prashantsahni

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 minus the final interest payment at maturity.

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

C) remain constant until maturity.

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

prashantsahni

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) the same.

B) lower.

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.

prashantsahni

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) $1,079.

B) $946.

C) $1,000.

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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.

prashantsahni

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 gain.

B) capital loss.

C) total return equal to the coupon yield.

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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.

prashantsahni

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

A) falls in value as time passes.

B) rises in value as time passes.

C) price is not related to time passing.

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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.

prashantsahni

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

A) approach the purchase price.

B) approach zero.

C) approach par.

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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.  

prashantsahni

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.

prashantsahni

The price and yield on a bond have:

A) positive relation.

B) no relation.

C) inverse relation.

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Interest rates and a bond's price have an inverse relationship. If interest rates increase the bond price will decrease and if interest rates decrease the bond price will increase.

prashantsahni

Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged (8%). What will have happened to the bond's price during this period?

A) It will have increased.

B) It will have decreased.

C) It will have remained constant.

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The bond is sold at a premium, as time passes the bond’s price will move toward par. Thus it will fall.
N = 10; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,134
N = 9; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,125

prashantsahni

A 12-year, $1,000 face value zero-coupon bond is priced to yield a return of 7.50% compounded semi-annually. What is the bond’s price?

A) $250.00

B) $419.85.

C) $413.32.

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Using an equation: Pricezerocoupon = Face Value × [ 1 / ( 1 + i/n)n × 2]
Here, Pricezerocoupon = 1000 × [ 1 / (1+ 0.075/2)12 × 2] = 1000 × 0.41332 = 413.32.
Using the calculator: N = (12 × 2) = 24, I/Y = 7.50 / 2 = 3.75, FV = 1000, PMT = 0. PV = -413.32