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Exam 3: Interest Rates and Security Valuation

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Question 31

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A bond that pays interest annually has a 6 percent promised yield and a price of $1,025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is six years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

A) $1,042.33
B) $995.99
C) $1,054.01
D) $987.44
E) None of the options presented

F) A) and E)
G) B) and D)

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Question 32

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A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is

A) greater than its PV.
B) less than par.
C) less than its E(r) .
D) less than its PV.
E) $1,000.00.

F) A) and D)
G) B) and C)

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Question 33

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A six-year annual payment corporate bond has a required return of 9.5 percent and an 8 percent coupon. Its market value is $20 over its PV. What is the bond's E(r) ?

A decrease in interest rates will

What is convexity? How does convexity affect duration-based predicted price changes for interest rates changes? Convexity is a measure of the nonlinearity (curvature)of a change in a bond's price caused by a change in interest rates. The level of convexity increases for greater interest rate changes. Duration is a linear estimate of a bond's price change as the interest rate changes from its current level. Due to convexity,the greater the interest rate change,the greater the error in using duration to estimate the bond's price change. For a multimillion-dollar bond portfolio,the dollar errors can be quite significant. In abnormal markets,bond investors may face more or less risk than the bond's duration would imply. Calculus

Convexity arises because

Conceptually,why does a bond's price fall when required returns rise on an existing fixed income security?

A 10-year maturity zero coupon bond will have lower price volatility than a 10-year bond with a 10 percent coupon.

A 10-year maturity coupon bond has a six-year duration. An equivalent 20-year bond with the same coupon has a duration

A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is

Ignoring default risk,if a bond's expected return is greater than its required return,then the bond's market price must be greater than the present value of the bond's cash flows.

A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60 and its required rate of return is 7 percent. By how much is the bond mispriced?

A 15-year,7 percent coupon annual payment corporate bond has a PV of $1,055.62. However,you pay $1,024.32 for the bond. By how many basis points is your E(r)different from your r?

The required rate of return on a bond is

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate,a 6 percent promised YTM,and six years to maturity. What is the bond's duration?

A security has an expected return less than its required return. This security is

An annual payment bond has a 9 percent required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change?

The higher a bond's coupon,the lower the bond's price volatility.

A bond that pays interest semiannually has a 6 percent promised yield and a price of $1,045. Annual interest rates are now projected to increase 50 basis points. The bond's duration is five years. What is the predicted new bond price after the interest rate change? (Watch your rounding.)

The greater a security's coupon,the lower the security's price sensitivity to an interest rate change,ceteris paribus.