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MCQ5

This document contains a sample of 14 multiple choice questions testing knowledge of chapter 5 on bonds. The questions cover topics such as how bond prices and interest rates relate, bond yield calculations, duration and how it impacts price variability, factors that impact bond returns, and bond pricing calculations. The answers to each question are provided at the end.

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Nadiah Nazeir
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64 views

MCQ5

This document contains a sample of 14 multiple choice questions testing knowledge of chapter 5 on bonds. The questions cover topics such as how bond prices and interest rates relate, bond yield calculations, duration and how it impacts price variability, factors that impact bond returns, and bond pricing calculations. The answers to each question are provided at the end.

Uploaded by

Nadiah Nazeir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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1

Fin 221: Sample MCQ –chapter 5

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 bond coupon, the lower the price of a bond

2. The bond yield to maturity calculation is


a. the guaranteed rate of return to an investor.
b. the same as the coupon rate.
c. the expected rate of return on the bond.
d. the realized rate of return on the bond.

3. Bond A has duration of 5.6 while bond B has duration of 6.0. Bond B:
a. will have greater price variability, given a change in interest rates, relative to bond A
b. will have a shorter maturity than bond A
c. will have a higher coupon rate than bond A
d. will have less price variability, given a change in interest rates, relative to bond A

4. As bond maturity _________ , so does the ________ and ________.


a. decreases; coupon rate; market price
b. decreases; duration; face value
c. increases; duration; price variability
d. increases; risk; coupon rate

5. In a fixed rate bond, the variable which changes to provide the market rate of return is:
a. price
b. coupon rate
c. coupon amount
d. face value

6. A bond yield measure should capture all of the following except:


a. coupon payments
b. reinvestment income
c. changing coupon rate levels
d. capital gains or losses

7. Calculate the bond volatility of $1,000 face value 8 percent coupon bond whose price has
varied from $1,020 to $1,050.
a. $30.00
b. 5 percent
c. 3 percent
d. $50.00

8. Which of the following statements is true?


a. bonds price vary directly with interest rates
b. bonds volatility varies inversely with maturity
c. low coupon bonds have lower bond volatility than high coupon bonds
d. bond duration increases with maturity
2

9. Interest rate risk is


a. duration
b. the extent that coupon rates vary with time
c. the potential variability in the realized rate of return caused by a change in market
interest rates
d. the potential variability in the realized rate of return caused by a changing discount
rates.

10. If a bond investor receives all the coupon payments on time and the face value on the contract
maturity date, investor's return could still vary because of
a. default risk
b. price risk
c. liquidity risk
d. reinvestment risk.

11. A $1000 bond with a coupon rate of 10%, interest paid semiannually, matures in eight years
and sells for $1120. What is the yield to maturity?
a. 10.8%
b. 11.0%
c. 7.9%
d. 7.6%

12. An investor who selects coupon bond with maturities matching his/her investment horizon,
a. has eliminated price risk, but not reinvestment risk.
b. has eliminated just one part of interest rate risk.
c. can know the expected yield on the bond, but not the realized yield.
d. all of the above.

11. The duration of a $1000, two-year, 7% loan (interest paid annually) is _____ when market loan
rates are 8%?
a. 2.036
b. 1.934
c. 1.902
d. 1.856

14. A $1000 bond with an 8.2% coupon rate, interest paid semiannually, and maturing in three
years, and similar bonds are currently yielding 7.6% in the market. What is the current
price of this bond?
a. $1,027.08
b. $1,131.19
c. $1,028.48
d. $972.00

Answers:
1. (b); 2. (c); 3. (a); 4. (c); 5. (a); 6. (c); 7. (c); 8. (d); 9. (c); 10. (d); 11. (c); 12. (d);
13 (c); 14. (c)

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