Final Ch 17

Question 1

Basis Point

Answer 1

One one‐hundredth of a percentage point

Question 2

Term Structure of Interest Rates

Answer 2

The relationship between time to maturity and

yield for a particular category of bonds

Question 3

Yield Curve

Answer 3

A graphical depiction of term structure of interest

rates

Question 4

Expectations Theory (of the Term Structure)

Answer 4

The return to a longer‐maturity bond is equal to
the average of the expected returns to one‐year
bonds

Question 5

Liquidity Preference Theory (of the Term

Structure)

Answer 5

Long‐term bonds should offer a higher yield since
investors require a liquidity premium to lend long
term.

Question 6

Yield spreads

Answer 6

The relationship between bond yields and the

particular features of various bonds

Question 7

Premium Bond

Answer 7

A bond selling for more than its face value

Question 8

Discount Bond

Answer 8

A bond selling for less than its face value

Question 9

Yield to Maturity

Answer 9

The promised compounded rate of return on a
bond purchased at the current market price and
held to maturity.

Question 10

Bond‐Equivalent Yield

Answer 10

Yield on an annual basis derived by doubling the

semiannual yield.

Question 11

Realized Compound Yield

Answer 11

Yield earned based on actual reinvestment rates

Question 12

Yield to Call

Answer 12

The promised return on a bond from the present

to the date that the bond is likely to be called.

Question 13

Reinvestment Rate Risk

Answer 13

Risk resulting from uncertainty about the rate at

which future interest coupons can be reinvested.

Question 14

Price Risk

Answer 14

The part of interest rate risk resulting from
uncertainty about what the bond can be sold for in
the future

Question 15

Forward Rates

Answer 15

Rates that are expected to prevail in the future.

Unobservable but anticipated future bond rates

Question 16

Bond Ladder

Answer 16

Purchase bonds with different maturity dates to

partially protect against interest rate risk.

Question 17

Duration

Answer 17

The average time that cash flows are paid over the
life of the bond calculated as the present‐value
weighted average of the timing of the payments

Question 18

Relationship between bond prices and interest

rates.

Answer 18

Bond prices move inversely to interest rates.

Question 19

Relationship between bond price movements and

maturity.

Answer 19

For a given change in market yields, changes in
bond prices are directly related to time to
maturity. Therefore, long‐term bond prices
fluctuate more that short‐term bond prices.

Question 20

Relationship between bond price volatility and

coupons.

Answer 20

Bond price fluctuations (volatility) and bond

coupon rates are inversely related.