Question

1.What is price risk/interest rate risk of a bond?

A. The risk of a decline in a bond’s price due to an decrease in interest rate

B. The risk of an increase in a bond’s price due to an decrease in interest rate

C. The risk of a decline in a bond’s price due to an increase in interest rate

D. The risk of an increase in a bond’s price due to an increase in interest rate

E. None of the above

2. What is reinvestment risk of a bond?

A. The risk that an increase in interest rates will lead to a decline in income from a bond portfolio.

B. The risk that a decline in interest rates will lead to a decline in income from a bond portfolio.

C. The risk that a decline in interest rates will lead to an increase in income from a bond portfolio.

D. The risk that an increase in interest rates will lead to an increase in income from a bond portfolio

. E. None of the above.

3. A Treasury bond has an 8% annual coupon and a 10% yield to maturity. Which of the following statements is CORRECT?

A. The bond sells at a premium.

B. The bond sells at a discount.

C. If the yield to maturity remains constant, the price of the bond will decline over time.

D. None of the above

4. A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is CORRECT?

A. If the bond’s yield to maturity declines, the bond will sell at a discount.

B. The bond’s current yield is less than its expected capital gains yield.

C. Market Interest rate on the bond is 9%.

D. Can not be determined from the information given.

5. What is the relationship between yield to maturity, current yield and capital gains yield?

A. Yield to maturity=current yield - capital gains yield

B. Yield to maturity= capital gains yield - current yield

C. Yield to maturity=current yield + capital gains yield

D. Yield to maturity= capital gains yield E. None of the above.

6. What is the value of a 10-year, 15% annual coupon bond, if rd = 15%?

A. 1000

B. 1057

C. 1034

D. 998

E. 987

7.What is the value of a 10-year, 10% semiannual coupon bond, if rd = 16%?

A. 705

B. 834

C. 872

D. 791

E. 988

Answer 1

ANSWER 1

Interest Rate Risk of the Bond is Basically Risk that the Value of Bond may Decline due to any Increase in Market Interest Rates as the the Bonds Prices usually Fall when the Expectations of Investors Increases (ie. Market Interest Rates)

CORRECT ANS : (C) part

ANSWER 2

Reinvestment Risk is basically risk that when we will reveive our Coupon Payments & Maturity Value, the Market Interest Rate may be Falling at that time due to which we wont be able to invest our money received at good rate resulting in reduced Income.

CORRECT ANS : (B) part

ANSWER 3

The Relationship Between "Coupon Rate" and "Yield to Maturity" is that :

• IF COUPON RATE > YTM : BOND SELLS AT PREMIUM
• IF COUPON RATE < YTM : BOND SELLS AT DISCOUNT
• IF COUPON RATE = YTM : BOND SELLS AT PAR

CORRECT ANS : (B) part

ANSWER 4

As we have Seen the Relationship in ANSWER 3 that :

• IF COUPON RATE = YTM : BOND SELLS AT PAR
• reason is that we are getting here(ie.Coupon) as per our Expectations(ie.YTM)

CORRECT ANS : (C) part

ANSWER 5

Yield to Maturity is = Current Yeild (+) Capital Gain Yield

CORRECT ANS : (C) part

ANSWER 6

Again, we have already discussed the Relationship between Coupon Rate & Market Rate in ANSWER 3

So, Here in this part :

Coupon Rate (ie.15%) = Market Rate (ie.15%)

Hence Bonds would Sell at PAR.

CORRECT ANS : (A) part

ANSWER 7

Value of Bond = Coupon * PVAF_{(at 8%,for 20periods)} + Maturity Value * PVF_{(at 8%,for 20^thperiods)}

Value of Bond = {50 * 9.81814740671} + {1000 * 0.21454820735}

Value of Bond = {490.907370335} + {214.54820735}

Value of Bond = 705 approx

CORRECT ANS : (A) part