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What is the term structure of interest rates and the yield curve?

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The term structure of interest rates ref...

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Genie would like to receive an exact real rate of return of 5% per year on a bond investment at a time when the expected rate of inflation is 4.5%. a)What nominal rate of return would Genie expect to receive on a bond investment? b)How much would Genie be willing to pay for a bond maturing in five years if it pays a semi-annual coupon of 8%?

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a)Nominal rate of return, blured image b)B...

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Which one of the following is NOT a bond provision?


A) Pledging financial assets as collateral to the bond issue.
B) Limiting dividend payments to equity holders.
C) Limiting payments to other existing bondholders.
D) Pledging equipment as collateral for the issue.

E) B) and C)
F) C) and D)

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Which one of the following statements is NOT correct?


A) AAA bonds are the safest bond investment.
B) Speculative grade bonds require high yields.
C) Large, well-established companies always have speculative grade ratings.
D) Speculative bonds are also called junk bonds.

E) A) and D)
F) B) and C)

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The yield to maturity (YTM) is:


A) the discount rate used to evaluate bonds.
B) the bond's internal rate of return.
C) the yield that an investor would expect to make if they bought the bond at the current price, held it to maturity, received all the promised payments on their scheduled dates, and reinvested all the cash flows received at YTM.
D) All of the above.

E) All of the above
F) C) and D)

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The current yield (CY) is:


A) The ratio of the semi-annual coupon interest divided by the bond's maturity value.
B) The ratio of the semi-annual coupon interest divided by the bond's current market price.
C) The ratio of the annual coupon interest divided by the bond's current market price.
D) The ratio of the annual coupon interest divided by the bond's maturity value.

E) B) and D)
F) A) and D)

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Use the following three statements to answer this question: I.The prices of bonds with higher durations are more sensitive to interest rate changes than are those with lower durations. II.All else being equal, durations will be higher when (1) market yields are lower, (2) bonds have longer maturities, and (3) bonds have lower coupons. III.Duration is a measure of risk of the bond


A) I is correct, II, III are incorrect.
B) I is incorrect, II, III are correct.
C) I, II and III are correct.
D) I, II and III are incorrect.

E) B) and D)
F) B) and C)

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An investor bought a bond at par and held it for one year.If the coupon rate is 5%, original maturity of the bond is 8 years, and the yield to maturity of the bond when it was sold was 6%, what is the holding period return of the bond? Assume annual interest coupon payments.


A) 5%
B) 6%
C) -1.21%
D) -1.23%

E) B) and D)
F) C) and D)

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Which of the following rated bonds has the least risk?


A) AA
B) AAA
C) BB
D) A

E) A) and B)
F) A) and C)

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Which of the following statements is TRUE?


A) The quoted price of a bond is the actual price an investor pays for the bond whenever the bond is sold at a date other than the date of a coupon payment.
B) The quoted price of a bond is the actual price an investor pays for the bond when the bond is sold on the date of a coupon payment.
C) A bond purchaser must pay the bond seller the cash price less the accrued interest on the bond.
D) The cash price plus the accrued interest on the bond is the quoted price of the bond.

E) A) and C)
F) B) and C)

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The nominal interest rate is:


A) the difference between the real rate and expected inflation.
B) low when expected inflation is low and high when expected inflation is high.
C) high when expected inflation is low and low when expected inflation is high.
D) None of the above

E) C) and D)
F) A) and C)

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The market yield rate on a twelve-year 7% annual-pay bond is 6%.The bond is callable in three years and its yield to call is 5.7%.What is the call price of the bond?


A) 1057.74
B) 1083.84
C) 1089.59
D) 1026.73

E) All of the above
F) A) and C)

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Suppose you observed that one-year T-bills are trading with a yield to maturity (YTM)of 4.75%.The yield spread between AAA and BB rated corporate bonds is 130 basis points.The maturity yield differential between the one-year T-bills and three-year government bonds is 45 basis points. a)What the market yield rate would you expect on a three-year BB rated corporate bond that pays a 7.25% annual coupon? b)How much would you pay for this three-year BB rated corporate bond if its coupon rate was 7.25% with interest paid annually?

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a)kb = 1-yr T-bill rate +/- mat...

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Which one of the following increases the sensitivity of the bond prices?


A) Increase in maturity
B) Decrease in maturity
C) Decrease in yield to maturity
D) Increase in coupon payment

E) None of the above
F) C) and D)

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A one-year bond offers a 12.5% yield to maturity (YTM) and a two-year bond offers an 11% yield to maturity (YTM) .Based on this information which of the following is true?


A) The term structure is upward sloping.
B) The term structure is flat.
C) The term structure is downward sloping.
D) The term structure cannot be determined.

E) C) and D)
F) B) and C)

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Suppose the spot exchange rate is C$.75 per US dollar.The forward exchange rate is C$.80per US dollar.Which of the following is true?


A) The Canadian inflation rate is lower.
B) The US dollar is selling at a premium.
C) The US dollar is selling at a discount.
D) None of the above.

E) A) and B)
F) A) and C)

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Suppose you observed that five-year government bonds are trading at a yield-to-maturity (YTM) of 5.75%.The yield spread between AAA and BBB rated corporate bonds is 130 basis points.The maturity yield differential between the three-year and five-year government bonds is 45 basis points.What yield would you expect to observe on BBB rated corporate bonds with three years to mature?


A) 5.30%
B) 6.60%
C) 7.05%
D) 7.50%

E) C) and D)
F) A) and B)

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Explain the difference between nominal and real interest rates.

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Nominal interest rates are the rates cha...

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refers to the relationship between interest rates and the term to maturity on underlying debt instruments.


A) The Expectations theory
B) The Liquidity preference theory
C) The Market segmentation theory
D) The Term structure of interest rates

E) A) and C)
F) All of the above

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Which of the following is NOT a true statement?


A) Mortgage bonds are debt instruments that are secured by real assets.
B) Callable bonds give the issuer the option to "call" or repurchase outstanding bonds at predetermined call prices at specified times.
C) Retractable bonds allow the bondholder to sell the bonds back to the issuer at predetermined prices at specified times earlier than the maturity date.
D) Extendible bonds allow the issuer to extend the maturity date of the bond.

E) None of the above
F) A) and D)

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