Unformatted text preview: 0 year bond's
Answer: False Page: 69 Level: Medium 13. Any security that returns a greater percentage of the price sooner is less price volatile.
Answer: True Page: 71 Level: Easy 14. Duration is the elasticity of a security's value to small coupon changes.
Answer: False Page: 73-74 Level: Medium 15. A coupon bond with a 3.5 year duration has the same price volatility as a 3.5 year maturity zero coupon
Answer: True Page: 78-80 Level: Medium Saunders, Financial Markets and Institutions, 2/e 19 16. The lower the level of interest rates, the greater is a bond's price sensitivity to interest rate changes.
Answer: True Page: 83-84 Level: Difficult Multiple Choice Questions 17. The interest rate used to find the fair present value of a financial security is the
A) Expected rate of return
B) Required rate of return
C) Realized rate of return
D) Realized yield to maturity
E) Current yield
Answer: B Page: 63 Level: Easy 18. A security has an expected return greater than its required return. This security is
A) Selling at a premium to par
B) Selling at a discount to par
C) Selling for more than its FPV
D) Selling for less than its FPV
E) A zero coupon bond
Answer: D Page: 63-64 Level: Medium 19. A bond that you held to maturity had a realized return of 8%, but when you bought it, it had an expected
return of 6%. If no default occurred, which one of the following must be true?
A) The bond was purchased at a premium to par
B) The coupon rate was 8%
C) The required return was greater than 6%
D) The coupons were reinvested at a higher rate than expected
E) The bond must have been a zero coupon bond
Answer: D Page: 63-64 Level: Medium 20 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 20. You would want to purchase a security if P _____ FPV or Err _____ rrr.
A) u , e
B) u , u
C) e , u
D) e , e
Answer: C Page: 63-64 Level: Difficult 21. A 6 year annual payment corporate bond has a market price of $1050. It pays annual interest of $100
and its required rate of return is 9%. By how much is the bond mispriced?
B) Overpriced by $5.14
C) Underpriced by $5.14
D) Overpriced by $11.32
E) Underpriced by $11.32
Answer: B Page: 63-64 Level: Medium
Response: FPV = 100 v PVIFA[r%,6yrs] + 1000 v PVIF(r%,6 yrs) = $1044.86 22. A 10 year corporate bond pays $75 interest semiannually. What is the bond's price if the required return
Answer: C Page: 67 Level: Medium
Response: 1 = 37.50 v PVIFA(3.5%,20) + 1000 v PVIF(3.5%,20) 23. A corporate bond has a coupon rate of 10% and a required return of 10%. This bond's price is
E) Not possible to determine from the information given
Answer: B Page: 66 Level: Easy Saunders, Financial Markets and Institutions, 2/e 21 24. A 10 year annual payment corporate coupon bond has an expected return of 11% and a required return
of 10%. The bond's market price is
A) Greater than its FPV
View Full Document