CHAPTER 18THE ANALYSIS AND VALUATION OF BONDS

TRUE/FALSE

1. For a bond the present value model incorporates both the coupon receipts and the capital gain or loss.

ANS: T PTS: 1

2. The major problem facing a bond analyst is the ability to forecast the basic interest rate level since
yield spreads are generally inconsequential.

ANS: F PTS: 1

3. Yield to maturity and current yield are equal when the bond is selling for exactly par value.

ANS: T PTS: 1

4. An interest rate is the price of loanable funds.

ANS: T PTS: 1

5. The internal rate of return is that discount rate that sets the present value of cash flows from an
investment equal to its par value.

ANS: F PTS: 1

6. If an investor buys a high coupon bond, and rates then fall, the investor has "locked up" that high yield
as a realized yield.

ANS: F PTS: 1

7. The three major theories explaining the term structure of interest rates are the expectations hypothesis,
the liquidity differential hypothesis, and the segmented quality hypothesis.

ANS: F PTS: 1

8. The expectations hypothesis is also known as both the institutional theory and the hedging pressure
theory.

ANS: F PTS: 1

9. Bond price volatility varies directly with the term to maturity and directly with the coupon.

ANS: F PTS: 1

10. The longer the time to maturity, the greater the percentage change in a bond's price.

ANS: T PTS: 1

11. There is an inverse relationship between duration and coupon.

ANS: T PTS: 1
12. The lower a bond's yield to maturity, the greater its duration.

ANS: T PTS: 1

13. Because you expect market interest rates to decline during the next four months, if you were offered
two bonds with equal duration, you would select the one with the higher measure of convexity.

ANS: T PTS: 1

14. The fundamental determinants of interest rates are the real risk free rate, inflation, and the risk
premium.

ANS: T PTS: 1

15. According to the expectations hypothesis, a rising yield curve indicates that investors demand for long
maturity bonds is expected to rise.

ANS: F PTS: 1

16. According to the segmented market hypothesis, yields for a particular maturity segment depend on
supply and demand within the maturity segment.

ANS: T PTS: 1

17. For a given change in yield bond price volatility is inversely related to term to maturity.

ANS: F PTS: 1

18. For a given change in yield bond price volatility is inversely related to coupon.

ANS: T PTS: 1

19. For a given change in yield bond price volatility is directly related to duration.

ANS: T PTS: 1

20. Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation
of that curve.

ANS: T PTS: 1

21. The price-yield curve is a concave curve representing the relationship of bond prices and yields.

ANS: F PTS: 1

22. The realized yield measures the expected rate of return of a bond that you expect to sell prior to its
maturity.

ANS: T PTS: 1

23. The term structure of interest rates is a dynamic function that relates the term to maturity to the yield to
maturity of bonds.
 ANS: F PTS: 1

MULTIPLE CHOICE

1. The annual interest paid on a bond relative to its prevailing market price is called its ____.
a. Promised yield
b. Yield to maturity
c. Coupon rate
d. Effective yield
e. Current yield
ANS: E PTS: 1

2. If the holding period is equal to the term to maturity for a corporate bond the rate of discount
represents the
a. Coupon yield.
b. Effective yield.
c. Yield to call.
d. Yield to maturity.
e. Reinvestment rate.
ANS: D PTS: 1

3. The nominal yield of a bond is the

a. Annual coupon as a percent of the current price.
b. Annual rate earned including the capital gain or loss.
c. Rate earned giving consideration to coupon reinvestment.
d. Coupon rate.
e. Promised yield to maturity.
ANS: D PTS: 1

4. If the coupon payments are not reinvested during the life of the issue then the
a. Promised yield is greater than the realized yield.
b. Promised yield is less than the realized yield.
c. Nominal yield declines.
d. Nominal yield is greater than the promised yield.
e. Current yield equals the yield to maturity.
ANS: A PTS: 1

5. The importance of the reinvestment assumption increases with a ____ coupon and a ____ term to
maturity.
a. Low, short
b. Low, long
c. High, short
d. High, long
e. Zero, very long
ANS: D PTS: 1

6. The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a
____ coupon and a ____ term to maturity.
a. Low, short
b. Low, long
 c. High, short
d. High, long
e. Zero, very long
ANS: E PTS: 1

7. The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted
at a value
a. Equal to or greater than par plus one year's interest.
b. Equal to par.
c. Equal to par less one year's interest.
d. Less than par.
e. Five percent over par.
ANS: A PTS: 1

8. Which of the following is not a major risk premium component for bond investors?
a. Quality differentials.
b. Term to maturity.
c. Indenture provisions.
d. Yield to maturity.
e. Exchange rate risk differences.
ANS: D PTS: 1

9. The term structure of interest rates is a static function that relates the
a. Term to call and the yield to maturity.
b. Term to maturity and the yield to maturity.
c. Term to call and the yield to call.
d. Term to maturity and the coupon rate.
e. Term to maturity and the current yield.
ANS: B PTS: 1

10. There are four major factors accounting for the existence of yield differentials. Which of the following
is not a factor?
a. Segments
b. Sectors
c. Indentures
d. Coupons
e. Maturities
ANS: C PTS: 1

11. The convexity of a bond is affected as follows:

a. Positively with maturity.
b. Positively with yield.
c. Inversely with coupon.
d. Choices a and b
e. Choices a and c
ANS: E PTS: 1

12. Which of the following statements is true?

a. An inverse relationship exists between coupon and convexity.
b. A direct relationship exists between maturity and convexity.
 c. An inverse relationship exists between yield and convexity.
d. Choices a and c only
e. All of the above statements are true
ANS: E PTS: 1

13. If you expected interest rates to fall, you would prefer to own bonds with
a. long durations and high convexity.
b. long durations and low convexity.
c. short durations and high convexity.
d. short durations and low convexity.
e. none of the above.
ANS: A PTS: 1

14. If you expected interest rates to fall, you would prefer to own bonds with
a. short maturities and low coupons.
b. long maturities and high coupons.
c. long maturities and low coupons.
d. short maturities and high coupons.
e. none of the above.
ANS: C PTS: 1

15. If you expected interest rates to rise, you would prefer to own bonds with
a. short maturities and low coupons.
b. long maturities and high coupons.
c. long maturities and low coupons.
d. short maturities and high coupons.
e. none of the above.
ANS: D PTS: 1

16. According to the liquidity preference hypothesis yield curves generally slope upward because
a. investors prefer short maturity obligations to long maturity obligations.
b. investors prefer long maturity obligations to short maturity obligations.
c. investors prefer less volatile long maturity obligations.
d. investors prefer more volatile short maturity obligations.
e. none of the above.
ANS: A PTS: 1

17. According to the segmented-market hypothesis a downward sloping yield curve indicates that
a. demand for long term bonds has fallen and demand for short term bonds has fallen.
b. demand for long term bonds has risen and demand for short term bonds has fallen.
c. demand for long term bonds has fallen and demand for short term bonds has risen.
d. demand for long term bonds has risen and demand for short term bonds has risen.
e. none of the above.
ANS: B PTS: 1

18. According to the segmented-market hypothesis a rising yield curve indicates that
a. demand for long term bonds has fallen and demand for short term bonds has fallen.
b. demand for long term bonds has risen and demand for short term bonds has fallen.
c. demand for long term bonds has fallen and demand for short term bonds has risen.
d. demand for long term bonds has risen and demand for short term bonds has risen.
 e. none of the above.
ANS: C PTS: 1

19. According to the expectations hypothesis a rising yield curve indicates that investors expect
a. future short term rates to fall
b. future short term rates to rise
c. future long term rates to rise
d. future long term rates to fall
e. none of the above
ANS: B PTS: 1

20. The price-yield relationship for a bond will become more convex
a. For a low coupon bond.
b. For a high coupon bond.
c. For a long maturity bond.
d. Choices b and c.
e. Choices a and c.
ANS: E PTS: 1

21. Convexity is a desirable feature of bonds because.

a. As interest rates decline, the price of a low convexity bond decreases at a decreasing rate.
b. As interest rates decline, the price of a high convexity bond decreases at an increasing rate.
c. As interest rates decline, the price of a low convexity bond increases at a decreasing rate.
d. As interest rates decline, the price of a high convexity bond increases at an increasing rate.
e. As interest rates decline, the price of a high convexity bond decreases at a decreasing rate.
ANS: D PTS: 1

22. The position of a bondholder that is long a callable bond is equal to being
a. Long a noncallable bond + long a call option on the bond.
b. Long a noncallable bond + short a call option on the bond.
c. Short a noncallable bond + long a call option on the bond.
d. Short a noncallable bond + short a call option on the bond.
e. None of the above.
ANS: B PTS: 1

23. Option adjusted duration can be calculated as

a. Duration of noncallable bond duration of call option on the bond.
b. Duration of noncallable bond + duration of call option on the bond.
c. Duration of callable bond duration of call option on the bond.
d. Duration of callable bond + duration of call option on the bond.
e. None of the above.
ANS: A PTS: 1

24. The option adjusted duration will approach the duration to maturity, when
a. Interest rates are significantly above the coupon rate because the option has very little
chance of being called, and the call option will have very little value.
b. Interest rates are significantly below the coupon rate because the option has very little
chance of being called, and the call option will have very little value.
c. Interest rates are significantly above the coupon rate because the option has a high chance
 of being called, and the call option will have significant value.
d. Interest rates are significantly below the coupon rate because the option has a high chance
of being called, and the call option will have significant value.
e. None of the above.
ANS: A PTS: 1

25. The promised yield to maturity calculation assumes that

a. All coupon interest payments are reinvested at the current market interest rate for the bond.
b. All coupon interest payments are reinvested at the coupon interest rate for the bond.
c. All coupon interest payments are reinvested at short tem money market interest rates.
d. All coupon interest payments are not reinvested.
e. None of the above
ANS: A PTS: 1

26. If the coupon payments are not reinvested during the life of the issue then the
a. Promised yield is greater than realized yield.
b. Promised yield is less than realized yield.
c. Nominal yield declines.
d. Nominal yield is greater than promised yield.
e. Current yield equals the yield to maturity.
ANS: A PTS: 1

27. Consider a bond portfolio manager who expects interest rates to decline and has to choose between the
following two bonds.
Bond A: 10 years to maturity, 5% coupon, 5% yield to maturity
Bond B: 10 years to maturity, 3% coupon, 4% yield to maturity
a. Bond A because it has a higher coupon rate.
b. Bond A because it has a higher yield to maturity.
c. Bond B because it has a lower coupon rate.
d. Bond A or Bond B because the maturities are the same.
e. None of the above.
ANS: C PTS: 1

28. ____ measures the expected rate of return of a bond assuming that you sell it prior to its maturity.
a. Yield to maturity
b. Current yield
c. Realized yield
d. Coupon rate
e. None of the above
ANS: C PTS: 1

29. The yield to call is a more conservative yield measure whenever the price of a callable bond is quoted
at a value
a. Equal to or greater than par plus one year's interest.
b. Equal to par.
c. Equal to par less one year's interest.
d. Less than par.
e. Five percent over par.
ANS: A PTS: 1
30. Which of the following is not a risk premium component of bonds?
a. Bond quality
b. Term to maturity of the bond
c. Indenture provisions
d. Foreign bond risk
e. All of the above are risk premium components of bonds.
ANS: E PTS: 1

31. Which term-structure hypothesis suggests that any long-term interest rate simply represents the
geometric mean of current and future on-year interest rates expected to prevail over the maturity of the
issue?
a. Expectations hypothesis
b. Liquidity preference hypothesis
c. Segmented market hypothesis
d. Preferred habitat hypothesis
e. Hedging pressure hypothesis
ANS: A PTS: 1

32. Which of the four major yield spreads defines the difference in yields between pure government
agency bonds and corporate bonds?
a. Segments
b. Sectors
c. Coupons
d. Seasoning
e. Maturity
ANS: A PTS: 1

33. All of the following are one of Malkiel's stated relationships between yield changes and bond prices
except
a. Bond prices move inversely to bond yields.
b. Longer-maturity bonds experience larger price changes than shorter-maturity bonds.
c. Bond price volatility increases at a diminishing rate as term to maturity increases.
d. Bond price movements resulting from equal absolute increases or decreases in yield are
symmetrical.
e. Bond price volatility is inversely related to the coupon rate.
ANS: D PTS: 1

34. Which duration is computed by discounting flows using the yield to maturity of the bond?
a. Effective
b. Macaulay Duration
c. Modified Duration
d. Present Value Duration
e. Cash Flow Duration
ANS: B PTS: 1

35. Consider a 12%, 15 year bond that pays interest semiannually, and its current price is $675. What is
the promised yield to maturity?
a. 10.23%
b. 18.45%
c. 17.77%
 d. 2.31%
e. 9.26%
ANS: B

i = .09227. Annualized i = .09227 2 = .1845

PTS: 1 OBJ: Multiple Choice Problems

36. Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the
promised yield to maturity?
a. 10.23%
b. 18.45%
c. 2.31%
d. 17.77%
e. 9.26%
ANS: D

i = .1777. Annualized i = .1777 1 = .1777

PTS: 1 OBJ: Multiple Choice Problems

37. Consider a 10%, 15 year bond that pays interest annually quarterly, and its current price is $1060.
What is the promised yield to maturity?
a. 10.23%
b. 18.45%
c. 2.31%
d. 17.77%
e. 9.26%
ANS: E

i = .02314. Annualized i = .02314 4 = .0926

PTS: 1 OBJ: Multiple Choice Problems

38. Consider a zero coupon bond that has a current price of $436.19 and matures in 10 years. What is its
yield to maturity?
a. 0.86%
 b. 8.65%
c. 8.00%
d. 58.80%
e. 6.564%
ANS: B
Price = Par/(1 + YTM)n
YTM = (Price/Par)1/n 1
YTM = (1000/436.19)1/10 1 = 8.65%

PTS: 1 OBJ: Multiple Choice Problems

39. What is the current price of a zero coupon bond with a 6% yield to maturity that matures in 15 years?
a. $4.17
b. $41.27
c. $417.27
d. $4,172.00
e. None of the above
ANS: C
Price = Par/(1 + YTM)n = 1000/(1.06)15 = $417.27

PTS: 1 OBJ: Multiple Choice Problems

40. What is the current price of a zero coupon bond with a 7% yield to maturity that matures in 20 years?
a. $1,000
b. $2,582
c. $25.82
d. $258.42
e. $100.00
ANS: D
Price = Par/(1 + YTM)n = 1000/(1.07)20 = $258.42

PTS: 1 OBJ: Multiple Choice Problems

41. Consider a bond with a 9% coupon and a current yield of 8 1/2%. What is this bond's price?
a. $1058.82
b. $1009.00
c. $1085.00
d. $1062.44
e. $1077.96
ANS: A
90 x = 0.085 x = $1,058.82

PTS: 1 OBJ: Multiple Choice Problems

42. Consider a bond with a current yield of 8% and a price of $1,250. What is this bond's coupon?
a. 8.0%
b. 10.0%
c. 11.0%
d. 8.5%
e. 9.6%
 ANS: B
Coupon $1,250 = 0.08. Therefore, coupon = $100.00 or 10%

PTS: 1 OBJ: Multiple Choice Problems

43. Consider a bond with a price of $944.44 and a coupon of 8 1/2%. What is the current yield?
a. 9.4%
b. 6.8%
c. 8.6%
d. 9.0%
e. 11.0%
ANS: D
85 $944.44 = 9%

PTS: 1 OBJ: Multiple Choice Problems

44. Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years at $1,100, what is the
bond's yield to call? Interest is paid semiannually.
a. 8%
b. 9.0%
c. 18.0%
d. 9.4%
e. 16.5%
ANS: C

i = .09. Annualized i = .09 2 = .18

PTS: 1 OBJ: Multiple Choice Problems

45. Suppose you have a 15%, 25 year bond traded at $975. If it is callable in 5 years at $1050, what is the
bond's yield to call? Interest is paid annually.
a. 15%
b. 16.5%
c. 7.65%
d. 8.52%
e. 9.64%
ANS: B

i = .165

PTS: 1 OBJ: Multiple Choice Problems

46. Suppose you have an 10%, 20 year bond traded at $1,120. If it is callable in 5 years at $1,150, what is
the bond's approximate yield to call? Interest is paid quarterly.
a. 7.78%
b. 8.00%
c. 9.40%
d. 9.36%
e. 9.72%
ANS: C

i = .0234. Annualized i = .0234 4 = .094

PTS: 1 OBJ: Multiple Choice Problems

47. Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is
10 percent and interest is paid semiannually.
a. 1.35 years
b. 1.78 years
c. 2.50 years
d. 2.78 years
e. 2.95 years
ANS: D
(1) (2) (3) (4) (5) (6)
Cash PV as %
Period Flow PV @ 5% PV of Flow of Price (1) (5)
1 $ 30 .9524 $ 28.57 .03180 .03180
2 30 .9070 27.21 .03028 .06056
3 30 .8638 25.91 .02884 .08652
4 30 .8227 24.68 .02747 .10988
5 30 .7835 23.51 .02617 .13085
6 1030 .7462 768.59 .85544 5.13264
$898.47 1.00000 5.55225

The duration equals 5.55225 semiannual periods or 2.77613 years.

PTS: 1 OBJ: Multiple Choice Problems

48. Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent
and a Macaulay duration of 7.2 years.
a. 6.43 years
b. 6.55 years
c. 6.79 years
d. 6.86 years
e. 7.01 years
ANS: D
Dmod = 7.2/(1 + .10/2) = 7.2/1.05 = 6.86 years

PTS: 1 OBJ: Multiple Choice Problems

49. A 12-year, 8 percent bond with a YTM of 12 percent has a Macaulay duration of 9.5 years. If interest
rates decline by 50 basis points, what will be the percent change in price for this bond?
a. +4.48%
b. +4.61%
c. +8.48%
d. +8.96%
e. +17.92%
ANS: A
Dmod = 9.5/(1 + .12/2) = 9.5/1.06 = 8.96 years

%P = Dmod i = (8.96) (50/100) = 4.48% (increase)

PTS: 1 OBJ: Multiple Choice Problems

50. Consider a bond with a duration of 6 years having a yield to maturity of 8% and interest rates are
expected to rise by 50 basis points. What is the percentage change in the price of the bond?
a. 2.88%
b. 3.45%
c. 3.89%
d. 3.45%
e. 2.88%

ANS: E
6 [1 + (0.08/2)] = 5.77

5.77 (50/100) = 2.88%

PTS: 1 OBJ: Multiple Choice Problems

51. If the price before yields changed was $950, what is the resulting price?
a. $922.64
b. $918.66
c. $1000.00
d. $968.50
e. $1012.45
ANS: A
(1 0.0288)(950) = $922.64

PTS: 1 OBJ: Multiple Choice Problems

52. Consider a bond with a duration of 7 years having a yield to maturity of 7% and interest rates are
expected to rise by 50 basis points. What is the percentage change in the price of the bond?
a. 3.62%
b. 3.45%
c. 3.38%
d. 3.38%
e. 3.62%

ANS: C
7 [1 + (0.07/2)] = 6.76
 6.76 (50/100) = 3.38%

PTS: 1 OBJ: Multiple Choice Problems

53. If the price before yields changed was $925, what is the resulting price?
a. $865.22
b. $918.66
c. $889.11
d. $1000.00
e. $1012.45
ANS: C
(1 0.0338)(925) = $889.11

PTS: 1 OBJ: Multiple Choice Problems

54. Consider a bond with a duration of 8 years having a yield to maturity of 8% and interest rates are
expected to rise by 50 basis points. What is the percentage change in the price of the bond?
a. 3.85%
b. 3.45%
c. 4.02%
d. 3.45%
e. 3.85%

ANS: E
8 [1 + (0.08/2)] = 7.69

7.69 (50 100) = 3.85%

PTS: 1 OBJ: Multiple Choice Problems

55. If the price before yields changed was $975, what is the resulting price?
a. $937.46
b. $918.66
c. $965.55
d. $898.62
e. $1012.45
ANS: A
(1 0.0385)(975) = $937.46

PTS: 1 OBJ: Multiple Choice Problems

56. Suppose the current 6 year spot rate is 8% and the current 5 year spot rate is 7%. What is the one year
forward rate in five years?
a. 12.62%
b. 11.58%
c. 13.14%
d. 14.65%
e. 15.14%
ANS: C
(1 + 0.08)6 (1 + 0.07)5 = 13.14%
 PTS: 1 OBJ: Multiple Choice Problems

57. Suppose the current 6 year rate is 9% and the current 5 year rate is 7%. What is the one year forward
rate for five years?
a. 19.57%
b. 18.62%
c. 15.80%
d. 14.65%
e. 12.67%
ANS: A
(1 + 0.09)6 (1 + 0.07)5 = 19.57%

PTS: 1 OBJ: Multiple Choice Problems

58. Suppose the current 7 year rate is 8% and the current 6 year rate is 6%. What is the one year forward
rate for six years?
a. 16.33%
b. 18.22%
c. 20.82%
d. 14.65%
e. 15.14%
ANS: C
(1 + 0.08)7 (1 + 0.06)6 = 20.82%

PTS: 1 OBJ: Multiple Choice Problems

59. Assume that you purchase a 3-year $1,000 par value bond, with a 8% coupon, and a yield of 10%.
After you purchase the bond, one- year interest rates are as follow, year 1 = 10%, year 2 = 8%, year 3
= 6% (these are the reinvestment rates). Calculate the realized horizon yield if you hold the bond to
maturity. Interest is paid annually.
a. 8.37%
b. 7.28%
c. 9.76%
d. 10.67%
e. 14.0%
ANS: C

The terminal value of cash flows = $1256.38 = 80(1.08)(1.06) + 80(1.06) + 80 +1000

PTS: 1 OBJ: Multiple Choice Problems

60. Assume that you purchase a 10-year $1,000 par value bond, with a 12% coupon, and a yield of 9%.
Immediately after you purchase the bond, yields fall to 8% and remain at that level to maturity.
Calculate the realized horizon yield, if you hold the bond for 5 years and then sell. Interest is paid
annually.
a. 16.25%
b. 12.15%
c. 7.75%
d. 10.05%
e. 9.34%
ANS: E

PTS: 1 OBJ: Multiple Choice Problems

61. Assume that you purchase a 5-year $1,000 par value bond, with a 6% coupon, and a yield of 7%.
Immediately after you purchase the bond, yields rise to 8% and remain at that level to maturity.
Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.
a. 6.0%
b. 7.11%
c. 8.0%
d. 15.25%
e. 8.18%
ANS: B
 PTS: 1 OBJ: Multiple Choice Problems

62. Estimate the percentage price change for a 5-year $1,000 par value bond, with a 6% coupon, if the
yield rises from 8% to 8.5%. Interest is paid semiannually.
a. 2.1%
b. 2.1%
c. 4.4%
d. 4.4%
e. None of the above
ANS: B

The present value of the weighted cash flows = $8015.41 = 30/(1.04) + 60/(1.04) 2 + 90/(1.04)3 + 120/
(1.04)4 + 150/(1.04)5 + 180/(1.04)6 + 210/(1.04)7 + 240/(1.04)8 + 270/(1.04)9 + 10300/(1.04)10

Macaulay duration = 8015.41/918.89 = 8.72 or 8.72/2 = 4.36 years

Modified duration = 4.36/(1 + .04) = 4.19 years.

%price change = (4.19 0.5) = 2.1%

PTS: 1 OBJ: Multiple Choice Problems

63. Calculate the Macaulay duration for a 5-year $1,000 par value bond, with a 6% coupon and a yield to
maturity of 8%. Interest is paid annually.
a. 6.44 years
b. 5.25 years
c. 4.44 years
d. 2.50 years
e. None of the above
ANS: C

The present value of the weighted cash flows = $4084.82 = 60/(1.08) + 120/(1.08) 2 + 180/(1.08)3 +
240/(1.08)4 + 5300/(1.08)5

Macaulay duration = 4084.41/920.15 = 4.44 years

PTS: 1 OBJ: Multiple Choice Problems

64. A 15-year bond has a $1,000 par value bond, a 4% coupon and a yield to maturity of 3.3%. Interest is
paid annually. The bond's current yield is
a. 3.7%
 b. 4.0%
c. 3.3%
d. 7.3%
e. None of the above
ANS: A

Current yield = 40/1081.78 = 3.7%

PTS: 1 OBJ: Multiple Choice Problems

65. A 5-year bond has a $1,000 par value bond, a 12% coupon and a yield to maturity of 8%. Interest is
paid semiannually. The bond's price is
a. $864.65
b. $1081.78
c. $852.80
d. $1162.22
e. None of the above
ANS: D

PTS: 1 OBJ: Multiple Choice Problems

66. A 15-year bond, purchased 5 years ago, has a $1,000 par value bond, a 10 percent coupon and a yield
to maturity of 12%. Interest is paid annually. The bond's price is
a. $864
b. $887
c. $1152
d. $1123
e. None of the above
ANS: B

PTS: 1 OBJ: Multiple Choice Problems

NARRBEGIN: Exhibit 18-01

Exhibit 18-1

THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S)

 A $1000 par value bond with 5 years to maturity and a 6% coupon has a yield to maturity of 8%.
Interest is paid semiannually.
NARREND

67. Refer to Exhibit 18-1. Calculate the current price of the bond.
a. $1579.46
b. $918.89
c. $789.29
d. $1000
e. $743.29
ANS: B

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-01

68. Refer to Exhibit 18-1. Calculate the Macaulay duration for the bond.
a. 4.19 years
b. 4.36 years
c. 8.72 years
d. 8.38 years
e. 9.52 years
ANS: B
The present value of the weighted cash flows = $8015.41 = 30/(1.04) + 60/(1.04) 2 + 90/(1.04)3 + 120/
(1.04)4 + 150/(1.04)5 + 180/(1.04)6 + 210 (1.04)7 + 240/(1.04)8 + 270/(1.04)9 + 10300/(1.04)10

Macaulay duration = 8015.41/918.89 = 8.72 or 8.72/2 = 4.36 years

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-01

69. Refer to Exhibit 18-1. Calculate the modified duration for the bond.
a. 4.19 years
b. 4.36 years
c. 8.72 years
d. 8.38 years
e. 9.52 years
ANS: A
Modified duration = 4.36/(1 + .04) = 4.19 years.

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-01

70. Refer to Exhibit 18-1. Estimate the percentage price change for this 5-year $1,000 par value bond, with
a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.
a. 2.1%
b. 2.1%
c. 4.4%
d. 4.4%
e. None of the above
 ANS: A
%price change = (4.19 0.5) = 2.1%

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-01

NARRBEGIN: Exhibit 18-02

Exhibit 18-2

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Talmart Corporation bonds have a $1,000 face value and will mature in 4 years. The bonds have a 7%
coupon rate. Interest is paid annually and the required rate of return is 6 percent for these bonds.
NARREND

71. Refer to Exhibit 18-2. What is the price of the Talmart corporate bonds?
a. $965.63
b. $966.13
c. $1,034.65
d. $1,135.10
e. $1,051.97
ANS: C

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-02

72. Refer to Exhibit 18-2. What is the Macaulay duration of the Talmart corporate bonds?
a. 3.43
b. 3.64
c. 3.76
d. 3.85
e. 4.11
ANS: B

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-02

73. Refer to Exhibit 18-2. What is the Modified duration of the Talmart corporate bonds?
a. 3.43
b. 3.64
c. 3.76
d. 3.85
e. 4.11
 ANS: A
Modified duration = 3.64/(1.06) = 3.43

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-02

74. Refer to Exhibit 18-2. If interest rates increase 50 basis points, what will be the approximate price
change for the Talmart bond?
a. 17.0%
b. 1.7%
c. 1.7%
d. 1.8%
e. 17.0%
ANS: B
MD(.005) = 3.43(.005) = 0.01715

PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 18-02

75. Zappo Corporation just issued $1,000 face value bonds that will mature in 20 years and have a 7%
coupon rate. Interest is paid semi-annually and the required rate of return is 9 percent for these bonds.
The bonds have a 5 year call provision that will pay a call premium of $1,050 if they are called in.
What is the price of the Zappo Corporation bond?
a. $815.98
b. $817.43
c. $826.35
d. $920.87
e. $953.07
ANS: E

PTS: 1 OBJ: Multiple Choice Problems

76. Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays
interest semi-annually with a coupon rate of 6% and a required rate of return of 8%.
a. 7.04
b. 7.17
c. 7.31
d. 7.38
e. 8.12
ANS: D
MD = 7.6/(1.03) = 7.38

PTS: 1 OBJ: Multiple Choice Problems