Reading 65: Introduction to the Valuation of Debt Securities- 2011, 前列腺, change, center, price

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Session 16: Fixed Income: Analysis and Valuation
Reading 65: Introduction to the Valuation of Debt Securities

LOS d: Explain how the price of a bond changes as the bond approaches its maturity date, and calculate the change in value that is attributable to the passage of time.

 

 

If a bond sells at a discount and market rates are expected to stay the same until maturity, the price of the bond will:

A) increase over time, approaching the par value at maturity.

B) increase over time, approaching the par value minus the final interest payment at maturity.

C) remain constant until maturity.

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The bond’s price will increase towards the par value over time.

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An investor buys a 6% coupon 5-year corporate bond priced to yield 7%. If rates remain unchanged when the investor sells the bond in 2 years, the investor will receive a:

A) capital loss.

B) total return equal to the coupon yield.

C) capital gain.

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Current yield of a bond = coupon payment / market price of bond. Bonds with a coupon lower than the prevailing interest rate will trade at a discount to par. If interest rates remain the same as the bond nears maturity the price will increase towards its par value. Thus, when they are sold, the investor will receive a capital gain.

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Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6%. If the term structure of interest rates does not change over the next twelve-month interval, the bond's price change (as a percentage of par) will be closest to:

A) -0.84.

B) 0.84.

C) 0.00.

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The bond price change is computed as follows:

Bond Price Change = New Price ? Old Price = (5/1.06 + 105/1.06²) ? (5/1.06 + 5/1.06² + 105/1.06³) = 98.17 ? 97.33 = 0.84.

The value -0.84 is the correct price change but the sign is wrong. The value 0.00 is incorrect because although the term structure of interest rates does not change the bond price increases since it is selling at a discount relative to par.

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If market rates do not change, as time passes the price of a zero-coupon bond will:

A) approach par.

B) approach the purchase price.

C) approach zero.

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A bond's value may differ substantially from it's maturity value prior to maturity.  But as maturity draws nearer the bond's value converges to it's maturity value.  This statement is true for regular bonds as well as zero-coupon bonds. 

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A discount bond (nothing changes except the passage of time):

A) falls in value as time passes.

B) price is not related to time passing.

C) rises in value as time passes.

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A discount bond sells at less than face value, therefore as time passes the bond value will converge upon the face value.

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An investor buys a 20-year, 10% semi-annual bond for $900. She wants to sell the bond in 6 years when she estimates yields will be 10%. What is the estimate of the future price?

A) $1,000.

B) $1,079.

C) $946.

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Since yields are projected to be 10% and the coupon rate is 10%, we know that the bond will sell at par value.

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A 5-year bond with a 10% coupon has a present yield to maturity of 8%. If interest rates remain constant one year from now, the price of the bond will be:

A) lower.

B) the same.

C) higher.

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A premium bond sells at more than face value, thus as time passes the bond value will converge upon the face value.