Bonds and their valuation (Difficulty: e = Easy, m = Medium, and t = Tough) Multiple Choice: Conceptual



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CHAPTER 7

BONDS AND THEIR VALUATION
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Interest rates Answer: e Diff: E

1. One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the the time to maturity, the the change in price.
a. longer; smaller.

b. shorter; larger.

c. longer; greater.

d. shorter; smaller.

e. Statements c and d are correct.
Interest rates and bond prices Answer: c Diff: E

2. Assume that a 10-year Treasury bond has a 12 percent annual coupon, while a 15-year Treasury bond has an 8 percent annual coupon. The yield curve is flat; all Treasury securities have a 10 percent yield to maturity. Which of the following statements is most correct?
a. The 10-year bond is selling at a discount, while the 15-year bond is selling at a premium.

b. The 10-year bond is selling at a premium, while the 15-year bond is selling at par.

c. If interest rates decline, the price of both bonds will increase, but the 15-year bond will have a larger percentage increase in price.

d. If the yield to maturity on both bonds remains at 10 percent over the next year, the price of the 10-year bond will increase, but the price of the 15-year bond will fall.

e. Statements c and d are correct.


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