Chapter 8 Bond Valuation and Risk 325 Chapter 8 Bond Valuation and Risk 1 The appropriate discount rate for valuing any bond is the A bond s coupon rate B bond s coupon rate adjusted for the expected inflation rate over the life of the bond C Treasury bill rate with an adjustment to include a risk premium if one exists D yield that could be earned on alternative investments with similar risk and maturity ANSWER D 2 The valuation of bonds is generally perceived to be the valuation of equity securities A harder than B easier than C just as difficult as D none of these ANSWER B 3 A bond with a 1 000 par value has an 8 percent annual coupon rate It will mature in 4 years and annual coupon payments are made at the end of each year Present annual yields on similar bonds are 6 percent What should be the current price A 1 069 31 B 1 000 00 C 97 12 D 927 66 E none of these ANSWER A 4 A bond with a ten percent coupon rate bond pays interest semi annually Par value is 1 000 The bond has three years to maturity The investors required rate of return is 12 percent What is the present value of the bond A 1 021 B 1 000 C 981 D 951 E none of these ANSWER D 326 Chapter 8 Bond Valuation and Risk 5 A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent The bond has a par value of 1 000 and matures in 20 years Based on this information a fair price of this bond is A 1 302 B 763 C 761 D 1 299 ANSWER C 6 From the perspective of investing institutions the most attractive foreign bonds offer a and are denominated in a currency that over the investment horizon A high yield appreciates B high yield remains stable C low yield appreciates D low yield depreciates ANSWER A 7 The value of risk securities will be relatively A high high B high low C low low D none of these ANSWER B 8 The larger the investor s relative to the the larger the of a bond with a particular par value A discount rate required rate of return discount B required rate of return discount rate discount C required rate of return discount rate premium D none of these ANSWER B 9 If the coupon rate equals the required rate of return the price of the bond A should be above its par value B should be below its par value C should be equal to its par value D is negligible ANSWER C Chapter 8 Bond Valuation and Risk 327 10 For a given par value of a bond the higher the investor s required rate of return is above the coupon rate the A greater is the premium on the price B greater is the discount on the price C smaller is the premium on the price D smaller is the discount on the price ANSWER B 11 Zero coupon bonds with a par value of 1 000 000 have a maturity of 10 years and a required rate of return of 9 percent What is the current price A 363 212 B 385 500 C 422 400 D 424 100 E none of these ANSWER C 12 If the coupon rate the required rate of return the price of a bond par value A equals equals B exceeds is less than C is less than is greater than D exceeds equals E none of these ANSWER A 13 As interest rates increase long term bond prices A increase by a greater degree than short term bond prices B increase by an equal degree as short term bond prices C decrease by a greater degree than short term bond prices D decrease by an equal degree as short term bond prices E decrease by a smaller degree than short term bond prices ANSWER C 14 The prices of bonds with are most sensitive to interest rate movements A high coupon payments B zero coupon payments C small coupon payments D none of these The size of the coupon payment does not affect sensitivity of bond prices to interest rate movements ANSWER B 328 Chapter 8 Bond Valuation and Risk 15 A n in the expected level of inflation results in pressure on bond prices A increase upward B increase downward C decrease downward D none of these ANSWER B 16 An expected in economic growth places pressure on bond prices A increase downward B increase upward C decrease downward D none of these ANSWER A 17 Assume that the price of a 1 000 zero coupon bond with five years to maturity is 567 when the required rate of return is 12 percent If the required rate of return suddenly changes to 15 percent what is the price elasticity of the bond A 980 B 980 C 494 D 494 E none of these ANSWER C 18 If a financial institution s bond portfolio contains a relatively large portion of it will be A high coupon bonds more favorably affected by declining interest rates B zero or low coupon bonds more favorably affected by declining interest rates C zero or low coupon bonds more favorably affected by rising interest rates D high coupon bonds completely insulated from rising interest rates ANSWER B 19 The prices of coupon and maturities are most sensitive to changes in the required rate of return A low short B low long C high short D high long ANSWER B Chapter 8 Bond Valuation and Risk 329 20 An insurance company purchases corporate bonds in the secondary market with six years to maturity Total par value is 55 million The coupon rate is 11 percent with annual interest payments If the expected required rate of return in 4 years is 9 percent what will the market value of the bonds be then A 52 115 093 B 55 341 216 C 55 000 000 D 56 935 022 ANSWER D 21 A 1 000 par bond with five years to maturity is currently priced at 892 Annual interest payments are 90 What is the yield to maturity A 13 percent B 12 percent C 11 percent D 10 percent ANSWER B 22 A bank buys bonds with a par value of 25 million for 24 040 000 The coupon rate is 10 percent and the bonds pay annual payments The bonds mature in four years The bank wants to sell them in two years and estimates the required rate of return in two years will be 8 percent What will the market value of the bonds be in two years A 24 113 418 B 24 667 230 C 25 000 000 D 25 891 632 ANSWER D 23 The price of short term bonds are commonly those of long term bonds A more volatile than B equally volatile as C less volatile than D both more volatile than and less volatile than ANSWER C 24 Assume that …