10.10: Multiple Choice

1.

When solving bond problems relating to a bond that pays interest on a quarterly basis, the ________ before being applied.

1. quoted annual yield to maturity should be multiplied by 4
2. quoted number of years until maturity should be divided by 4
3. quoted annual coupon payments should be divided by 4
4. stated face value should be divided by 4

2.

Which of the following is NOT an adjustment that must be made when interest is paid semiannually instead of annually?

1. Dividing the annual coupon payment by 2
2. Dividing the annual interest rate by 2
3. Dividing the total number of years by 2
4. Dividing the annual yield to maturity by 2

3.

Which of the following is NOT considered a factor that influences a bondholder’s required rate of return?

1. Financial risk
2. Other investments by the bondholder
3. Risk premium
4. Business risk

4.

How might an investment in a bond fund be affected by a decline in interest rates?

1. The fund investment would not be affected.
2. The fund investment would likely decrease in value.
3. The fund investment would likely increase in value.
4. Coupon payments from bonds in the fund would decline.

5.

Interest rates and bond prices ________.

1. are unrelated
2. have an inverse relationship
3. have a direct relationship
4. are both economic factors set by central banks

6.

The coupon rate of a bond is typically ________.

1. fixed at the time of bond issuance
2. subject to change based on the federal funds rate
3. zero in the case of zero-coupon bonds
4. Both A and C

7.

A zero-coupon bond is a bond that ________.

1. has no value
2. has no periodic coupon payments
3. has been rated below investment grade
4. Both A and C

8.

A bond that has a coupon rate less than prevailing interest rates will ________.

1. sell at par value
2. sell at a discount
3. sell at a premium
4. be overpriced

9.

Determining bond prices often involves using which two TVM (time value of money) equations?

1. The future value of a lump sum and the present value of a lump sum
2. The present value of an annuity and the future value of a lump sum
3. The future value of an annuity and the present value of a lump sum
4. None of the above

10.

A normal yield curve will ________.

1. slope downward as it moves along its x-axis (term).
2. slope upward as it moves along its x-axis (yield).
3. fluctuate depending on the federal funds rate
4. slope upward as it moves along its x-axis (term).

11.

An inverted yield curve is an indication that ________.

1. long-term yields and interest rates are higher than short-term rates
2. the economy is in the process of a significant recovery
3. short-term yields and interest rates are higher than long-term rates
4. the yields to maturity on all bonds are less than market interest rates

12.

Bond laddering is ________.

1. a risky bond investment strategy that may yield tremendous returns
2. a strategy in which bonds with several different maturity periods are added to a portfolio
3. a strategy that involves replacing equity investments with bonds in a portfolio
4. a bond strategy that sacrifices diversity for potential capital gains

13.

A call feature ________.

1. is desirable to an investor
2. may cause additional risk for the bond issuer
3. may cause additional risk for an investor
4. Both A and B

14.

The duration of a bond is ________.

1. a measurement of the bond’s overall risk
2. synonymous with the bond’s term
3. a measurement of how long an investor holds the bond
4. a measurement of the bond’s sensitivity to interest rate changes