Which of the following statements is most correct

Which of the following statements is most correct

Subject: Business    / Finance   
Question

1. Which of the following statements is most correct?

i. The price of a bond will approach its par value as it moves toward its maturity.

ii. Over time, the price of a discount bond will rise if interest rate do not change.

iii. The price of a bond will rise if the perceived credit quality of the issuer deteriorates.

A. i and ii only

B. i and iii only

C. ii and iii only

D. All of the above

2. The graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities is known as:

A. The yield curve

B. The term to maturity

C. The term structure of interest rates

D. The yield spread

3. Using spot rates, the theoretical value of a bond is calculated:

A. As the present value of all expected future cash flows

B. By discounting a cash flow for a given period by the corresponding spot rate for that period

C. By discounting all future cash flows at the riskfree rate

D. By compounding all expected future cash flows

4. The theory which adopts the view that the term structure reflects the future path of interest rates as well as a risk premium is the:

A. The liquidity theory

B. The pure expectations theory

C. The preferred habitat theory

D. The market segmentation theory

5. When the yield rises steadily as the maturity increases, the yield curve is said to be:

A. Positive

B. Upward sloping

C. Normal

D. All of the above

6. The risks that cause uncertainty about the return over some investment horizon are:

A. The uncertainty about the price of a bond at the end of the investment horizon.

B. The uncertainty about the rate at which the proceeds from a bond that matures prior to the maturity date can be reinvested until the maturity date.

C. The uncertainty about the movement of equity prices relative to debt instruments.

D. A and B

7. Suppose that all investors expect that interest rates for the 4 years will be as follows:

Year
    

Forward Interest Rate

0
    

(Today) 5%

1
    

7%

2
    

9%

3
    

10%

What is the price of 3-year zero coupon bond with a par value of $1,000?

A. $863.83

B. $816.58

C. $772.18

D. $765.55

8. Given the bond described below, if interest were paid semi-annually (rather than annually), and the bond continued to be priced at $850, the resulting effective annual yield to maturity would be:

Par Value
    

$1,000

Time to Maturity
    

20 years

Coupon
    

10% (paid annually)

Current Price
    

$850

Yield to Maturity
    

12%

A. Less than 12%

B. More than 12%

C. 12%

D. Cannot be determined

9. Calculate the BEY for a 7-year Treasury bond priced at $813, with a face value of $1000.

A. 4.60%

B. 3.00%

C. 2.30%

D. 2.98%

10. Assume that a 1-year spot rate is 12% and a 2-year spot rate is 13%. Calculate the 1-year forward rate.

A. 14.09%

B. 14.01%

C. 14.10%

D. 14.11%

11. Suppose, for instance, an investor wants to determine the price of a bond currently trading in the market, and which has the following characteristics.

Nominal value: R 3 000 000

Coupon (semi-annual): 12.50%

Maturity date: 30 March 2015

Settlement date: 30 September 2009

YTM: 10.375%

Calculate the price

A. R 5 475 859.25

B. R 3 262 178.94

C. R 3 222 631.44

D. R 2 720 939.75

12. You buy a 20-year, 7% coupon bond (paid annually) with a face value of R1000 at a yield of 7.90%. You hold the bond for five years, during which you re-invest the coupons at 6 ¾%. At the end of five years you sell the bond at a yield of 7.35%. What is your annual holding period yield?

A. 11.25%

B. 7.86%

C. 8.50%

D. 10.15%