve shows:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA)kb = 1-yr T-bill r...View AnswerShow Answer

The risk premium of a company would increase with:

Correct AnswerverifiedShow Answer

Suppose Canadian interest rates are presently 4.5 percent on one-year Canadian T-bills.Suppose that the U.S.dollar is quoted at US$1 = C$1.0695 and that the interest rate on one-year T-bills in the U.S.is 4.9 percent.What should the one-year forward exchange rate (C$/US$) be?

Correct AnswerverifiedShow Answer

What is the term structure of interest rates and the yield curve?

Correct AnswerverifiedThe term structure of interest rates ref...View AnswerShow Answer

Which of the following is not a correct statement of the interest rate parity (IRP) theory?

Correct AnswerverifiedShow Answer

Explain the difference between nominal and real interest rates.

Explain the difference between the coupon rate and the current yield.

Briefly describe three theories of the term structure of interest rates.

Correct Answerverified1. The liquidity preference theory sugge...View AnswerShow Answer

The nominal interest rate is:

Correct AnswerverifiedShow Answer

Which of the following statements is TRUE?

Correct AnswerverifiedShow Answer

Bonds that are classified as unsecured obligations are called:

Correct AnswerverifiedShow Answer

Which of the following is (are) needed to price a bond?

Correct AnswerverifiedD

Explain the implication of an increase in expected inflation.

Correct AnswerverifiedNominal interest rates include...View AnswerShow Answer

Explain the term "yield to maturity."

Correct AnswerverifiedThe yield to maturity is the discount ra...View AnswerShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified
A)kb = 1-yr T-bill r...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The term structure of interest rates ref...
View Answer

Correct Answer
verified

Correct Answer
verified
1. The liquidity preference theory sugge...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
D

Correct Answer
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Nominal interest rates include...
View Answer

Correct Answer
verified
The yield to maturity is the discount ra...
View Answer