Docsity
Docsity
Prepare for your exams
Prepare for your exams

Study with the several resources on Docsity

Earn points to download
Earn points to download

Earn points by helping other students or get them with a premium plan

Guidelines and tips
Guidelines and tips
Sell on Docsity
Sell on Docsity
Docsity AI
Docsity AI
Log inSign up

Prepare for your exams

Study with the several resources on Docsity

Find documents

Prepare for your exams with the study notes shared by other students like you on Docsity

Search for your university

Find the specific documents for your university's exams

Docsity AINEW

Summarize your documents, ask them questions, convert them into quizzes and concept maps

Explore questions

Clear up your doubts by reading the answers to questions asked by your fellow students

Earn points to download

Earn points by helping other students or get them with a premium plan

Share documents
download point icon20 Points

For each uploaded document

Answer questions
download point icon5 Points

For each given answer (max 1 per day)

All the ways to get free points
Get points immediately

Choose a premium plan with all the points you need

Study Opportunities

Choose your next study program

Get in touch with the best universities in the world. Search through thousands of universities and official partners

Community

Ask the community

Ask the community for help and clear up your study doubts

Free resources

Our save-the-student-ebooks!

Download our free guides on studying techniques, anxiety management strategies, and thesis advice from Docsity tutors

Valuing Bonds: Multiple Choice and Short Answer Questions, Exercises of Financial Management

Vietnam National University Ho Chi Minh City (VNUHCM)Financial Management

Financial Management Excercise

Typology: Exercises

2019/2020

Uploaded on 10/25/2021

anna614
anna614 🇻🇳

3.5

(2)

2 documents

1 / 31

Toggle sidebar

This page cannot be seen from the preview

Don't miss anything!

bg1
Chapter 03 - Valuing Bonds
3-1
Chapter 03
Valuing Bonds
Multiple Choice Questions
1. The following entities issue bonds to raise long-term loans except:
A. The federal government
B. State and local governments
C. Companies
D. Individuals
2. The type of bonds where the identities of bonds' owners are recorded and the coupon
interest payments are sent automatically are called:
A. Bearer bonds
B. Government bonds
C. Registered bonds
D. None of the above
3. A government bond issued in Germany has a coupon rate of 5%, face value of euros 100
and maturing in five years. The interest payments are made annually. Calculate the price of
the bond (in euros)if the yield to maturity is 3.5%.
A. 100
B. 106.77
C. 106.33
D. none of the above
4. Generally, a bond can be valued as a package of:
I) Annuity, II) Perpetuity, III) Single payment
A. I and II only
B. II and III only
C. I and III only
D. none of the above
pf3
pf4
pf5
pf8
pf9
pfa
pfd
pfe
pff
pf12
pf13
pf14
pf15
pf16
pf17
pf18
pf19
pf1a
pf1b
pf1c
pf1d
pf1e
pf1f

Partial preview of the text

Download Valuing Bonds: Multiple Choice and Short Answer Questions and more Exercises Financial Management in PDF only on Docsity!

Chapter 03

Valuing Bonds

Multiple Choice Questions

  1. The following entities issue bonds to raise long-term loans except: A. The federal government B. State and local governments C. Companies D. Individuals
  2. The type of bonds where the identities of bonds' owners are recorded and the coupon interest payments are sent automatically are called: A. Bearer bonds B. Government bonds C. Registered bonds D. None of the above
  3. A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and maturing in five years. The interest payments are made annually. Calculate the price of the bond (in euros)if the yield to maturity is 3.5%. A. 100 B. 106. C. 106. D. none of the above
  4. Generally, a bond can be valued as a package of: I) Annuity, II) Perpetuity, III) Single payment A. I and II only B. II and III only C. I and III only D. none of the above
  1. A government bond issued in Germany has a coupon rate of 5%, face value of euros 100 and maturing in five years. The interest payments are made annually. Calculate the yield to maturity of the bond (in euros) if the price of the bond is 106 euros. A. 5.00% B. 3.80% C. 3.66% D. none of the above
  2. Generally, bonds issued in the following countries pay interest semi-annually. I) USA, II) UK, III) Canada, IV) Germany, & V) Japan A. I, II, III, & IV B. I, II, III, & V C. II, III, & IV only D. None of the above
  3. If a bond is paying interest semi-annually, then: A. interest is paid once a year B. interest is paid every six moths C. interest is paid every three months D. none of the above
  4. A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming annual coupon payment, calculate the price of the bond. A. $857. B. $951. C. $1000. D. $1051.
  5. A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the semi-annual interest payment? A. $ B. $ C. $ D. None of the above
  1. Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of 8%, and ten years to maturity. This bond's duration is: A. 8.7 years B. 7.6 years C. 0.1 years D. 6.5 years
  2. A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%, and twenty years to maturity. The bond's duration is: A. 10.0 years B. 7.4 years C. 20.0 years D. 12.6 years
  3. A bond with a face value of $1,000, coupon rate of 0%, yield to maturity of 9%, and ten years to maturity. This bond's duration is: A. 6.7 years B. 7.5 years C. 9.6 years D. 10.0 years
  4. A bond with duration of 10 years has yield to maturity of 10%. This bond's volatility is: A. 9.09% B. 6.8% C. 14.6% D. 6.0%
  5. A bond with duration of 5.7 years has yield to maturity of 9%. The bond's volatility is: A. 1.9% B. 5.2% C. 5.7% D. 9.0%
  1. If a bond's volatility is 10% and the interest rate goes down by 0.75% (points) then the price of the bond: A. decreases by 10% B. decreases by 7.5% C. increases by 7.5% D. increases by 0.75%
  2. If a bond's volatility is 5% and the interest rate changes by 0.5% (points) then the price of the bond: A. changes by 5% B. changes by 2.5% C. changes by 7.5% D. none of the above
  3. Volatility of a bond is given by: I) Duration/ (1 + yield) II) Slope of the curve relating the bond price to the interest rate III) Yield to maturity A. I only B. II only C. III only D. I and II only
  4. The term structure of interest rates can be described as the: A. Relationship between the spot interest rates and the bond prices B. Relationship between spot interest rates and stock prices C. Relationship between spot interest rates and maturity of a bond D. None of the above
  1. If the 4-year spot rate is 7% and the 3-year spot rate is 6%, what is the one-year forward rate of interest three years from now? A. 10.0% B. 6.5% C. 9.6% D. None of the above
  2. Interest represented by "r 2 " is: A. Spot rate on a one-year investment (APR) B. Spot rate on a two-year investment (APR) C. Expected spot rate 2 years from today D. Expected spot rate one year from today
  3. How can one invest today at the 2-year forward rate of interest? I) By buying a 2-year bond and selling a 1-year bond with the same coupon II) By buying a 1-year bond and selling a 2-year bond with the same coupon III) By buying a 1-year bond and then after a year reinvesting in a further 1-year bond A. I only B. II only C. III only D. II and III only
  4. The expectations hypothesis states that the forward interest rate is the: I) expected future spot rate II) always greater than the spot rate III) yield to maturity A. I only B. II only C. III only D. II and III only
  1. If the nominal interest rate per year is 10% and the inflation rate is 4%, what is the real rate of interest? A. 10% B. 4% C. 5.8% D. None of the above
  2. Mr. X invests $1000 at 10% nominal rate for one year. If the inflation rate is 4%, what is the real value of the investment at the end of one year? A. $ B. $ C. $ D. None of the above
  3. What forward rate is embedded in a two year zero coupon bonds with a yield to maturity of 6% and a three year zero coupon bond and a yield to maturity of 6.5%? Assume both bonds are currently priced at par. A. 5.50% B. 6.00% C. 6.50% D. 7.50%
  4. Which bond is more sensitive to an interest rate change of 0.75%? Bond A: YTM = 4.00%, Maturity = 8 years, Coupon = 6% or $60, Par Value = $1, Bond B: YTM = 3.50%, Maturity = 5 years, Coupon = 7% or $70, Par Value = $1, A. A B. B C. Both the same D. Cannot be determined

True / False Questions

  1. The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall. True False
  2. The relationship between nominal interest rate and real interest rate is given by: (1 + rnominal) = (1 + rreal)(1 + inflation rate) True False
  3. Treasury bonds do not have default risk, but are subject to inflation risk. True False
  4. Indexed bonds were completely unknown in the U.S. before 1997. True False
  5. The U.S. Treasury issues inflation-indexed bonds known as TIPs. True False
  6. Forward rates are always higher than spot rates. True False
  7. Defaulted bonds often pay some level of residual? True False

Short Answer Questions

  1. Briefly explain the cash flows associated with a bond to the investor.
  2. Briefly explain the term "yield to maturity."
  3. What is the relationship between interest rates and bond prices?
  4. Discuss the concept of duration.
  1. Define the term, "real interest rate."
  2. What are TIPs? Briefly explain.
  3. What is the relationship between spot and forward rates?

Chapter 03 Valuing Bonds Answer Key

Multiple Choice Questions

  1. The following entities issue bonds to raise long-term loans except: A. The federal government B. State and local governments C. Companies D. Individuals

Type: Easy

  1. The type of bonds where the identities of bonds' owners are recorded and the coupon interest payments are sent automatically are called: A. Bearer bonds B. Government bonds C. Registered bonds D. None of the above

Type: Medium

  1. Generally, bonds issued in the following countries pay interest semi-annually. I) USA, II) UK, III) Canada, IV) Germany, & V) Japan A. I, II, III, & IV B. I, II, III, & V C. II, III, & IV only D. None of the above

Type: Medium

  1. If a bond is paying interest semi-annually, then: A. interest is paid once a year B. interest is paid every six moths C. interest is paid every three months D. none of the above

Type: Easy

  1. A 3-year bond with 10% coupon rate and $1000 face value yields 8% APR. Assuming annual coupon payment, calculate the price of the bond. A. $857. B. $951. C. $1000. D. $1051.

PV = (100/1.08) + (100/(1.08^2)) + (1100/(1.08^3)) = $1051.

Type: Medium

  1. A 5-year treasury bond with a coupon rate of 8% has a face value of $1000. What is the semi-annual interest payment? A. $ B. $ C. $ D. None of the above

Annual interest payment = 1000(0.08) = $80; Semi-annual payment = 80/2 = $

Type: Easy

  1. A three-year bond has 8.0% coupon rate and face value of $1000. If the yield to maturity on the bond is 10%, calculate the price of the bond assuming that the bond makes semi-annual coupon interest payments. A. $857. B. $949. C. $1057. D. $1000.

PV = (40/1.05) + (40/(1.05^2)) +... + (1040/(1.05^6)) = $949.

Type: Difficult

  1. A four-year bond has an 8% coupon rate and a face value of $1000. If the current price of the bond is $878.31, calculate the yield to maturity of the bond (assuming annual interest payments). A. 8% B. 10% C. 12% D. 6%

Use trial and error method. (80/1.12) + (80/(1.12^2)) + (80/(1.12^3)) + (1080/(1.12^4)) = $870.51. Therefore, yield to maturity is 12%. Or use a financial calculator: PV = -878.31; N = 4; PMT = 80; FV = 1000; COMPUTE: I = 12%

Type: Difficult

  1. A bond with a face value of $1,000 has coupon rate of 7%, yield to maturity of 10%, and twenty years to maturity. The bond's duration is: A. 10.0 years B. 7.4 years C. 20.0 years D. 12.6 years

Step 1: N = 20; PMT = 70; FV = 1,000; I = 10; Compute PV = 744. Step 2: Duration = [((1)(70)/1.1) + ((2)(70)/1.1^2) +... + ((20)(1070)/1.1^20)]/744.59 = 10 years

Type: Difficult

  1. A bond with a face value of $1,000, coupon rate of 0%, yield to maturity of 9%, and ten years to maturity. This bond's duration is: A. 6.7 years B. 7.5 years C. 9.6 years D. 10.0 years

Type: Difficult

  1. A bond with duration of 10 years has yield to maturity of 10%. This bond's volatility is: A. 9.09% B. 6.8% C. 14.6% D. 6.0%

Volatility (%) = Duration/(1 + yield) = 10/1.1 = 9.09%

Type: Difficult

  1. A bond with duration of 5.7 years has yield to maturity of 9%. The bond's volatility is: A. 1.9% B. 5.2% C. 5.7% D. 9.0%

Volatility = 5.7/1.09 = 5.

Type: Difficult

  1. If a bond's volatility is 10% and the interest rate goes down by 0.75% (points) then the price of the bond: A. decreases by 10% B. decreases by 7.5% C. increases by 7.5% D. increases by 0.75%

Change in bond price = (Volatility) * (change in interest rates) = 10 * 0.75 = 7.5%

Type: Difficult

  1. If a bond's volatility is 5% and the interest rate changes by 0.5% (points) then the price of the bond: A. changes by 5% B. changes by 2.5% C. changes by 7.5% D. none of the above

Type: Medium