Homework answers / question archive / Question 1 5 / 5 pts A measurement for the difference between the risks of any two bonds is:    Normal yield curve     The difference between the pretax and after-tax yield for the bond     Inverted yield curve     Yield spread     Question 2 5 / 5 pts There are two characteristics of an option-free bond that determine its price volatility are coupon and term to maturity

Question 1 5 / 5 pts A measurement for the difference between the risks of any two bonds is:    Normal yield curve     The difference between the pretax and after-tax yield for the bond     Inverted yield curve     Yield spread     Question 2 5 / 5 pts There are two characteristics of an option-free bond that determine its price volatility are coupon and term to maturity

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Question 1

5 / 5 pts

A measurement for the difference between the risks of any two bonds is:

  

Normal yield curve

   

The difference between the pretax and after-tax yield for the bond

   

Inverted yield curve

   

Yield spread

 

 

Question 2

5 / 5 pts

There are two characteristics of an option-free bond that determine its price volatility are coupon and term to maturity. Which of the following is true for a given term to maturity and initial yield?

  

The price volatility of a bond is independent of coupon and term to maturity

   

The price volatility of a bond is lower as the term to maturity becomes greater

   

The price volatility of a bond is lower as the coupon rate becomes lower

   

The price volatility of a bond is greater as the coupon rate becomes lower

 

 

IncorrectQuestion 3

0 / 5 pts

A bond has a Macaulay duration in half years of 9.7059 a Macaulay duration annualized (years) of 4.8529, and a modified dollar duration of 4.6640. If the market yield increases from 9% to 9.1%, what is the bonds percent price change?

  

(0.48529)%

   

(0.4644)%

   

0.48529%

   

0.4644%

 

 

Question 4

5 / 5 pts

The price yield relationship graph shows the graphical relationship between duration and convexity. What does this graph show about convexity and duration?

  

Both duration and convexity are straight lines

   

Both duration and convexity are curved lines

   

Duration is a curve line and convexity is a straight line

   

Duration is a straight line and convexity is a curve line

 

 

IncorrectQuestion 5

0 / 5 pts

A bond has a convexity measure in half years of 830.000. What is the percentage price change due to convexity for a 200 basis point change in the market’s required yield?

  

4.84%

   

4.00%

  

4.15%

   

3.84%

 

IncorrectQuestion 6

0 / 5 pts

Patel Inc. has two alternatives for one-year investments.
Alternative 1 is buy a one-year investment at the one-year spot rate which is known with certainty.
Alternative 2 is buy a six-month bond and, when it matures in six months, buy another six-month bond. The first six-month spot rate is known with certainty, but the second six-month rate is unknown.

 
The following table shows theoretical spot rates:
 
Patel calculates the second six-month forward rate in which Patel would be indifferent between the two alternative investments to be 6.35%.

 
Patel has a trusted bond dealer that, in six months, will sell Patel a second six-month bond yielding 6.30%. What investment should Patel make?

  

Invest in the first six-month bond yielding 6.00%. In six months invest in the dealer’s second six-month bond yielding 6.30% because this yield is higher than the current spot rate that is known with certainty of 6.00%.

  

Invest in the one year bond yielding 6.25%.

   

Invest in the first six-month bond yielding 6.00%. In six months invest in a bond with the expected future yield of 6.35% because this yield is higher than the markets expected future current spot rate of 6.25%.

   

Invest in the first six-month bond yielding 6.00%. In six months invest in the dealer’s second six-month bond yielding 6.30% because this yield is higher than the markets expected future current spot rate of 6.25%.

 

IncorrectQuestion 7

0 / 5 pts

Using the yield curve to price a bond is:

  

Less accurate because this process uses one interest rate to calculate the present value of the bond’s future cash flows

  

The second step in bond pricing following the duration or convexity curve to calculate the present value of the bond’s future cash flows

  

Not used in practice to price a bond

   

More accurate because this process uses one interest rate to calculate the present value of the bond’s future cash flows

 

IncorrectQuestion 8

0 / 5 pts

Patel Inc. has two alternatives for one-year investments.
Alternative 1 is buy a one-year investment at the one-year spot rate which is known with certainty.
Alternative 2 is buy a six-month bond and, when it matures in six months, buy another six-month bond. The first six-month spot rate is known with certainty, but the second six-month rate is unknown.

 
The following table shows theoretical spot rates:
 
Calculate the second six-month forward rate in which Patel would be indifferent between the two alternative investments.

  

6.75%

   

6.00%

  

6.25%

  

6.50%

 

 

Question 9

5 / 5 pts

The term structure of interest rates is best defined as

  

The economic graph showing the intersection of bond supply and demand

   

The maturity curve showing the graphical relationship between duration and maturity

   

The price curve showing the graphical relationship between duration and convexity

   

The yield curve showing the graphical relationship between yield and maturity

 

 

IncorrectQuestion 10

0 / 5 pts

A 9%, 6-year bond duration table calculation produced the following results:


  If the market yield increases from 9% to 9.1%, what is the bonds dollar price change?

  

$(0.90)

   

$(0.80)

   

$0.80

   

$0.90