A+ Answers

Question1

Forward Rates

Year1-Year Forward Rate

14.6%

24.9%

35.2%

45.5%

55.8%

What should the purchase price of a 1-year zero coupon bond be if it is purchased today and has face value of $1,000?

A. $966.37 B. $945.51 C. $950.21 D. $912.87 E. $956.02

Question 2

Forward Rates

Year 1-Year Forward Rate

1 4.6%

2 4.9%

3 5.2%

4 5.5%

5 5.8%

What is the yield to maturity of a 4-year bond?

A. 5.02% B. 4.95% C. 5.05% D. 4.69% E. 5.08%

Question 3

Forward Rates

Year 1-Year Forward Rate

1 5%

2 5.5%

3 6.0%

4 6.5%

5 7.0%

What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?

A. $877.54 B. $894.21 C. $888.33 D. $871.80 E. $883.32

Question 4

Forward Rates

Year1-Year Forward Rate

14.6%

24.9%

35.2%

45.5%

55.8%

What should the purchase price of a 4-year zero coupon bond be if it is purchased today and has face value of $1,000?

A. $879.54

B. $821.15

C. $887.42

D. $866.32

E. $856.02

Question 5

Given the yield on a 3 year zero-coupon bond is 7% and forward rates of 6% in year 1 and 6.5% in year 2, what must be the forward rate in year 3?

A. 7.2%

B. 8.6%

C. 8.5%

D. 6.9%

E. none of the above.

Question 6

The term structure of interest rates is:

A. The relationship between the rates of interest on all securities.

B. The relationship between the interest rate on a security and its time to maturity.

C. The relationship between the yield on a bond and its default rate.

D. All of the above.

E. None of the above.

Question 7

The duration of a bond normally increases with an increase in

A. term to maturity.

B. yield to maturity.

C. coupon rate.

D. all of the above.

E. none of the above.

Question 8

The two components of interest-rate risk are

A. price risk and default risk.

B. reinvestment risk and systematic risk.

C. call risk and price risk.

D. price risk and reinvestment risk.

E. none of the above.

Question 9

A 6%, 30-year corporate bond was recently being priced to yield 8%. The Macaulay duration for the bond is 8.4 years. Given this information, the bond's modified duration would be

A. 8.05

B. 9.44

C. 9.27

D. 7.78

E. none of the above

Question 10

Ceteris paribus, the duration of a bond is negatively correlated with the bond's

A. time to maturity.

B. coupon rate.

C. yield to maturity.

D. B and C.

E. none of the above.

Question 11

The duration of a 5-year zero-coupon bond is

A. smaller than 5.

B. larger than 5.

C. equal to 5.

D. equal to that of a 5-year 10% coupon bond.

E. none of the above.

Question 11

Holding other factors constant, which one of the following bonds has the smallest price volatility?

A. Cannot tell from the information given.

B. 7-year, 10% coupon bond

C. 7-year, 12% coupon bond

D. 7 year, 14% coupon bond

E. 7-year, 0% coupon bond