Davidson; Management - 3rd Australasian Edition



1.
Which of the following statements is true?
A.
Bond prices and interest rates move together.
B.
Coupon rates are fixed at the time of issue.
C.
Short-term securities have large price swings relative to long-term securities.
D.
The higher the coupon, the lower the price of a bond)


2.
What is the price of a corporate bond maturing in 5 years that has a 5% coupon (annual payments), a $1,000 face value, and is rated Aa) A local newspaper's financial section reports that the yields on 5 year bonds are: Aaa = 6%, Aa = 7%, and A = 8%.
A.
$900
B.
$918
C.
$1900
D.
$500


3.
Debbie Vivien purchases a one-year discount bond with a face value of $1,000 for $862.07. What is the yield of the bond?
A.
10%
B.
12%
C.
16%
D.
18%


4.
When a bond's coupon rate is equal to the market rate of interest, the bond will sell for
A.
a discount
B.
a premium
C.
par
D.
a variable rate.


5.
A bond currently selling at a premium price above face value
A.
has a yield equal to its coupon rate.
B.
has a yield below its coupon rate.
C.
has a yield above its coupon rate.
D.
has no risk.


6.
Duration is a measure of
A.
a bond's price.
B.
a bond's contractual maturity.
C.
the length of time it takes to get back the original investment.
D.
bond price volatility.


7.
The sum of time weighted discounted cash flows divided by the price of the security is the
A.
volatility of the security.
B.
present value of the security cash flows.
C.
duration of the security.
D.
always greater than the maturity of the security.


8.
Which of the following statements is true?
A.
Bonds vary directly with interest rates.
B.
Bond volatility varies inversely with maturity.
C.
Low coupon bonds have lower bond volatility than high coupon bonds.
D.
Bond duration increases with maturity.


9.
Which of the following risks will not affect zero coupon bonds?
A.
price risk
B.
reinvestment risk
C.
credit risk
D.
default risk


10.
The yield to maturity measure assumes that coupon interest is reinvested at
A.
the yield to maturity.
B.
the changing market rates.
C.
the coupon rate.
D.
the treasury bond rate.


11.
Calculate the volatility of $1,000 face value 8% coupon bond whose price has varied from $1,020 to $1,050.
A.
$30.00
B.
5%
C.
3%
D.
$50.00


12.
Price risk and reinvestment risk
A.
offset one another to a certain extent as interest rates change.
B.
are two bond risks related to credit risk.
C.
work together to magnify the price impact of a change in interest rate.
D.
both have an effect on bond price.


13.
An investor worried about interest rate risk should
A.
not purchase coupon bonds.
B.
select bonds whose maturity matches the investor's investment holding period)
C.
select bonds whose duration matches the investor's investment holding period)
D.
invest only in Australian government Treasury bonds.


14.
Two factors that affect interest rate risk are
A.
default risk and reinvestment risk.
B.
liquidity risk and reinvestment risk.
C.
price risk and political risk.
D.
price risk and reinvestment risk.


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