Question

QUESTION 1

1. Match the specific risk on bonds to its description.

   -       A.       B.       C.       D.    The chance that the bond's par value will lose purchasing power.       -       A.       B.       C.       D.    The chance that the bond buyer will not receive interest and principal payments when due       -       A.       B.       C.       D.    The chance that the bond owner will lose money if a bond is sold prior to maturity.       -       A.       B.       C.       D.    The chance that the bond value will fall when its YTM rises

   A. Liquidity risk B. Interest rate risk C. Default risk D. Inflation risk

1 points   

QUESTION 2

1. A bond is selling for its $1,000 par value. The bond has a 4% coupon paid semiannually, a 4% YTM, and matures in 10 years. However, the bond's YTM rises to 4.5%. Calculate the percent change in the bond's value. Remember that the bond is a semiannual bond when calculating the new price.

1 points   

QUESTION 3

1. Bonds with longer maturities have higher interest rate risk.

   True

   False

1 points   

QUESTION 4

1. Which ones of the following are correct related to bond ratings? Select all that apply.

   		A bond rated as B is a speculative grade or junk bond.
   		Everything else the same, investment grade bonds have lower yields than speculative grade or junk bonds.
   		A bond rated as BBB is a speculative grade or junk bond.
   		A bond rated as AAA is a speculative grade or junk bond.

Answer 1

1.

The chance that the bond's par value will lose purchasing power. (Inflation Risk)

The chance that the bond buyer will not receive interest and principal payments when due. (Default Risk)

The chance that the bond owner will lose money if a bond is sold prior to maturity. (Liquidity Risk)

The chance that the bond value will fall when its YTM rises. (Interest Rate Risk)

2.

Bond par value = $1,000

Coupon rate = 4% semi-annual

Time to maturity = 10 years

Present value of Bond = $1,000

If YTM rises to 4.50%

Using TVM Calculation,

PV = [FV = 1000, PMT = 20, T = 20, I = 0.045/2]

PV = $960.09

Percentage change in Bond Price = (960.09-1000)/1000

Percentage change in Bond Price = -3.99%

New Bond Price = $960.09

3.

True

Explanation:

Bonds with longer maturity have higher duration and so the change in interest rate has more more effect on the price change of bonds with longer maturity.

4.

Everything else the same, investment grade bonds have lower yields than speculative grade or junk bonds.

Explanation:

Speculative grade bonds have higher yield because it has high probability of default and to compensate investors it has high default risk premium in it.

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