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Exam 3: Interest Rates and Security Valuation

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Question 21

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

A) True
B) False

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Question 22

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

A) True
B) False

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Question 23

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

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

The duration of a 180-day T-Bill is (in years)

An investor is considering purchasing a Treasury bond with a 16-year maturity,a 6 percent coupon and a 7 percent required rate of return. The bond pays interest semiannually. a. What is the bond's modified duration? b. If annual promised yields decrease 30 basis points immediately after the purchase,what is the predicted price change in dollars based on the bond's duration?

A corporate bond returns 12 percent of its cost (in PV terms) in the first year,11 percent in the second year,10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years?

If an N year security recovered the same percentage of its cost in PV terms each year,the duration would be

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

You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was your annual compound rate of return?

At equilibrium,a security's required rate of return will be less than its expected rate of return.

You would want to purchase a security if P ____________ PV or E(r) ____________ r.

Is the realized rate of return related to the expected return? the required return? Explain.

A six-year maturity bond has a five-year duration. Over the next year maturity will decline by one year and duration will decline by

All else equal,the holder of a fairly priced premium bond must expect a capital loss over the holding period.

How does an increase in interest rates affect a security's duration?

The ___________ the coupon and the ______________ the maturity; the __________ the duration of a bond,ceteris paribus.

The interest rate used to find the present value of a financial security is the

A bond that you held to maturity had a realized return of 8 percent,but when you bought it,it had an expected return of 6 percent. If no default occurred,which one of the following must be true?

Duration is