The correct answer for each question is indicated by a .

1

If the nominal interest rate is 8% per year and the expected inflation rate is 3% per year, calculate the real rate of interest:

A)

8%

B)

5%

C)

2.86%

D)

4.85%

2

A 5-year bond with 6% coupon rate and $1000 face value is selling for $852.10. Calculate the yield to maturity of the bond. (Assume annual interest payments.)

A)

9.23%

B)

4.91%

C)

8.78%

D)

9.89%

3

Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of 6%, and three years to maturity. This bond's duration is:

A)

2.6 years

B)

2.8 years

C)

3.0 years

D)

3.2 years

4

The term structure of interest rates can be described as the:

A)

Relationship between the spot interest rates and the bond prices

B)

Relationship between spot interest rates and stock prices

C)

Relationship between spot interest rates and maturity of a bond

D)

None of the above

5

Comparing a 1-year bond and a 5-year bond, which will experience a larger price change in price if interests rate rise? Assume equivalent risk and identical coupons.

A)

1 year bond

B)

5 year bond

C)

Both will change equally

D)

More information is needed to answer this question.

6

The expectations theory states that the forward interest rate is the:

A)

Expected future spot rate

B)

Always greater than the spot rate

C)

Yield to maturity

D)

None of the above

7

If the yield to maturity is higher than the coupon rate, the bond price will be

A)

Below par

B)

Above par

C)

At par

D)

Cannot be determined

8

Duration tells you

A)

When you receive the final payment

B)

When you receive the first payment

C)

The average time to each payment

D)

The average change in interest rates

9

The bid price is:

A)

The price investors receive if they sell the bond

B)

The price investors need to buy a bond

C)

The profit the dealer makes when selling a bond

D)

Both A and B are correct

10

Which of the following statements is most consistent with expectations theory?

A)

If short-term rates are equal to long-term rates, then investors must be expecting short-term rates to rise.

B)

If short-term rates are higher than long-term rates, then investors must be expecting short-term rates to rise.

C)

If short-term rates are lower than long-term rates, then investors must be expecting short-term rates to rise.

D)

None of the above

11

A 5 year $1,000 par value bond pays a 6.50% annual coupon. Given a YTM of 8.0%, what is the price of the bond today?

A)

$780

B)

$860

C)

$940

D)

$1000

12

What is the expected YTM on a bond that pays a $15 coupon annually has a $1,000 par value, and matures in 6 years if the current price of the bond is $978?

A)

1.89%

B)

3.67%

C)

9.78%

D)

15.00%

13

Volatility is ________ at lower interest rates, and _________ at higher interest rates.

A)

higher, lower

B)

lower, higher

C)

unchanged, lower

D)

higher, unchanged

14

The value of any bond is equal to

A)

The cash payments discounted at the forward rates.

B)

The cash payments discounted at the spot rates.

C)

The cash payments discounted at the duration rates.

D)

The par value discounted at the spot rates.

15

Duration of a pure discount bond is:

A)

Equal to its half-life

B)

Less than a zero coupon bond

C)

Equal to its liabilities hedged

D)

Equal to its maturity

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