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CHAPTER 5 TRUE-FALSE QUESTIONS (T) 1. The coupon rate may be the market rate of interest for a bond. (T) 2. The price of a bond and the market rate of interest are inversely related. (F) 3. The price of a bond is the present value of future payments discounted at the coupon rate. (T) 4. Yield to maturity assumes reinvestment of coupons at the same yield. (T) 5. The realized yield may be influenced by coupon reinvestment rates. (F) 6. If market interest rates have increased since a bond was purchased, price risk will increase the price of the bond and reinvestment risk will decrease the return on the coupons. (T) 7. A zero coupon bond has no reinvestment risk. (T) 8. The higher the coupon rate, the lower the bond price volatility. (F) 9. Price risk is a measure of bond volatility. (F) 10. Short-term bonds have greater price risk compared to long-term bonds. (T) 11. The price risk of a bond tends to offset reinvestment risk somewhat as market interest rates vary. (F) 12. In a short-term bond price risk is not a problem, but reinvestment risk is a considerable concern. (T) 13. Price risk is one aspect of interest rate risk. (T) 14. Price risk is of no concern to the investor if the bond is held to maturity. (F) 15. Duration is a measure of interest rate volatility. (T) 16. The duration of a zero coupon bond equals the term to maturity of the bond. (T) 17. The duration of a coupon bond must be shorter than its term to maturity. (F) 18. If the coupon rate equals the market rate, a bond is likely to be selling at a discount. (F) 19. The coupon rate varies inversely with bond prices. (F) 20. Bonds with lower coupon rates have a shorter duration than similar bonds with high coupon rates. (F) 21. Money has time value because of inflation. (F) 22. Duration matching eliminates risk. (F) 23. A zero-coupon bond bears no interest. 1
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(T) 24. Expected yield is essentially a forecast. MULTIPLE CHOICE QUESTIONS (b) 1. Which of the following statements is true? a. Bond prices and interest rates move together. b. Coupon rates are fixed at the time of issue. c. Short-term securities have large price swings relative to long-term securities. d. The higher the coupon, the lower the price of a bond. (a) 2. Which of the following statements is true about bonds? a. The higher the coupon rate, the shorter the duration. b. The yield on a bond is usually fixed. c. A bond's coupon rate is equal to its face value. d. Most bonds pay interest annually. (c) 3. $5,000 invested at 6%, compounded quarterly, will be worth how much after 5 years? a. $6,691 b. $16,036 c. $6,734 d. $5,386 (a) 4. Tom deposits $10,000 in a savings deposit paying 4%, compounded monthly. What amount would he have at the end of seven years? a. $13,225 b. $13,159 c. $13,179 d. $13,325 (c) 5. Judy would like to accumulate $70,000 by the time her son starts college in ten years. What amount would she need to deposit now in a deposit account earning 6%, compounded yearly, to accumulate her savings goal?
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