QUESTION 1 The largest investors in corporate bonds are life insurance companies

Question

QUESTION 1

The largest investors in corporate bonds are life insurance companies and pension funds.

True

False

5 points   

QUESTION 2

Most secondary market transactions for corporate bonds take place through dealers in the over-the-counter (OTC) market.

True

False

5 points   

QUESTION 3

The value (or price) of a bond is the present value of its expected future cash flows.

True

False

5 points   

QUESTION 4

Bond prices decline when the interest rate decreases.

True

False

5 points   

QUESTION 5

The face or par value for bonds is the amount paid to bondholders at maturity and is usually equal to $1,000.

True

False

5 points   

QUESTION 6

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments equal to the price of the bond.

True

False

5 points   

QUESTION 7

Zero coupon bonds have no coupon payments so they sell for more than their par value.

True

False

5 points   

QUESTION 8

Interest rate risk is the risk that bond prices will fluctuate when the interest rate changes.

True

False

5 points   

QUESTION 9

US Treasury securities are considered risky investments because the coupon payments are unpredictable.

True

False

5 points   

QUESTION 10

Bonds are very difficult to value because their future cash flows are very difficult to predict.

True

False

5 points   

QUESTION 11

If the bond's coupon rate is equal to the market rate then the bond will sell at a price

equal to its face value

greater than its face value

less than its face value

equal to its foreign currency value, e.g., its price in British pounds

5 points   

QUESTION 12

When calculating the price of a bond that pays a semiannual coupon one needs to

use double the number of years until maturity for the number of payments

use half the annual coupon payment

use half the annual rate of return as the discount rate

all of the above

5 points   

QUESTION 13

The yield to maturity of a bond is the discount rate that makes the present value of the coupon and principal payments

more than the price of the bond

equal to zero

equal to the price of the bond

less than the price of the bond

5 points   

QUESTION 14

Which one of the following statements is true?

All else equal long-term bonds have lower price volatility than short-term bonds.

There is an inverse relation between bond prices and market interest rates.

All else equal short-term bonds are more risky than long-term bonds.

All else equal US government bonds are more risky than corporate bonds.

5 points   

QUESTION 15

An investor owns a 10-year US government bond with a 9 percent coupon rate. If the yield-to-maturity on the bond is 8 percent then this bond is selling for

its par value.

a discount.

a premium.

its face value.

5 points   

QUESTION 16

BA Corp is issuing a 10-year bond with a coupon rate of 8 percent and a par value of $1,000. The market interest rate on similar bonds is currently 6 percent. If the coupon payments are made annually, what is the value of this bond?

5 points   

QUESTION 17

Knight, Inc. has issued a 3-year bond with a $1,000 par value and an annual coupon rate of 6 percent. The current market rate of interest is 5 percent. What is the value of this bond if the coupon payments are made semiannually?

5 points   

QUESTION 18

Diane Carter is interested in buying a 5-year zero coupon bond with a face value of $5,000. If the market interest rate on these types of bonds is currently 9 percent, what is the current price of this bond?

5 points   

QUESTION 19

Rudy Sandberg wants to invest in 4-year bonds that are currently priced at $933.76. The bonds have a coupon rate of 6 percent and annual coupon payments. If the par value of the bonds is $1,000, what is the bond's yield-to-maturity?

5 points   

QUESTION 20

You own a 5-year bond with a face value of $1,000 and a coupon rate of 5 percent with annual payments. The bond is currently worth $810.46. If market interest rates remain unchanged, what will be the value of the bond next year when there are 4 years left until maturity?

equal to its face value

greater than its face value

less than its face value

equal to its foreign currency value, e.g., its price in British pounds

Explanation / Answer

1.

Life insurance companies and pension funds are big institutional investors. They will have a diversified portfolio of investments. But they invest major portion of their investments in corporate bonds. Corporate bonds carry a fixed return and moderate risk level.

Therefore, correct option is “True”

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