FMI Chapter 5 Bond market

The appropriate discount rate for valuing any bond is the

• bond's coupon rate.

• bond's coupon rate adjusted for the expected inflation rate over the life of the bond.

• yield that could be earned on alternative investments with similar risk and maturity.

• Treasury bill rate with an adjustment to include a risk premium if one exists.

The valuation of bonds is generally perceived to be ____ the valuation of equity securities.

• easier than

• just as difficult as

• more difficult than

• none of the above

The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value.

• discount rate; required rate of return; discount

• required rate of return; discount rate; premium

• required rate of return; discount rate; discount

• none of the above

As interest rates increase, long-term bond prices

• increase by a greater degree than short-term bond prices.

• decrease by a greater degree than short-term bond prices.

• increase by an equal degree as short-term bond prices.

• decrease by an equal degree as short-term bond prices.

The prices of bonds with ____ are most sensitive to interest rate movements.

• high coupon payments

• zero coupon payments

• small coupon payments

• none of the above

A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.

• increase; upward

• increase; downward

• decrease; downward

• none of the above

The prices of ____-coupon and ____ maturities are most sensitive to changes in the required rate of return.

• low; short

• high; short

• low; long

• high; long

The price of short-term bonds are commonly ____ those of long-term bonds.

• more volatile than

• less volatile than

• equally volatile as

• A and B occur with about equal frequency

Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

• above; above

• above; below

• below; below

• below; above

If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

• increase; increase

• decrease; decrease

• increase; decrease

• decrease; increase