finance 3826 ch. 10 and 11

In regards to bonds, convexity relates to the ______.A. shape of the bond price curve with respect to interest ratesB. shape of the yield curve with respect to maturityC. slope of the yield curve with respect to liquidity premiumsD. size of the bid-ask spread A
To earn a high rating from the bond rating agencies, a company would want to have:I. A low times interest earned ratioII. A low debt to equity ratioIII. A high quick ratioA. I onlyB. II and III onlyC. I and III onlyD. I, II, and III B
According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long term corporate bonds versus short term bonds could be due to _____.A. declining liquidity premiumsB. an expectation of an upcoming recessionC. a decline in future inflation expectations D. an increase in expected interest rate volatility D
Bonds rates ___ or better by Standard & Poor’s are considered investment grade.A. AAB. BBBC. BBD. CCC B
In an era of particularly low interest rates, which of the following bonds is most likely to be called?A. Zero coupon bondsB. Coupon bonds selling at a discountC. Coupon bonds selling at a premiumD. Floating rate bonds C
Consider the expectations theory of the term structure of interest rates. If the yield curve is downward sloping, this indicates that investors expect short term interest rates to ____ in the future.A. increaseB. decreaseC. not changeD. change in an unpredictable manner B
Which of the following bonds would most likely sell at the lowest yield?A. a callable debentureB. a puttable mortgage bondC. a callable mortgage bondD. a puttable debenture B
Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward sloping yield curve would indicate _____.A. expected increases in inflation over timeB. expected decreases in inflation over timeC. the presence of a liquidity premiumD. that the equilibrium interest rate in the short term part of the market is lower than the equilibrium interest rate in the long term part of the market A
A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding period return if an investor decides to sell now?A. increasedB. decreasedC. stayed the sameD. cannot be determined B
Because of convexity, when interest rates change, the actual bond price will ___ the bond price predicted by duration.A. always be higher thanB. sometimes be higher thanC. always be lower thanD. sometimes be lower than A
A bond’s price volatility ___ at ___ rate as maturity increases.A. increases; an increasingB. increases; a decreasingC. decreases; an increasingD. decreases; a decreasing B
As a result of bond convexity, an increase in a bond’s price when yield to maturity falls is ____ the price decrease resulting from an increase in yield of equal magnitude.A. greater thanB. equivalent toC. smaller thanD. cannot be determined A
Duration is a concept that is useful in assessing a bond’s ___.A. credit riskB. liquidity riskC. price volatilityD. convexity risk C
An increase in a bond’s yield to maturity results in a price decline that is ___ the price increase resulting from a decrease in yield of equal magnitude.A. greater thanB. equivalent toC. smaller thanD. cannot be determined C
All other things equal, a bond’s duration is _____.A. higher when the yield to maturity is higherB. lower when the yield to maturity is higherC. the same at all yield ratesD. indeterminable when the yield to maturity is high B
A bank has an average duration of its liabilities equal to 2 years. The bank’s average duration of its assets is 3.5 years. The bank’s market value of equity is at risk if __.A. interest rates fallB. credit spreads fallC. interest rates riseD. the price of all fixed income securities rises C
All other things equal, a bond’s duration is ______.A. higher when the coupon rate is higherB. lower when the coupon rate is higherC. the same when the coupon rate is higherD. indeterminable when the coupon rate is high B
Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive:I. 8% coupon, noncallable 20 year maturity par bondII. 9% coupon, currently callable 20 year maturity premium bondIII. Zero coupon 30 year maturity bondA. I, II, IIIB. II, III, IC. III, I, IID. III, II, I C
When interest rates increase, the duration of a 20 year bond selling at a premium ____.A. increasesB. decreasesC. remains the sameD. increases at first and then declines B
The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 points. If you believe the spread will soon return to its historical levels, you should ____.A. buy the AA and short the AAAB. buy both the AA and the AAAC. buy the AAA and short the AAD. short both the AA and the AAA C
If you choose a zero coupon bond with a maturity that matches your investment horizon, which of the following is correct?I. You will have no interest rate risk on this bondII. In the absence of default, you can be sure you will earn the promised yieldIII. The duration of your bond is less than the time to your investment horizonA. I onlyB. I and II onlyC. II and III onlyD. I, II, and III B
As compared with equivalent maturity bonds selling at par, deep discount bonds will have _____.A. greater reinvestment riskB. greater price volatility C. less call protectionD. shorter average maturity B
When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?A. Price volatility increases at an increasing rate.B. Price volatility increases at a decreasing rate.C. Price volatility decreases at a decreasing rate.D. Price volatility decreases at an increasing rate. C
You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger

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