finance data bank

8.2 Dynamic Behavior of Bond Prices

7)

Which of the following statements is false?

A)

When a bond is trading at a discount, the price drop when a coupon is paid will be larger than the price increase between coupons, so the bond's discount will tend to decline as time passes.

B)

When a bond trades at a price equal to its face value, it is said to trade at par.

C)

As interest rates and bond yield rise, bond prices will fall.

D)

Ultimately, the prices of all bonds approach the bond's face value when the bonds mature and their last coupon are paid.

8)

Which of the following statements is false?

A)

A bond trades at par when its coupon rate is equal to its yield to maturity.

B)

The clean price of a bond is adjusted for accrued interest.

C)

The price of the bond will drop by the amount of the coupon immediately after the coupon is paid.

D)

If a coupon bond's yield to maturity exceeds its coupon rate, the present value of its cash flows at the yield to maturity will be greater than its face value.

9)

Which of the following formulas is incorrect?

A)

Invoice price= dirty price

B)

Clean price= dirty price- accrued interest

C)

Accrued interest= coupon amount×

D)

Cash price= clean price+ accrued interest

10)

Which of the following statements is false?

A)

Prices of bonds with lower durations are more sensitive to interest rate changes.

B)

When a bond is trading at a discount, the price increase between coupons will exceed the drop when a coupon is paid, so the bond’s price will rise and its discount will decline as time passes.

C)

Coupon bonds may trade at a discount, at a premium, or at par.

D)

The sensitivity of a bond's price changes in interest rates is the bond's duration.

WS3)

Consider a zero coupon bond with 20 years to maturity. The amount that the price of the bond will change if its yield to maturity decreases from 7% to 5% is closest to:

A)

$120

B)

-$53

C)

$53

D)

$673

Consider the following four bonds that pay annual coupons:

Bond	Years to maturity	Coupon	YTM
A	1	0%	5%
B	5	6%	7%
C	10	10%	9%
D	20	0%	8%

11)

Which of the four bonds is the most sensitive to a one percent increase in the YTM?

A)

Bond A

B)

Bond B

C)

Bond C

D)

Bond D

12)

Which of the four bonds is the least sensitive to a one percent increase in the YTM?

A)

Bond A

B)

Bond B

C)

Bond C

D)

Bond D

WS4)

Consider a corporate bond with a $1000 face value, 8% coupon with semiannual coupon payments, 7 years until maturity, and a YTM of 9%. It has been 57 days since the last coupon payment was made and there are 182 days in the current coupon period. The dirty (cash) price for this bond is closest to:

A)

$949.70

B)

$961.40

C)

$936.40

D)

$948.90

13)

Consider a corporate bond with a $1000 face value, 10% coupon with semiannual coupon payments, 5 years until maturity, and currently is selling for (has a cash price of) $1,113.80. The next coupon payment will be made in 63 days and there are 182 days in the current coupon period. The clean price for this bond is closest to:

A)

$1146.50

B)

$1065.70

C)

$1113.80

D)

$1081.10

Use the table for the question(s) below.

Consider the following four bonds that pay annual coupons:

Bond	Years to maturity	Coupon	YTM
A	1	0%	5%
B	5	6%	7%
C	10	10%	9%
D	20	0%	8%

14)

Assume that the YTM increases by 1% for each of the four bonds listed. Rank the bonds based upon the sensitivity of their prices from least to most sensitive.

8.3 The Yield Curve and Bond Arbitrage

15)

Which of the following statements is false?

A)

We can use the law of one price to compute the price of a coupon bond from the prices of zero-coupon bonds.

B)

The plot of the yields of coupon bonds of different maturities is called the coupon-paying yield curve.

C)

It is possible to replicate the cash flows of a coupon bond using zero-coupon bonds.

D)

Because the coupon bond provides cash flows at different points in time, the yield to maturity of a coupon bond is the simple average of the yields of the zero-coupon bonds of equal and shorter maturities.