Questions: True/false
Question 1:
Answer: True
Question 2
Answer: false
Municipal bonds are tax exempted in order to make them more attractive
Question 3
Answer: false
Given the same duration, three different bonds yield to maturity will be different given that coupon rates are different.
Question 4
Answer: True
Question 5
Answer: False
Sarbanes Oxley act passed in 2002 set new standards that would oversee the rising accounting scandals, corporations were to allow independent audits to rate their bonds.
Question 6
Answer: True
Question 7
Answer: True
Question 8
Answer: True
Question 9
Answer: False
A junk bond is a bond that has a high probability of default and therefore pays higher yields to attract investors, and this does not mean it is in default.
Question 10
Answer: True
Question 11
Answer: True
Question 12
Answer: True
Reinvestment risk- risk that bonds may not earn the same amount earned by original bond
Question 13
Answer: True
Question 14
Answer: True
Yield to maturity increases if an investor buys a bond at a lower price
Question 15
Answer: True
Multiple Choice:
Question 16
Answer: E. none of the above
Fixed coupon bonds are not adjusted for interest rate change but floating rate bonds coupon value is adjusted to changes in interest rates.
Question 17
Face value = 1000
Duration 10 years
Coupon 80
Interest rate = 9%
Answer: A. $935.82
Question 18
Answer C. $828.81
Question 19
Answer: B. $1,111.58
Question 20
Answer: E. $978.40
Question 21
Answer E.
As interest rates fall, investors prefer coupon rate bonds, when interest rate increase coupon rates bonds become less desirable.
Question 22
Answer A.
Question 23
Answer B
As interest rates fall, investors prefer coupon rate bonds
Question 24
Answer D. $1,075
Question 25
Answer E.
All but one(only AAA are investment grade)
Question 26
Answer: C 9.2
2 yrs ago Default risk = rollin yield to maturity — risk free rate
2 yrs ago 2.8
Today it is half = 2.8/2=1.4
Risk free rate = 7.8
New bonds = 7.8+1.4=9.2
Question 27
Answer: D
Price of the bond today will be lower than price of the bond one year from now.
Question 28
Answer: B
Question 29
Answer: C
Junior debts paid after senior debts, have higher returns due to high default risk