Fin 320 Exam 2 Ch. 3 – Flashcards

If interest rates increase, the value of a fixed income contract decreases and vice versa. True False

A bond with an 11 percent coupon and a 9 percent required return will sell at a premium to par. True False

A fairly priced bond with a coupon less than the expected return must sell at a discount from par. True False

The duration of a four-year maturity 10 percent coupon bond is less than four years. True False

The longer the time to maturity, the lower the security's price sensitivity to an interest rate change, ceteris paribus. True False

The greater a security's coupon, the lower the security's price sensitivity to an interest rate change, ceteris paribus. True False

For a given interest rate change, a 20-year bond's price change will be twice that of a 10-year bond's price change. True False

Any security that returns a greater percentage of the price sooner is less price-volatile. True False

A zero coupon bond has a duration equal to its maturity and a convexity equal to zero. True False

The lower the level of interest rates, the greater a bond's price sensitivity to interest rate changes. True False

The higher a bond's coupon, the lower the bond's price volatility. True False

Higher interest rates lead to lower bond convexity, ceteris paribus. True False

A 10-year maturity zero coupon bond will have lower price volatility than a 10-year bond with a 10 percent coupon. True False

Duration is the elasticity of a security's value to small coupon changes. the weighted average time to maturity of the bond's cash flows. the time until the investor recovers the price of the bond in today's dollars. greater than maturity for deep discount bonds and less than maturity for premium bonds. the second derivative of the bond price formula with respect to the YTM.

Which of the following bond terms are generally positively related to bond price volatility? I. Coupon rate II. Maturity III. YTM IV. Payment frequency II and IV only I and III only II and III only II only II, III, and IV only

If an N year security recovered the same percentage of its cost in PV terms each year, the duration would be N. 0. sum of the years/N. N!/N2. none of the options.

The ___________ the coupon and the ______________ the maturity; the __________ the duration of a bond, ceteris paribus. larger; longer; longer larger; longer; shorter smaller; shorter; longer smaller; shorter; shorter None of the options presented

A decrease in interest rates will decrease the bond's PV. increase the bond's duration. lower the bond's coupon rate. change the bond's payment frequency. not affect the bond's duration.

Convexity arises because bonds pay interest semiannually. coupon changes are the opposite sign of interest rate changes. duration is an increasing function of maturity. present values are a nonlinear function of interest rates. duration increases at higher interest rates.

For large interest rate increases, duration _____________ the fall in security prices, and for large interest rate decreases, duration ______________ the rise in security prices. overpredicts; overpredicts overpredicts; underpredicts underpredicts; overpredicts underpredicts; underpredicts None of the options presented