Question 1

The spot rate for year 1 is 7.5% and the forward rate for year one to two is 8%. The two-year discount factor is

Accepted Answer

A)   .845.
B)   .861.
C)   .852.
D)   .888.E) None of the above
F) A) and D)

Question 2

The theory that states yield curve shape is formed by the relationship of supply and demand curves for various security maturities is

Accepted Answer

A)   liquidity preference theory.
B)   term structure theory.
C)   market segmentation theory.
D)   risk minimization theory.E) A) and D)
F) All of the above

Question 3

On which of the following bonds will a 1% increase in yield have the greatest impact?

Accepted Answer

A)   30-year maturity, selling at $1,000
B)   30-year maturity, selling at $900
C)   20-year maturity, selling at $850
D)   20-year maturity, selling at $1,050E) C) and D)
F) A) and D)

Question 4

The best method for an investor to guarantee higher interest rates would be to purchase a bond which has a _____ coupon and a _____ term to maturity.

Accepted Answer

A)   low, short
B)   low, long
C)   high, short
D)   zero, very longE) A) and D)
F) B) and C)

Question 5

The yield-to-maturities on treasury issues do not give a direct reading of future spot rates as

Accepted Answer

A)   not enough years of maturities are available.
B)   there is no default risk measured.
C)   most have coupon rates.
D)   the treasury market is not large enough to draw conclusions.E) None of the above
F) B) and C)

Question 6

Which of the following is NOT correct concerning forward rates?

Accepted Answer

A)   Forward rates link the current spot rate over one holding period to the current spot rate over a longer holding period.
B)   They apply to contracts made now but relating to a period forward in time.
C)   The forward rate, in reality, is the interest rate specified on a one-year loan.
D)   Forward rates involve contracts made now for a loan made one year from now and paid back two years from now.E) A) and D)
F) None of the above

Question 7

The types of securities priced in accord with the set of spot rate are

Accepted Answer

A)   treasury issues.
B)   municipal bonds.
C)   common stocks.
D)   preferred stocks.E) B) and C)
F) A) and B)

Question 8

If there is a one-year spot rate of 6% and two-year spot rate of 8%, the forward rate from year 1 to 2 is

Accepted Answer

A)   9.06%.
B)   9.72%.
C)   8.12%.
D)   10.04%.E) A) and C)
F) None of the above D

Question 9

The yield-to-maturity for corporate bonds is typically done assuming compounding that is

Accepted Answer

A)   semi-annual.
B)   monthly.
C)   annually.
D)   quarterly.E) A) and D)
F) C) and D)

Question 10

The pattern of interest rates appropriate for discounting cash flows of various maturities is known as the

Accepted Answer

A)   market's prime-rate liquidity
B)   random error of interest rates
C)   random walk with drift
D)   term structure of interest ratesE) B) and D)
F) None of the above

Question 11

If the number of compounding intervals are increased within a year, it will

Accepted Answer

A)   increase or decrease the effective annual interest rate depending on the coupon rate.
B)   not affect the calculation of the annual interest rate.
C)   decrease the effective annual interest rate of a low coupon bond.
D)   increase the annual effective interest rate.E) None of the above
F) B) and C) D

Question 12

An investor adopts the strategy of investing for one year anUnder unbiased expectations theory, he must expect that

Accepted Answer

A)   the one-year forward rate for years one to two will be above 9%.
B)   the two-year spot rate is too high.
C)   the inflation rate will drop more than the market expects.
D)   the one-year forward rate for years one to two will be at least 7%.E) B) and C)
F) A) and B)

Question 13

There is With a liquidity premium of .3%, the liquidity preference theory states that the spot rate for year two should be

Accepted Answer

A)   7.7%.
B)   2.4%.
C)   8.0%.
D)   8.3%.E) A) and C)
F) A) and B)

Question 14

A yield curve is developed using the yield-to-maturities on

Accepted Answer

A)   common stocks.
B)   treasury issues.
C)   corporate bonds.
D)   muni bonds.E) B) and D)
F) C) and D)

Question 15

The liquidity preference theory states that an investor

Accepted Answer

A)   does not consider interest rate risk.
B)   wishes to reduce price risk.
C)   assumes a declining yield curve.
D)   will prefer a maturity to a rollover strategy.E) None of the above
F) A) and B)

Question 16

Finding a bond's yield-to-maturity is the same as finding its

Accepted Answer

A)   NPV.
B)   Return on Assets.
C)   IRR.
D)   Profitability Index.E) None of the above
F) C) and D)

Question 17

A one-year Treasury bill has a yield of 6%. A bond will pay $70 at the end of year 1 and $1,070 at the end of year 2.	If its market value is $1,036.50, the two-year spot rate is

Accepted Answer

A)   6%.
B)   9%.
C)   7%.
D)   5%.E) A) and B)
F) None of the above

Question 18

The assumption that all bond interest income can be reinvested at the yield-to-maturity assumes the yield curve

Accepted Answer

A)   has an increasingly negative slope.
B)   is flat.
C)   has a positive sloped, linear shape.
D)   has an increasing rate of growth.E) B) and D)
F) A) and C)

Question 19

Empirical evidence of liquidity premiums indicates

Accepted Answer

A)   the longer the maturity, the larger the liquidity premium.
B)   they exist for up to one-year maturity.
C)   they only explain flat yield curves.
D)   they don't exist.E) B) and D)
F) A) and D) B

Question 20

In the ____ theory, it is assumed that markets are inhabited by various investors who strictly prefer different investment horizons.

Accepted Answer

A)   liquidity premium
B)   market segmentation
C)   preferred habitat
D)   market anomalyE) B) and C)
F) A) and D)

Exam 20: Fundamentals of Bond Valuation

The spot rate for year 1 is 7.5% and the forward rate for year one to two is 8%. The two-year discount factor is

Correct AnswerverifiedShow Answer

The theory that states yield curve shape is formed by the relationship of supply and demand curves for various security maturities is

Correct AnswerverifiedShow Answer

On which of the following bonds will a 1% increase in yield have the greatest impact?

Correct AnswerverifiedShow Answer

The best method for an investor to guarantee higher interest rates would be to purchase a bond which has a _____ coupon and a _____ term to maturity.

Correct AnswerverifiedShow Answer

The yield-to-maturities on treasury issues do not give a direct reading of future spot rates as

Correct AnswerverifiedShow Answer

Which of the following is NOT correct concerning forward rates?

Correct AnswerverifiedShow Answer

The types of securities priced in accord with the set of spot rate are

Correct AnswerverifiedShow Answer

If there is a one-year spot rate of 6% and two-year spot rate of 8%, the forward rate from year 1 to 2 is

Correct AnswerverifiedD

The yield-to-maturity for corporate bonds is typically done assuming compounding that is

Correct AnswerverifiedShow Answer

The pattern of interest rates appropriate for discounting cash flows of various maturities is known as the

Correct AnswerverifiedShow Answer

If the number of compounding intervals are increased within a year, it will

Correct AnswerverifiedD

An investor adopts the strategy of investing for one year anUnder unbiased expectations theory, he must expect that

Correct AnswerverifiedShow Answer

There is With a liquidity premium of .3%, the liquidity preference theory states that the spot rate for year two should be

Correct AnswerverifiedShow Answer

A yield curve is developed using the yield-to-maturities on

Correct AnswerverifiedShow Answer

The liquidity preference theory states that an investor

Correct AnswerverifiedShow Answer

Finding a bond's yield-to-maturity is the same as finding its

Correct AnswerverifiedShow Answer

A one-year Treasury bill has a yield of 6%. A bond will pay $70 at the end of year 1 and $1,070 at the end of year 2. If its market value is $1,036.50, the two-year spot rate is

Correct AnswerverifiedShow Answer

The assumption that all bond interest income can be reinvested at the yield-to-maturity assumes the yield curve

Correct AnswerverifiedShow Answer

Empirical evidence of liquidity premiums indicates

Correct AnswerverifiedB

In the ____ theory, it is assumed that markets are inhabited by various investors who strictly prefer different investment horizons.

Correct AnswerverifiedShow Answer

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The best method for an investor to guarantee higher interest rates would be to purchase a bond which has a _ coupon and a _ term to maturity.

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D

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D

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B

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