#1
Which of the following is used to calculate the present value of future cash flows from a bond?
Yield to Maturity
ExplanationYield to Maturity calculates bond's present value.
#2
A bond with a higher coupon rate will generally have:
Lower price and lower interest rate risk
ExplanationHigher coupon bond implies lower price and risk.
#3
Which term refers to the interest rate that investors demand for investing in a bond?
Yield to Maturity
ExplanationYield to Maturity is the demanded interest rate.
#4
What does the term 'par value' represent for a bond?
The face value of the bond
ExplanationPar value represents bond's face value.
#5
What is the primary risk associated with investing in bonds?
Credit risk
ExplanationPrimary risk is credit risk in bonds.
#6
What is the term used to describe the risk that an issuer will fail to make timely payments of interest and principal?
Credit risk
ExplanationFailure to pay interest/principal is credit risk.
#7
Which of the following bond types carries the highest interest rate risk?
Long-term bonds
ExplanationLong-term bonds carry highest interest rate risk.
#8
What is the relationship between bond prices and interest rates?
Bond prices and interest rates move inversely
ExplanationBond prices move opposite to interest rates.
#9
What is the formula to calculate the price of a bond?
Present Value of Coupons + Present Value of Face Value
ExplanationBond price = Present Value of Coupons + Present Value of Face Value.
#10
If a bond's yield to maturity is higher than its coupon rate, what is likely true about its price?
It will be at a discount
ExplanationBond likely trades at a discount.
#11
What is the impact of a credit rating downgrade on bond prices?
Bond prices decrease
ExplanationBond prices decrease due to credit rating downgrade.
#12
Which bond valuation method assumes that all future cash flows from the bond will be reinvested at the yield to maturity?
Yield to Maturity (YTM)
ExplanationYield to Maturity assumes reinvestment at YTM.
#13
Duration is a measure of a bond's:
Sensitivity to changes in interest rates
ExplanationDuration measures bond's interest rate sensitivity.
#14
What does a higher duration indicate about a bond's sensitivity to interest rate changes?
Higher sensitivity
ExplanationHigher duration implies higher sensitivity to rate changes.
#15
What does a bond's convexity measure?
The curvature of its price-yield relationship
ExplanationConvexity measures bond's price-yield curve curvature.
#16
What is the primary factor that determines a bond's coupon rate?
The issuer's cost of debt
ExplanationCoupon rate determined by issuer's cost of debt.
#17
What does a negative convexity imply for a bond?
Lower price sensitivity to interest rate changes
ExplanationNegative convexity means lower price sensitivity.
#18
What is the primary purpose of using duration as a measure of interest rate sensitivity?
To estimate the bond's price change in response to interest rate changes
ExplanationDuration estimates bond price change due to rate changes.