Ch03 - Chapter 3 Interest Rates and Security Valuation...

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Chapter 3 Interest Rates and Security Valuation True/False Questions 1. If interest rates increase, the value of a fixed income contract decreases and vice versa. Answer: True Page: 69 Level: Easy 2. At equilibrium a security's required rate of return will be less than its expected rate of return. Answer: False Page: 65 Level: Easy 3. If a security's realized return is negative, it must have been true that the expected return was greater than the required return. Answer: False Page: 65 Level: Medium 4. If the present value of a security's cash flows is below its current market price the security is undervalued. Answer: True Page: 64 Level: Easy 5. A bond with an 11% coupon and a 9% required return will sell at a premium to par. Answer: True Page: 67 Level: Easy 6. A bond with a 10% coupon and an 8% required return will sell at a discount from par. Answer: False Page: 67 Level: Easy 7. Discount bonds always have higher rrr than premium bonds, that is why the discount bonds cost less. Answer: False Page: 68 Level: Easy 8. The duration of a four year maturity 10% coupon bond is less than four years. Answer: True Page: 78 Level: Easy 9. The longer the time to maturity the lower the security's price sensitivity to an interest rate change, ceteris paribus. Answer: False Page: 72 Level: Easy 10. The greater a security's coupon the lower the security's price sensitivity to an interest rate change, ceteris paribus. Answer: True Page: 74 Level: Easy 11. For a given interest rate change, a 20 year bond's price change will be twice that of a 10 year bond's price change. Answer: False Page: 72 Level: Medium 12. Any security that returns a greater percentage of the price sooner is less price volatile. Answer: True Page: 74 Level: Easy 13. A zero coupon bond has a duration equal to its maturity and convexity equal to zero. Answer: True Page: 78, Appendix 3C Level: Medium 14. The lower the level of interest rates the greater is a bond's price sensitivity to interest rate changes. Answer: True Page: 70 Level: Medium 15. The higher a bond's coupon, the lower the bond's price volatility. Answer: True Page: 74 Level: Easy 16. Higher interest rates lead to lower bond convexity, all else equal. Answer: True Page: Appendix 3C Level: Medium 30
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17. Zero coupon bonds will always have a lower price than equivalent maturity, equivalent default risk coupon bonds. Answer: True Page: 73 Level: Easy 18. If the rrr on a particular bond rises, the FPV of those bonds will rise also. Answer: False Page: 63 Level: Easy 19. The required rate of return on a bond is A) the interest rate that equates the current market price of the bond with the present value of all future cash flows received. B)
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This note was uploaded on 12/05/2011 for the course ECON 3311 taught by Professor L during the Spring '11 term at University of Texas at Dallas, Richardson.

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Ch03 - Chapter 3 Interest Rates and Security Valuation...

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