File ch17.rtf Chapter 17 Bond Yields
Type: Multiple Choice
1. How is the value of a bond determined?
a) The present value of the bond’s future cash flows is discounted by one or more appropriate
rate(s).
b) The perpetuity model is used to determine the value of a bond.
c) The present value of the company’s future cash flows is discounted by one or more
appropriate rate(s).
d) The constant growth dividend model is often used to value bonds.
Ans: A
EASY
Response: Section: Bond Prices.
2. Which of the following statements is most correct?
a) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the
shortest term federal securities.
b) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the
longest term federal securities.
c) The real risk-free rate of interest is a rate that has been adjusted to remove the effects of
inflation for some period, while the nominal risk-free rate of interest reflects the rate of inflation
for some period.
d) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the
longest term federal securities, plus a forecast of the rate of inflation for the period of the
securities.
Ans: C
MODERATE
Response: Real rates are inflation adjusted, while nominal rates are not.
Section: Bond Yields and Interest Rates.
3. What is meant by the real risk-free rate of interest?
a) The opportunity cost of foregoing consumption, representing the rate that must be offered to
individuals to persuade them to save rather than consume.
b) The rate actually used in the market, not in textbooks.
c) The rate quoted on short-term Treasury bills.
d) The nominal risk-free interest rate, less the expected inflation.
Ans: A
MODERATE
Response: Section: Bond Yields and Interest Rates
, 4. For most long term bonds, when coupons are reinvested, what is the most important
component of the bond’s total return?
a) Coupon rate.
b) Interest-on-interest.
c) Yield to Maturity
d) Interest-on-principal.
Ans: A
MODERATE
Response: Section: Measuring Bond Yields
5. What is meant by “Yield to Maturity”?
a) The coupon interest rate paid each year, divided by the face value of the bond.
b) The coupon interest rate paid each, divided by the current price of the bond.
c) The periodic interest rate that equates the current price with the expected future flows.
d) The periodic interest rate that equates the current price with the expected future flows, up to
the time of the first call.
Ans: C
MODERATE
Response: Section: Bond Yields and Interest Rates.
6. An investor has three sources of dollar returns from a bond investment. Which of the
following is NOT included among the three sources?
a) The semi-annual coupon payments.
b) The interest earned on reinvesting the coupon payments.
c) The principal paid at maturity.
d) The interest earned on reinvesting the last coupon and the principal.
Ans: D
DIFFICULT
Response: The total dollar return is calculated by adding the funds at the time of maturity, so the
coupon and principal repayment cannot be reinvested. Section: Bond Yields and Interest Rates.
7. Which of the following is a situation in which an investor will NOT receive the promised yield
to maturity?
a) The investor holds the bond until maturity, and reinvests coupon payment at the original yield
to maturity.
b) Interest rates do not change during the life of the bond.
c) The issuer calls the bond prior to original maturity.
d) The realized compound yield is equal to the promised yield to maturity.
Ans: C
DIFFICULT
Response: A call means the issuer is paying back the amount borrowed, plus a call premium,
earlier than the original maturity date. The issuer will choose to do so only if interest rates have
Type: Multiple Choice
1. How is the value of a bond determined?
a) The present value of the bond’s future cash flows is discounted by one or more appropriate
rate(s).
b) The perpetuity model is used to determine the value of a bond.
c) The present value of the company’s future cash flows is discounted by one or more
appropriate rate(s).
d) The constant growth dividend model is often used to value bonds.
Ans: A
EASY
Response: Section: Bond Prices.
2. Which of the following statements is most correct?
a) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the
shortest term federal securities.
b) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the
longest term federal securities.
c) The real risk-free rate of interest is a rate that has been adjusted to remove the effects of
inflation for some period, while the nominal risk-free rate of interest reflects the rate of inflation
for some period.
d) The real risk-free rate of interest is the rate that is shown in the Wall Street Journal for the
longest term federal securities, plus a forecast of the rate of inflation for the period of the
securities.
Ans: C
MODERATE
Response: Real rates are inflation adjusted, while nominal rates are not.
Section: Bond Yields and Interest Rates.
3. What is meant by the real risk-free rate of interest?
a) The opportunity cost of foregoing consumption, representing the rate that must be offered to
individuals to persuade them to save rather than consume.
b) The rate actually used in the market, not in textbooks.
c) The rate quoted on short-term Treasury bills.
d) The nominal risk-free interest rate, less the expected inflation.
Ans: A
MODERATE
Response: Section: Bond Yields and Interest Rates
, 4. For most long term bonds, when coupons are reinvested, what is the most important
component of the bond’s total return?
a) Coupon rate.
b) Interest-on-interest.
c) Yield to Maturity
d) Interest-on-principal.
Ans: A
MODERATE
Response: Section: Measuring Bond Yields
5. What is meant by “Yield to Maturity”?
a) The coupon interest rate paid each year, divided by the face value of the bond.
b) The coupon interest rate paid each, divided by the current price of the bond.
c) The periodic interest rate that equates the current price with the expected future flows.
d) The periodic interest rate that equates the current price with the expected future flows, up to
the time of the first call.
Ans: C
MODERATE
Response: Section: Bond Yields and Interest Rates.
6. An investor has three sources of dollar returns from a bond investment. Which of the
following is NOT included among the three sources?
a) The semi-annual coupon payments.
b) The interest earned on reinvesting the coupon payments.
c) The principal paid at maturity.
d) The interest earned on reinvesting the last coupon and the principal.
Ans: D
DIFFICULT
Response: The total dollar return is calculated by adding the funds at the time of maturity, so the
coupon and principal repayment cannot be reinvested. Section: Bond Yields and Interest Rates.
7. Which of the following is a situation in which an investor will NOT receive the promised yield
to maturity?
a) The investor holds the bond until maturity, and reinvests coupon payment at the original yield
to maturity.
b) Interest rates do not change during the life of the bond.
c) The issuer calls the bond prior to original maturity.
d) The realized compound yield is equal to the promised yield to maturity.
Ans: C
DIFFICULT
Response: A call means the issuer is paying back the amount borrowed, plus a call premium,
earlier than the original maturity date. The issuer will choose to do so only if interest rates have
