PDF- Chapter 3, Chapter 3 Methodology, -The Outsiders - Chapter 3.pdf

## Description

Chapter 03

• - Valuing Bonds

Chapter 03 Valuing Bonds Multiple Choice Questions

The following entities issue bonds to raise long-term loans except: A

### Individuals

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

# Registered bonds D

None of the above

#### A government bond issued in Germany has a coupon rate of 5%,

face value of euros 100 and maturing in five years

## Calculate the price of the bond (in euros)if the yield to maturity is 3

• none of the above

#### Generally,

a bond can be valued as a package of: I) Annuity,

II) Perpetuity,

III) Single payment A

### II and III only C

I and III only D

• none of the above

## Chapter 03

• - Valuing Bonds

### 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

• none of the above

#### Generally,

bonds issued in the following countries pay interest semi-annually

• & V) Japan A
• & IV only D

# None of the above

### 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

## Assuming annual coupon payment,

calculate the price of the bond

# What is the semi-annual interest payment

None of the above

### Chapter 03

• - Valuing Bonds

#### 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

### If the current price of the bond is \$878

calculate the yield to maturity of the bond (assuming annual interest payments)

A 5-year bond with 10% coupon rate and \$1000 face value is selling for \$1123

# None of the above

Which of the following statements about the relationship between interest rates and bond prices is true

? I) There is an inverse relationship between bond prices and interest rates

#### II) There is a direct relationship between bond prices and interest rates

III) The price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates

(Assuming that coupon rate is the same for both) IV) The price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates

(Assuming that the coupon rate is the same for both) A

### I and IV only B

I and III only C

II and III only D

None of the given statements are true

Chapter 03

• - Valuing Bonds

# 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

7 years B

6 years C

1 years D

5 years

#### 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

0 years B

4 years C

0 years D

6 years

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

7 years B

5 years C

6 years D

0 years

### This bond's volatility is: A

#### A bond with duration of 5

• 7 years has yield to maturity of 9%

## The bond's volatility is: A

Chapter 03

• - Valuing Bonds

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
• increases by 7
• increases by 0

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
• changes by 7
• none of the above

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

# I and II only

### 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

Chapter 03

• - Valuing Bonds

## Which of the following statements is true

? I) The spot interest rate is a weighted average of yields to maturity II) Yield to maturity is the weighted average of spot interest rates and estimated forward rates III) The yield to maturity is always higher than the spot rates A

# II only C

### I and III only

A forward rate prevailing from period three through to period four can be: I) readily observed in the market place II) extracted from spot interest rate with 3 and 4 years to maturity III) extracted from 1 and 2 year spot interest rates A

I only B

II only C

### III only D

I and III only

If the 3-year spot rate is 10

• 5% and the 2-year spot rate is 10%,

what is the one-year forward rate of interest two years from now

### If the 5-year spot rate is 10% and the 4-year spot rate is 9%,

what is the one-year forward rate of interest four years from now

### Chapter 03

• - Valuing Bonds

# 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

None of the above

Interest represented by "r2" 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

#### 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

II only C

## II and III only

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

## Chapter 03

• - Valuing Bonds

## If the nominal interest rate per year is 10% and the inflation rate is 4%,

what is the real rate of interest

## 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

• \$1100 B
• \$1000 C
• \$1058 D

None of the above

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

? Assume both bonds are currently priced at par

Which bond is more sensitive to an interest rate change of 0

• ? Bond A: YTM = 4

### Maturity = 8 years,

Coupon = 6% or \$60,

Par Value = \$1,000 Bond B: YTM = 3

### Both the same D

Cannot be determined

### True / False Questions

Chapter 03

• - Valuing Bonds

## In the US,

most bonds make coupon payments annually

# The duration of a zero coupon bond is the same as its maturity

True False

## True False

### The term structure of interest rate is the relationship between yield to maturity and maturity

#### True False

If the term structure of interest rate is flat the nine-year interest rate is equal to the ten-year interest rate

# True False

Short-term and long-term interest rates always move in parallel

# Chapter 03

• - Valuing Bonds

The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall

# True False

The relationship between nominal interest rate and real interest rate is given by: (1 + rnominal) = (1 + rreal)(1 + inflation rate) True False

Treasury bonds do not have default risk,

but are subject to inflation risk

True False

### Indexed bonds were completely unknown in the U

• before 1997

True False

#### Treasury issues inflation-indexed bonds known as TIPs

True False

Forward rates are always higher than spot rates

#### True False

Defaulted bonds often pay some level of residual

• ? True False

### Chapter 03

• - Valuing Bonds

### Briefly explain the cash flows associated with a bond to the investor

Briefly explain the term "yield to maturity

# Discuss the concept of duration

## Chapter 03

• - Valuing Bonds

# Briefly discuss the concept of volatility

Briefly explain what is meant by "the term structure of interest rates

Briefly explain the expectations theory

### What is the relationship between real and nominal rates of interest

Chapter 03

• - Valuing Bonds

### Define the term,

• "real interest rate

# What are TIPs

• ? Briefly explain

What is the relationship between spot and forward rates

## Chapter 03

• - Valuing Bonds

Chapter 03 Valuing Bonds Answer Key

# Multiple Choice Questions

The following entities issue bonds to raise long-term loans except: A

# Companies D

Individuals

### Type: Easy

The type of bonds where the identities of bonds' owners are recorded and the coupon interest payments are sent automatically are called: A

# Type: Medium

Chapter 03

• - Valuing Bonds

A government bond issued in Germany has a coupon rate of 5%,

face value of euros 100 and maturing in five years

# Calculate the price of the bond (in euros)if the yield to maturity is 3

none of the above The annual interest payment = (100) × (0

• 05) = 5 euros Price = PV

#### Using a financial Calculator: PMT = 5

FV = 100

• & N = 5

Compute: PV = 106

77 euros

# Type: Medium

### 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

Type: Easy

A government bond issued in Germany has a coupon rate of 5%,

face value of euros 100 and maturing in five years

### Calculate the yield to maturity of the bond (in euros) if the price of the bond is 106 euros

none of the above The annual interest payment = (100) × (0

• 05) = 5 euros Using a financial Calculator: PMT = 5

## FV = 100

• & N = 5
• -106 Compute: I = 3

Type: Medium

### Chapter 03

• - Valuing Bonds

Generally,

bonds issued in the following countries pay interest semi-annually

I) USA,

II) UK,

• & V) Japan A
• & IV only D

# 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

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

• 54 PV = (100/1
• 08) + (100/(1
• 08^2)) + (1100/(1
• 08^3)) = \$1051

## Type: Medium

#### Chapter 03

• - Valuing Bonds

## A 5-year treasury bond with a coupon rate of 8% has a face value of \$1000

08) = \$80

### Type: Easy

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

• 00 PV = (40/1
• 05) + (40/(1

05^2)) +

• + (1040/(1
• 05^6)) = \$949

## Type: Difficult

### A four-year bond has an 8% coupon rate and a face value of \$1000

If the current price of the bond is \$878

calculate the yield to maturity of the bond (assuming annual interest payments)

• 6% Use trial and error method
• 12) + (80/(1
• 12^2)) + (80/(1
• 12^3)) + (1080/(1
• 12^4)) = \$870

Therefore,

• yield to maturity is 12%

PMT = 80

FV = 1000

## COMPUTE: I = 12%

Type: Difficult

Chapter 03

• - Valuing Bonds

# Calculate the yield to maturity on the bond assuming annual interest payments

None of the above Use a financial calculator: PV =

# Type: Medium

Which of the following statements about the relationship between interest rates and bond prices is true

? I) There is an inverse relationship between bond prices and interest rates

#### II) There is a direct relationship between bond prices and interest rates

III) The price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates

(Assuming that coupon rate is the same for both) IV) The price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates

(Assuming that the coupon rate is the same for both) A

### I and IV only B

I and III only C

II and III only D

None of the given statements are true

### Type: Difficult

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

7 years B

6 years C

1 years D

• 5 years PV = \$865

# Duration = [(55

56) + 2(51

44) + 3(47

63) + 4(44

10) + 5(40

83) + 6(37

• 81) + 7(35) + 8(32

42) + 9(30

• 01) + 10(490

99)]/(865

80) = 7

6 years

## Chapter 03

• - Valuing Bonds

### 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

0 years B

4 years C

0 years D

• 6 years Step 1: N = 20

PMT = 70

# FV = 1,000

Compute PV = 744

• 59 Step 2: Duration = [((1)(70)/1
• 1) + ((2)(70)/1
• + ((20)(1070)/1

1^20)]/744

• 59 = 10 years

### 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

7 years B

5 years C

6 years D

0 years

### Type: Difficult

A bond with duration of 10 years has yield to maturity of 10%

#### This bond's volatility is: A

• 0% Volatility (%) = Duration/(1 + yield) = 10/1

Type: Difficult

### Chapter 03

• - Valuing Bonds

A bond with duration of 5

• 7 years has yield to maturity of 9%

The bond's volatility is: A

• 0% Volatility = 5

### 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
• increases by 7
• increases by 0
• 75% Change in bond price = (Volatility) * (change in interest rates) = 10 * 0

#### Type: Difficult

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
• changes by 7
• none of the above 5 * 0

Type: Medium

# Chapter 03

• - Valuing Bonds

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

Type: Difficult

The term structure of interest rates can be described as the: A

## Relationship between spot interest rates and stock prices C

### None of the above

Type: Difficult

Which of the following statements is true

? I) The spot interest rate is a weighted average of yields to maturity II) Yield to maturity is the weighted average of spot interest rates and estimated forward rates III) The yield to maturity is always higher than the spot rates A

II only C

# III only D

#### I and III only

Type: Difficult

Chapter 03

• - Valuing Bonds

A forward rate prevailing from period three through to period four can be: I) readily observed in the market place II) extracted from spot interest rate with 3 and 4 years to maturity III) extracted from 1 and 2 year spot interest rates A

II only C

# III only D

### Type: Difficult

#### If the 3-year spot rate is 10

• 5% and the 2-year spot rate is 10%,

what is the one-year forward rate of interest two years from now

## None of the above forward rate = [(1

105^3)/(1

-1 = 11

### Type: Difficult

If the 5-year spot rate is 10% and the 4-year spot rate is 9%,

what is the one-year forward rate of interest four years from now

• 0% forward rate = [(1

1^5)/(1

-1 = 14

## Type: Difficult

#### Chapter 03

• - Valuing Bonds

## 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

07^4)/(1

-1 = 10%

Type: Difficult

## Expected spot rate 2 years from today D

Expected spot rate one year from today

### 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

II and III only

## Chapter 03

• - Valuing Bonds

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

II only C

# III only D

### If the nominal interest rate per year is 10% and the inflation rate is 4%,

what is the real rate of interest

• r real = 5

## Type: Easy

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

• \$1100 B
• \$1000 C
• \$1058 D

None of the above Real investment = (1000 * 1

• 04) = \$1058

### Type: Medium

Chapter 03

• - Valuing Bonds

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

? Assume both bonds are currently priced at par

• 50% First calculate the future value of \$1 at each YTM

You get 1

• 1236 for the 2 year bond and 1
• 1910 for the 3 year bond

Now determine the IRR over between years 2 and 3

# Which bond is more sensitive to an interest rate change of 0

• ? Bond A: YTM = 4

### Par Value = \$1,000 Bond B: YTM = 3

Maturity = 5 years,

# Coupon = 7% or \$70,

Par Value = \$1,000 A

# Cannot be determined The price of bond A decreases from 1134 to 1108

Bond B decreases in price from 1158 to 1121

A drops by 4

• 67% and B drops by 3

# Type: Easy

Chapter 03

• - Valuing Bonds

# In the US,

most bonds make coupon payments annually

Type: Easy

### Type: Difficult

The duration of a zero coupon bond is the same as its maturity

# Type: Medium

The longer a bond's duration greater is its volatility

#### Type: Medium

The term structure of interest rate is the relationship between yield to maturity and maturity

### Type: Medium

If the term structure of interest rate is flat the nine-year interest rate is equal to the ten-year interest rate

### Chapter 03

• - Valuing Bonds

Short-term and long-term interest rates always move in parallel

### Type: Difficult

The expectations theory implies that the only reason for a declining term structure is that investors expect spot interest rates to fall

# Type: Difficult

The relationship between nominal interest rate and real interest rate is given by: (1 + rnominal) = (1 + rreal)(1 + inflation rate) TRUE

## Treasury bonds do not have default risk,

but are subject to inflation risk

Type: Medium

Indexed bonds were completely unknown in the U

• before 1997

Type: Medium

Treasury issues inflation-indexed bonds known as TIPs

#### Type: Medium

Chapter 03

• - Valuing Bonds

Type: Difficult

## Interest payments occur each period,

usually annually or semi-annually

Periodic interest payments are also called coupon payments

### Type: Easy

Briefly explain the term "yield to maturity

" The yield to maturity is the single discount rate that is used to calculate the present value of cash flows received from buying a bond

# It is used for calculating the bond value

Conceptually it is the same as the internal rate of return (IRR)

It is also stock-in-trade of any bond dealer

### Chapter 03

• - Valuing Bonds

What is the relationship between interest rates and bond prices

? Interest rates and bond prices are inversely related

# High interest rates cause bond prices to fall and vice-versa

### For a given change in interest rates,

prices of long-term bonds fluctuate more than for short-term bonds

### Similarly,

for a given change in interest rates low coupon bond prices fluctuate more than for high coupon bonds

# Type: Medium

### Discuss the concept of duration

Duration can be thought of as the weighted average time of a bond's cash flow

The weights are determined by the present value factors

# Duration is expressed in units of time

Duration is an important concept for two reasons

the volatility of a bond is directly related to its duration

#### Second,

one way to hedge interest rate risk is through a strategy of duration matching

Type: Difficult

## Bond's volatility is directly related to duration

Volatility is also the slope of the curve relating the bond price to the interest rate

Type: Medium

#### Briefly explain what is meant by "the term structure of interest rates

" The term structure of interest rates is the plot of interest rates on the y-axis and the maturity on the x-axis

It is also called the yield curve

### It shows how interest rates and maturity are related

Economists have developed several theories to explain the shape of the yield curve

### Type: Medium

Chapter 03

• - Valuing Bonds

Briefly explain the expectations theory

This theory postulates that the current forward rates are the expected value of the corresponding future spot rates

# What is the relationship between real and nominal rates of interest

? The exact relationship is given by: (1 + nominal rate ) = (1 + real rate) * (1 + expected Inflation rate)

It can also be written as: nominal rate = real rate + Inflation rate + (real rate) * (Inflation rate)

## Type: Easy

### Define the term,

• "real interest rate

" Real interest rate is the inflation adjusted nominal interest rate

# We do not observe it directly

The relationship between the two is given by: 1 + rnominal = (1 + rreal rate)(1 + inflation rate)

(An approximate formula that works for low values is: rnominal = rreal rate + Inflation rate)

Type: Medium

### What are TIPs

• ? Briefly explain

Treasury

# The real cash flows on TIPs are fixed,

• but the nominal cash flows,

which includes interest and principal,

are increased as the Consumer Price Index (CPI) increases

Thus the buying power of the lender in protected

## Chapter 03

• - Valuing Bonds

# What is the relationship between spot and forward rates

? A forward rate is the internal rate of return derived from the future value of bonds given spot rates from two different maturity bonds

# Type: Difficult

## Chapter-3

### Medicare Claims Processing Manual

benefits va gov WARMS docs admin26 handbook Chapter 3 The VA Loan and Guaranty 3 3 1 Basic Elements of a VA Guaranteed Loan, Continued a General rules (continued) Subject Explanation Section Interest Rate and Points Interest rate and points are negotiated between the lender and

## Chapter 3

### Chapter 3 An Intervention Model of HIV/AIDS Protection for Sex

PDF Chapter 3 Methodology SIGIR sigir files museum pub 30 15 pdf PDF Dissertation Chapter 3 Sample Ashford Writing Center writingcenter ashford edu Dissertation 20Chapter 203 20Annotated 20Sample 0 pdf PDF Impacts

## Chapter 3

### Medicare Claims Processing Manual

benefits va gov WARMS docs admin26 handbook Chapter 3 The VA Loan and Guaranty 3 3 1 Basic Elements of a VA Guaranteed Loan, Continued a General rules (continued) Subject Explanation Section Interest Rate and Points Interest rate and points are negotiated between the lender and

## CHAPTER 4 Aircraft Welding

### Chapter 5 Aircraft Welding Sweethaven02 Com

PDF Chapter 4 Aircraft Metal Structural Repair sweethaven02 Aviation MaintHandbook ama Ch04 pdf PDF Section 1 IDENTIFICATION OF METALS raanzraanz nz techproject FAA 20AC43 Chapter 2004 pdf PDF AC 65 15A Airframe & Powerplant Mechanics

### Chapter 4 Answers - Scarsdale Middle School

quia SCH4U SCH4U Chem 12 Chapter 4 pdf Chapter 4 ANSWER KEY Chapter 4 Structures and Properties of Substances Solutions for Practice Problems Student Textbook pages 165–166 1 Problem dhar weebly uploads 4 3 6 9 4369749 ch04 pdf 4 5 Questions

## Chapter 4 Biology Form 4

### Biology Form 4 Chapter 3 Exercise

PDF Biology Form 4 Chapter 3 Notes Savvy Studiosmail01 savvystudios br biology form 4 chapter 3 notes pdf PDF Biology Form 4 Chapter 2 Savvy Studiosmail01 savvystudios br biology form 4 chapter 2 pdf PDF Biology Form 4 Chapter 2

## CHAPTER 4 Caselette - Audit of Receivables

### unstoppable - Cengage Learning Asia

PDF Solution Manual Practical Auditing By Empleo Maestrus test maestrus solution manual practical auditing by empleo pdf PDF Fraud Issues & Answers for Internal Auditors chapters theiia Participant 20Materials 20 20FRAUD 20Issue 20and 20Answers

## Chapter 4 Cost

### Cost Accounting 14th Edition Chapter 4 Solutions - Kronoscode

PDF chapter 4 cost estimation Colorado Department of Transportation codot gov library chapter 4 cost estimation pdf PDF Chapter 4 Job Order Costing 12 ovgu de bwl1 MACC Macc3 pdf PDF Cost Accounting Chapter 4

<