#1
What does the term 'Yield to Maturity (YTM)' refer to in bond valuation?
The interest rate at which the present value of a bond's cash flows equals its current market price.
ExplanationYTM is the rate making the bond's present value equal to its market price.
#2
What happens to the price of a bond when its yield to maturity (YTM) increases?
The bond's price decreases.
ExplanationBond price decreases with an increase in YTM.
#3
Which of the following bond types pays no periodic interest?
Zero-coupon bond
ExplanationZero-coupon bonds don't pay periodic interest but are sold at a discount.
#4
What is the relationship between bond prices and interest rates?
Bond prices and interest rates move inversely.
ExplanationInverse relationship between bond prices and interest rates.
#5
What does a bond's coupon rate represent?
The interest rate at which the bond pays interest.
ExplanationCoupon rate signifies bond's interest payment rate.
#6
Which of the following formulas is used to calculate the price of a bond?
PV = C / (1 + r)^n
ExplanationPresent Value formula for bond pricing.
#7
Which of the following factors affects the sensitivity of bond prices to changes in interest rates?
All of the above
ExplanationVarious factors contribute to bond price sensitivity to interest rate changes.
#8
How does the market price of a bond typically compare to its face value when interest rates rise above the bond's coupon rate?
Market price is lower than face value
ExplanationMarket price falls below face value when interest rates exceed the coupon rate.
#9
What is the term used to describe the total return an investor earns on a bond, including both coupon payments and any capital gains or losses?
Total return
ExplanationTotal return encompasses all earnings from a bond.
#10
Which bond valuation method discounts future cash flows at the discount rate that reflects the riskiness of the cash flows?
Discounted cash flow (DCF)
ExplanationDCF evaluates bonds based on risk-adjusted cash flows.
#11
What is the primary risk associated with investing in zero-coupon bonds?
Interest rate risk
ExplanationZero-coupon bonds are highly sensitive to interest rate fluctuations.
#12
What does the term 'bond duration' refer to?
The weighted average time it takes for a bond's cash flows to be received
ExplanationDuration measures bond's cash flow timing.
#13
When does a bond sell at a premium?
When its coupon rate is higher than the market interest rate
ExplanationPremium occurs when coupon rate exceeds market rate.
#14
What is the duration of a perpetuity?
Indefinite
ExplanationPerpetuity's duration is infinite.
#15
Which term describes the increase in a bond's value as it approaches its maturity date?
Accretion
ExplanationAccretion refers to the increase in bond value approaching maturity.