Chapter 23 Quiz, Warrants and Convertibles




1. If the nominal interest rate is 8% per year and the expected inflation rate is 3% per year, calculate the real rate of interest:
A.8%
B.5%
C.2.86%
D.4.85%


2. A 5-year bond with 6% coupon rate and $1000 face value is selling for $852.10. Calculate the yield to maturity of the bond. (Assume annual interest payments.)
A.9.23%
B.5%
C.8.78%
D.9.89%


3. Consider a bond with a face value of $1,000, a coupon rate of 6%, a yield to maturity of 6%, and three years to maturity. This bond's duration is:
A.2.6 years
B.2.8 years
C.3.0 years
D.3.2 years


4. Consider a bond with a face value of $1,000, a coupon rate of 0%, a yield to maturity of 9%, and ten years to maturity. This bond's duration is:
A.6.7 years
B.7.5 years
C.9.6 years
D.10.0 years


5. Consider a bond with a duration of 12 years and a market yield of 6%. This bond's volatility is:
A.9.3%
B.11.3%
C.14.6%
D.6.0%


6. If the 3-year spot rate is 12% and the 2-year spot rate is 10%, what is the forward rate of interest?
A.3.7%
B.16.1%
C.9.5%
D.None of the above


7. The term structure of interest rates can be described as the:
A.Relationship between the spot interest rates and the bond prices
B.Relationship between spot interest rates and stock prices
C.Relationship between spot interest rates and maturity of a bond
D.None of the above


8. Which of the following statements is true?
A.The spot interest rate is a weighted average of yields to maturity
B.Yield to maturity is the weight average of spot interest rates
C.The yield to maturity is always higher than the spot rates
D.None of the above


9. If the 20-year forward rate of interest is the same as the 19-year spot rate, what is the 20-year spot rate?
A.Smaller than the 19-year spot rate
B.Larger than the 19-year spot rate
C.Can't say without knowing the 21-year spot rate
D.The same as the 20 year forward rate


10. The expectations hypothesis states that the forward interest rate is the:
A.Expected future spot rate
B.Always greater than the spot rate
C.Yield to maturity
D.None of the above


11. The yield to maturity:
A.Is the present value of future coupons divided by the present value of the final principal payment
B.Is the discount rate at which the present value of promised interest and principal payments equals face value
C.Is the discount rate at which the present value of expected interest and principal payments equals market price
D.Is calculated by the same formula as the internal rate of return (IRR)


12. Two bonds mature in 2001, but bond A offers a 10.5% yield to maturity, vs. 10.1% for bond B. Which of the following explanations makes sense?
A.The term structure is upward-sloping, and bond A has a higher coupon than B
B.The term structure is flat, and bond A offers a higher liquidity premium than bond B
C.Bond B has a higher risk of default
D.The term structure is downward-sloping, and bond B has a lower coupon than A


13. According to the liquidity – preference theory the forward rate is:
A.Less than the expected future spot rate
B.Greater than the expected future spot rate
C.Equal to the expected future spot rate
D.None of the above


14. The liquidity preference hypothesis states that the forward rates are set higher than the expected spot rates because:
A.Of a downward sloping yield curve
B.Long-term rates are higher than short-term rates
C.Investors must be induced to buy the riskier long-term bonds
D.None of the above


15. Which of the following rated bonds have the least risk?
A.AAA
B.AA
C.A
D.BBB



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