Dr. Sudhakar Raju FN 6700 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). a) b) c) d) 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:

a) b) c) d)

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:

a) Less than 12% b) More than 12% c) Less than 10%

d) 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: a) b) c) d) $308 $315 $464 $555.

5.) If an investors required return is 12%, the value of a 10-year maturity zerocoupon bond (discounted semi-annually) with a maturity value of $1,000 is closest to: a) b) c) d) $312 $688 $1,000 $1,312

6.) Zello Corporations $1,000 par value bond sells for $960, matures in five years, and has a 7% coupon rate paid semiannually. What is the bonds current yield?

a) b) c) d)

7.0% 7.3% 8.0% Insufficient information provided

7.) The yield to maturity on a bond is:

a) Below the coupon rate when the bond sells at a discount and above the coupon
rate when the bond sells at a premium. b) The interest rate that makes the present value of the payments equal to the bond price. c) Based on the assumptions that all future payments received are reinvested at the coupon rate. d) Based on the assumption that all future payments received are reinvested at future market rates. 8.) Zello Corporations $1,000 par value bond sells for $960, matures in five years, and has a 7% coupon rate paid semiannually. What is the bonds yield to maturity? a) b) c) d) 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:

a) b) c) d)

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) b) c) d) I and II only I and IV only II and III only 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 bonds term-to-maturity. 12). When interest rates decline, the duration of a 30-year bond selling at a premium: a) b) c) d) Increases Decreases Remains the same 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? a.) b.) c.) d.) Maturity 2015 2015 2030 2030 Coupon Rate 10% 12% 10% 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) b) c) d) greater for shorter maturities lower for longer durations lower for higher coupons none of the above

16.) Phillip Morris has issued bonds that pay interest semi-annually with the following characteristics: Coupon 8% Yield-to-Maturity 8% Maturity Modified Duration 15 years 10 years

Identify the direction of change in modified duration if the coupon of the bond were 4%, not 8% a) b) c) d) 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) b) c) d) 5.14 8.65 10.08 10.69

18.) An analyst determines the following information about a semiannual coupon bond (Par = $1,000): Par Value Modified Duration Current Price Yield to Maturity (YTM) $1,000 10 $800 8%

If the YTM increases to 9 percent, the predicted decrease in price, using the duration concept, is closest to: a) b) c) d) $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 bonds expected price change is: a) 3.27% b) 3.66%

c) 5.00% d) 6.54% 20). Yield-to-maturity and current yield on a bond are equal: a) b) c) d) 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. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

B A A C C C A D A A D