Investments & Portfolio Management

Quiz 4 [Final Term] Time: 30 minutes Total Marks: 20

Name _____________________________ ID ________________ Sec:_______

1. The annual interest paid on a bond relative to its prevailing market price is called its _____________. a) Promised yield b) Yield to maturity c) Coupon rate d) Effective yield e) Current yield 2. The term structure of interest rates is a static function that relates the a) Term to call and the yield to maturity. c) Term to call and the yield to call. b) Term to maturity and the yield to maturity. d) Term to maturity and the coupon rate.

3. Consider a 15%, 20 year bond that pays interest annually, and its current price is $850. What is the promised yield to maturity? a) 10.23% b) 18.45% c) 2.31% d) 17.77% e) 9.26% 4. Consider a bond with a 9% coupon and a current yield of 8 1/2%. What is this bonds price? a) $1058.82 b) $1009.00 c) $1085.00 d) $1062.44 e) $1077.96 5. Suppose you have a 12%, 20 year bond traded at $850. If it is callable in 5 years at $1,100, what is the bonds yield to call? Interest is paid semiannually. a) 8% b) 9.0% c) 18.0% d) 9.4% e) 16.5% 6. Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is 10 percent and interest is paid semiannually. a) 1.35 years b) 1.78 years c) 2.50 years d) 2.78 years e) 2.95 years 7. A 12-year, 8 percent bond with YTM of 12 percent has Macaulay duration of 9.5 years. If interest rates decline by 50 basis points, what will be the percent change in price for this bond? a) +4.48% b) +4.61% c) +8.48% d) +8.96% e) +17.92% 8. Consider a bond with a duration of 7 years having a yield to maturity of 7% and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond? a) 3.62% b) 3.45% c) -3.38% d) 3.38% e) -3.62% 9. If the price before yields changed was $925, what is the resulting price? b) $918.66 c) $889.11 d) $1000.00 e) $1012.45

a) $865.22

10. Assume that you purchase a 10-year $1,000 par value bond, with a 12% coupon, and a yield of 9%. Immediately after you purchase the bond, yields fall to 8% and remain at that level to maturity. Calculate the realized horizon yield, if you hold the bond for 5 years and then sell. Interest is paid annually. a) 16.25% b) 12.15% c) 7.75% d) 10.05% d) 9.34%

Problem: A $1000 par value bond with 5 years to maturity and a 6% coupon has a yield to maturity of 8%. Interest is paid semiannually. a. b. c. d. Calculate the current price of the bond. Calculate the Macaulay duration for the bond Calculate the modified duration for the bond Estimate the percentage price change for this 5-year $1,000 par value bond, with a 6% coupon, if the yield rises from 8% to 8.5%. Interest is paid semiannually.

Answer: 1. E 2. B 3. D 4. A 5. C 6. D 7. a 8. c 9. c 10. e