Quiz Chapter 7

A client is considering an investment in an 8%, $1,000 par value, 5-year Government of Canada bond. Assuming a discount rate of 6%, and semi-annual coupon payments, what should the client pay for this bond?
1. Not pay more than $1,000.
2. Not pay more tha

4. The present value of the coupon payments is found using the APV formula:
APV=C ((1-(1/(1+r)n))/r) = $40((1-(1/(1.03)10))/.03 = $40(8.5302) = $341.21
The present value of the principal is found using the PV formula:
PV=FV/(1+r)n = $1,000/(1.03)10= $744.

What is the yield of a 92-day T-bill with a price of 98.75?
a. 3.19%
b. 4.02%
c. 4.96%
d. 5.02%

D.T-bill yield is calculated as (100-price)/price x (365/term) x 100. In this example, the T-bill yield of 5.02% is determined as (100-98.75)/98.75 x (365/92) x 100.
Score: 0/1

What is the approximate yield to maturity (per $100 face value) for a bond with a 7.0% coupon, current market price of $107.50 and 5 years to maturity?
a. 5.30%
b. 5.50%
c. 6.15%
d. 8.19%

A. The approximate yield to maturity is determined as (annual interest income +/- annual price change)/((purchase price + 100)/2) x 100. In this example, the return is determined as ($7.00 - ($7.50/5 years))/((107.50 + 100)/2) x100 = 5.30%.
Score: 0/1

What expectations are implicit in a downward sloping yield curve?
a. Investors expect rates to fall in the future.
b. Investors expect rates to rise in the future.
c. Investors expect rates to rise then fall.
d. Investors expect rates to remain fairly sta

A.A downward sloping yield curve, where short-term rates are higher than long-term rates, indicates that investors expect interest rates to decline in the future. They require a high short-term rate, perhaps because current inflation rates are high, but a

Which of the following bond theorems are correct?
i) Bond prices move inversely to interest rates.
ii) The longer the term to maturity the greater the interest rate risk.
iii) Bonds with low coupon rates have more price volatility than bonds with high cou

1.There are some conventional rules regarding the price action of fixed-income securities. Each of these rules is explained separately below.
First it must be understood that there is very little difference between interest rates and yields. After all, ea

If an investor expects market interest rates to decline, what type of bonds should she buy?
a. Short-term, low coupon.
b. Long-term, low coupon.
c. Long-term, high coupon.
d. Short-term, high coupon.

b.If market interest rates decline, bond prices will increase and bondholders will earn capital gains. The investor should attempt to maximize the potential capital gain by purchasing bonds that are more volatile. Long-term bonds are more volatile than sh

Why is the normal slope of the yield curve upward sloping to the right?
a. Yields increase with time to reflect the increased risk of longer terms to maturity.
b. Bond prices increase as the term to maturity of the bond increases.
c. Yields are higher for

b. Bond yields normally increase as the term to maturity increases to reflect the risk of holding a bond with a longer term. The actual slope of the yield curve can vary significantly depending on economic conditions and other factors such as supply and d

What is the settlement period for Government of Canada bonds with terms to maturity of three years or less?
a. Same day
b. Second clearing day after the transaction takes place.
c. Third clearing day after the transaction takes place.
d. First clearing da

b.Government of Canada (GoC) Treasury Bills are settled the same day. All GoC Bonds and GoC Guaranteed Bonds with a term to maturity of three years or less, or to the earliest call date, where a transaction is completed at a premium, are settled the secon

What must an investor pay when purchasing a bond?
a. The bond's market price plus interest accrued since the last interest payment.
b. The market price of the bond.
c. The market price of the bond as of the settlement date.
d. The bond's market price less

A.When a securities transaction takes place, the change in legal ownership of the securities is effective immediately. However, payment for purchased securities does not have to be made until some time later, and delivery of sold securities also does not

Calculate the accrued interest on the following transaction. A 7% bond maturing April 12, 2018 is purchased on December 15th and settles on December 18th. The principal amount of the purchase is $100,000.
1. $642.47
2. 1,227.40
3. $1,284.93
4. $4,794.42

3.Accrued interest is determined from the day after the last interest payment date up to and including the settlement date. Interest payments are semi-annual on the anniversary date of maturity (e.g. April 12) and exactly six months later (e.g. October 12

DDD Co. Inc. has an outstanding 12 year bond with a coupon of 8.75%. The financial press is quoting it with a yield of 6%. What does this imply with respect to the bond?
a. The price of the bond will be below par.
b. The price of the bond will be at par.

11c.The most important bond pricing relationship to understand is the inverse relationship between bond prices and interest rates (or bond yields)� as interest rates rise, bond prices fall and as interest rates fall, bond prices rise. So if the yield of t

Sonoma is convinced that interest rates are going to drop. She wishes to buy a bond, hold it until rates have dropped, then sell it to earn a capital gain. Recommend a bond for her to purchase.
a. A 6% 10 year bond.
b. A 6% 8 year bond.
c. A 6 month T-bil

12a.Longer-term bonds are more volatile in price than shorter-term bonds. If she wishes the price to move up more, she should choose the longer term bond.

Neta has read that interest rates are expected to go up. She currently owns 4 bonds and is thinking of selling one before this happens. Recommend the best bond she should sell?
a. A 6% 8 year bond with a duration of 7.
b. A 7% 9 year bond with a duration

13d.Duration is a measure of the sensitivity of a bond's price to changes in interest rates. It is defined as the approximate percentage change in the price or value of a bond for a 1% change in interest rates. The higher the duration of the bond, the mor

The inflation rate is expected to be 3% next year. Sharif buys a bond at par with a 7% coupon. Calculate his real rate of return?
a. 3%
b. 4%
c. 7%
d. 10%

b.Because inflation reduces the value of a dollar, the return that is received, known as the nominal rate, must be reduced by the inflation rate to arrive at the actual or real rate of return.
Real Rate = Nominal Rate - Inflation Rate.

JVV Inc. is about to sell a new issue of debt. The maturity of the debt is expected to be 20 years. Interest rates in the market place are as follows:
BONDS
BOND YIELDS
Government of Canada 10 year bonds
4%.
Government of Canada 20 year bonds
8%
10 year c

d.The appropriate discount rate is chosen based on the risk of the particular bond. The discount rate can be estimated by the yields currently applicable to bonds with similar coupon, term and credit quality. These yields are determined by the marketplace

Calculating YTM for a year semi annual 9% bond, trading at 96.77 semi-annual.
N = 8
PMT = ?
PV = ?
FV = 100.
COMP press 1/Y =- 5%

PMT = 4.5
PV = -96.77