Ch 4_problems.pdf - CHAPTER 4 UNDERSTANDING FIXEDINCOME RISK AND RETURN PROBLEMS These questions were developed by Danny Hassett CFA(Cedar Hill TX USA

21 CHAPTER 4 UNDERSTANDING FIXED‑INCOME RISK AND RETURN PROBLEMS These questions were developed by Danny Hassett, CFA (Cedar Hill, TX, USA), Lou Lemos, CFA (Louisville, KY, USA), and Bin Wang, CFA (Austin, TX, USA). Copyright © 2013 by CFA Institute. 1. A “buy-and-hold” investor purchases a fixed-rate bond at a discount and holds the securi-ty until it matures. Which of the following sources of return is least likely to contribute to the investor’s total return over the investment horizon, assuming all payments are made as scheduled? A. Capital gainB. Principal paymentC. Reinvestment of coupon payments 2. Which of the following sources of return is most likely exposed to interest rate risk for an investor of a fixed-rate bond who holds the bond until maturity? 3. An investor purchases a bond at a price above par value. Two years later, the investor sells the bond. The resulting capital gain or loss is measured by comparing the price at which the bond is sold to the:

22 Part I: Learning Objectives, Summary Overview, and Problems The following information relates to Problems 4–6 An investor purchases a nine-year, 7% annual coupon payment bond at a price equal to par value. After the bond is purchased and before the first coupon is received, interest rates increase to 8%. The investor sells the bond after five years. Assume that interest rates remain unchanged at 8% over the five-year holding period.