Reading 68: Yield Measures, Spot Rates, and Forward Rates style, black, following

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1．ich of the following is an incorrect statement when zero-coupon bonds are compared to coupon-paying bonds with the same maturity? Zero-coupon bonds:

A)   are less sensitive to interest rate changes.

B)   are sold at a lower price.

C)   have a higher duration.

D)   have a higher convexity.

2． the promised yield is equal to the realized yield then:

A)   nominal yield is smaller than the promised yield.

B)   current yield is lesser than the yield to maturity.

C)   promised yield is greater than current yield.

D)   the coupon payments are reinvested at the promised yield during the life of the issue.

3． investor purchases a 4-year, 6 percent, semiannual-pay Treasury note for $9,485. The security has a par value of $10,000. To realize a total dollar return equal to 7.515 percent (its yield to maturity), the investor must have which of the following reinvestment assumptions?

A)   All payments must be reinvested at less than 7.515%.

B)   All payments must be reinvested at more than 7.515%.

C)   All payments must be reinvested at 7.515%.

D)   Total dollar return is unaffected by the reinvestment assumption.

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答案和详解如下：

1．ich of the following is an incorrect statement when zero-coupon bonds are compared to coupon-paying bonds with the same maturity? Zero-coupon bonds:

A)   are less sensitive to interest rate changes.

B)   are sold at a lower price.

C)   have a higher duration.

D)   have a higher convexity.

The correct answer was A)

Since zero-coupon bonds have a higher duration than coupon-paying bonds of the same maturity, they are more sensitive to interest rate changes.

2． the promised yield is equal to the realized yield then:

A)   nominal yield is smaller than the promised yield.

B)   current yield is lesser than the yield to maturity.

C)   promised yield is greater than current yield.

D)   the coupon payments are reinvested at the promised yield during the life of the issue.

The correct answer was D)

The promised yield is the YTM and the realized yield is the actual return earned during a specific horizon.  In order for the realized yield to equal the promised yield, reinvestments must occur at the promised yield.  When the realized yield is equal to the promised yield there are no conclusions that can be made about whether the bond is selling at par, a discount, or a premium.

3． investor purchases a 4-year, 6 percent, semiannual-pay Treasury note for $9,485. The security has a par value of $10,000. To realize a total dollar return equal to 7.515 percent (its yield to maturity), the investor must have which of the following reinvestment assumptions?

A)   All payments must be reinvested at less than 7.515%.

B)   All payments must be reinvested at more than 7.515%.

C)   All payments must be reinvested at 7.515%.

D)   Total dollar return is unaffected by the reinvestment assumption.

The correct answer was C)

The reinvestment assumption that is embedded in any present value-based yield measure implies that all coupons and principal payments must be reinvested at the specific rate of return, in this case, the yield to maturity. Thus, to obtain a 7.515% total dollar return, the investor must reinvest all the coupons at a 7.515% rate of return. Total dollar return is made up of three sources, coupons, principal, and reinvestment income.

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