# Investments Homework 1

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1. Bond A has a yield to maturity of 7.90%, while bond B has a YTM of 7.60%. This difference would be described by a bond trader as:

a. there-tenths of a percent

b. three percentage points

c. 30 basis points

d. 3 basis points

2. By examining bond prices, coupons, and maturities, it is relatively straightforward to determine _____ interest rates.

a. real

b. nominal

c. expected

d. preferred

3. The current yield of a bond is far more useful than just looking at the coupon rate, because it utilizes the ____ instead of the ______ of a bond.

a. par value; forward rate

b. market price; face value

c. maturity date; coupon rate

d. cash flows; estimated payments

4. Susan has selected an appropriate bond to fill a gap in her portfolio. She has calculated the yield to maturity to be 8.3 percent, but she knows that this yield will only be realized if:

a. coupons received are reinvested at the YTM

b. interest rates remain constant

c. the bond is sold before the maturity date

d. the bond is called

5. A bond investor has three possible sources of dollar returns. These are coupon payments, capital gains or losses, and:

a. repayment of principal

b. call provisions

d. interest on interest

6. You can say with certainty that holding all factors affecting bond prices constant, the price of a bond currently trading over face value will:

b. remain the same

c. fluctuate up and down

d. trend towards its arithmetic mean

7. John is considering buying bonds because he expects interest rates to decline over the next 12 months. To maximize his capital gain potential he decides to invest in a:

a. Treasury note

b. short maturity bond

c. long maturity bond

d. inflation indexed bond

8. When bond traders fear that interest rates are heading up, they know they can reduce their exposure to the interest rate change by holding bonds with:

a. high yields

b. low coupons

c. high coupons

d. low yields

9. The most accurate measure of the economic life of a bond can be found by calculating the bond's:

a. coupon yield

b. yield to maturity

c. maturity horizon

d. duration

10. Central to the concept of bond duration is the fact that the duration of a bond that pays coupon interest will always be ______ the bonds maturity.

a. not related to

b. the same as

c. more than

d. less than

11. Consider two bonds that mature on the same date. Bond A has a shorter duration than bond B because Bond A has a:

a. higher coupon

b. lower coupon

c. higher yield to maturity

d. lower yield to maturity

12. Bonds appeal to a wide variety of investors because they can offer bother _______ and ________.

a. certainty of income; protection against inflation

b. low risk premiums; large capital gains

c. high dividends; return of principal

d. liquidity; earnings growth upside

13. Individual investors who want to diversify with foreign bonds may choose a bond fund because many issues of foreign bonds do not have:

a. credit ratings

b. a liquid resale market

c. redeemable coupons

d. fixed maturities

14. The bond market favors the Federal Reserve pursuing a tight monetary policy because it will likely reduce the potential of bond price declines due to:

a. economic growth

b. demand for Treasury securities

c. inflation

d. investors' appetite for stocks

15. A yield curve graphically displays the term structure of interest rates because it shows interest rates for bonds that are identical EXCEPT for:

a. maturity

b. coupon

c. rating

d. yield

16. You observe that the yield curve has a steep upward slope. The liquidity preference theory explains this shape as being the result of investors' expectations of future interest rates, combined with a/an:

a. rate inversion

b. market segmentation

c. impending recession

17. Two companies have bonds outstanding that have identical maturities and coupon rates. The bond of company A are trading at a yield to maturity 100 basis points higher than the bonds of company B. The MOST LIKELY explanation for this yield spread is that since the date of issue, company A has had a change in its:

a. taxable status

b. credit rating

c. expected growth rate

d. market position

18. You have chosen a passive bond investment strategy and are building a portfolio of bonds with a variety of maturities. These types of strategies are most common among investors who prefer NOT to:

a. utilize the yield curve

b. invest in Treasury issues

c. time the market

d. be subject to credit risk

19. Becky has chosen to use an immunization strategy to structure her bond portfolio. Her primary reason for this decision is to offset ________ with__________.

a. price risk; reinvestment rate risk

b. price risk; liquidity risk

c. maturity risk; coupon risk

d. maturity risk; liquidity risk

20. Under an active bond investment strategy, the investor who expects interest rates to decline will MOST LIKELY seek to generate capital gains by making what change to his bond portfolio?

a. Shift to low coupon bonds

b. Reduce maturities

c. Decrease weighting of high yield bonds

d. Increase duration

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