Reading 66: Introduction to the Measurement of Interest R

comparing, interest, change, higher, price

LOS b: Demonstrate the price volatility characteristics for option-free, callable, prepayable, and putable bonds when interest rates change.

Q1. In comparing the price volatility of putable bonds to that of option-free bonds, a putable bond will have:

A) less price volatility at higher yields.

B) less price volatility at low yields.

C) more price volatility at higher yields.

Q2. If interest rates fall, the:

A) value of call option embedded in the callable bond falls.

B) callable bond's price rises more slowly than that of a noncallable but otherwise identical bond.

C) callable bond's price rises faster than that of a noncallable but otherwise identical bond.

Q3. At a market rate of 7%, a $1,000 callable par value bond is priced at $910, while a similar bond that is non-callable is priced at $960. What is the value of the embedded call option?

A) $40.

B) $50.

C) $30.

Q4. Consider the following two statements about putable bonds:

Statement #1: As yields fall, the price of putable bonds will rise less quickly than similar option-free bonds (beyond a critical point) due to the decrease in value of the embedded put option.

Statement #2: As yields rise, the price of putable bonds will fall more quickly than similar option-free bonds (beyond a critical point) due to the increase in value of the embedded put option.

You should:

A) agree with both statements.

B) disagree with both statements.

C) agree with only one statement.

Q5. An investor gathered the following information about two 7% annual-pay, option-free bonds:

Bond R has 4 years to maturity and is priced to yield 6%
Bond S has 7 years to maturity and is priced to yield 6%
Both bonds have a par value of $1,000.

Given a 50 basis point parallel upward shift in interest rates, what is the value of the two-bond portfolio?

A) $2,044.

B) $2,030.

C) $2,086.

Q6. Which of the following bonds experience the greatest precentage price change when the market interest rates rise?

A) A high coupon, long maturity bond.

B) A low coupon, long maturity bond.

C) A low coupon, short maturity bond.

Q7. Which of the following bonds is likely to exhibit the greatest volatility due to interest rate changes? A bond with a:

A) high coupon and a long maturity.

B) low coupon and a long maturity.

C) low coupon and a short maturity.

Q8. A $1,000 face, 10-year, 8.00% semi-annual coupon, option-free bond is issued at par (market rates are thus 8.00%). Given that the bond price decreased 10.03% when market rates increased 150 basis points (bp), which of the following statements is TRUE? If market yields:

A) decrease by 150bp, the bond's price will increase by more than 10.03%.

B) decrease by 150bp, the bond's price will decrease by more than 10.03%.

C) decrease by 150bp, the bond's price will increase by 10.03%.