Topic Quiz 7 Flashcards
What interest rates lie on the pure yield curve?
a. Zero coupon bond yields
b. Forward yields
c. Yield to maturity
d. Expected yields
a. Zero coupon bond yields
Which of the following occurs when a bond is trading at a yield that is greater than the bond’s coupon rate?
a. The bond’s price will decrease.
b. The bond’s price will increase.
c. The bond’s price will be less than its face value.
d. The bond’s price will be greater than its face value.
c. The bond’s price will be less than its face value.
When calculating the yield to maturity is is assumed that:
a. The pure yield curve does not exist.
b. The pure yield curve is flat.
c. The pure yield curve has an inverse shape.
d. The pure yield curve has a normal shape.
b. The pure yield curve is flat.
How does the liquidity preference theory explain the normal shape of a yield curve?
a. Longer term bonds require a greater return in compensation for their lower liquidity.
b. Short term yields tend to be lower in recession periods.
c. You cannot hold onto a short term bond until it matures.
d. It reflects changes in the business cycle.
a. Longer term bonds require a greater return in compensation for their lower liquidity.
What is the name of the theory that assumes investors and issuers of bonds only invest in or issue bonds that have specific maturities?
a. The preferred habitat theory
b. The liquidity preference theory
c. The market segmentation theory
d. The expectations theory
c. The market segmentation theory
Are the following statement true or false?
a. The trading yield on a coupon paying bond will be its internal rate of return.
b. Zero coupon paying bonds will trade at a discount to their face value.
c. The yield to maturity of a semi-annual coupon paying bond can be different each six-months time period.
a. The trading yield on a coupon paying bond will be its internal rate of return. (TRUE)
Trading Yield = YTM
b. Zero coupon paying bonds will trade at a discount to their face value. (TRUE)
c. The yield to maturity of a semi-annual coupon paying bond can be different each six-months time period. (FALSE)
YTM covers all coupons and remains the same.
What risk is a bond portfolio subject to when interest rates changes?
a. Term risk
b. Holding period risk.
c. Price risk.
c. Price risk.
No such thing as Holding Period Risk.
Why might forward yields be different to expected future short rates?
a. Short-term investors are more sensitive to change in the yield curve.
b. Some investors mainly trade in short-term interest rate securities and have some investors mainly trade in long term interest rate securities.
c. Yield curves typically have a normal shape.
a. Short-term investors are more sensitive to change in the yield curve. (FALSE)
b. Some investors mainly trade in short-term interest rate securities and have some investors mainly trade in long term interest rate securities. (TRUE)
c. Yield curves typically have a normal shape. (Correct but doesn’t answer question).
The expectations theory argues that:
a. investors require a premium to invest in longer-term bonds.
b. forward yields are the future short rates expected by the market.
c. Investors have specific needs and invest in specific maturities.
b. forward yields are the future short rates expected by the market.
What would be the price of a bond with a YTM of zero?
Sum of the its coupons and Face Value.
What is a par bond?
What does a credit spread measure?
Are bonds priced using ZCB yields or yield to maturity?
How is the preferred habitat theory different from the market segmentation theory?
Market Segmentation Theory (MST) indicate that different bond issuers have specific funding needs and only issue at specific maturities and similarly investors also have specific needs and invest in specific maturities. Noting this, the MST indicate that markets are largely segmented by maturity.
Preferred Habitat Theory (PHT) is a variation of the MST. PHT indicate that while investors and borrowers have a preferred specific maturity (i.e. a preferred term) they are willing to switch to another term if they are compensated with a higher yield. PHT explains why bond yields move up and down together in parallel fashion.
Would investors be more interested in the yield to call or yield to maturity of a callable bond that is trading at a deep discount?
A deep discount is when the bond’s price is a lot smaller than the bond’s face value. So investors are more interested in the bond’s yield to maturity as the chances of this bond being called are very small.
