Exercise

Answer the following questions.

1. A bond is selling at a discount when its:

A. Coupon rate is higher than its yield to maturity

B. Current yield is lower than its coupon rate

C. Yield to maturity is higher than its coupon rate

D. Yield to maturity is lower than its current yield

2. Which two of the following two statements are true about bonds?

I. The prices of short-term bonds fluctuate more than the prices of long-term bonds, due to changes in interest rates.

II. The prices of long-term bonds fluctuate more than the prices of short-term bonds, due to changes in interest rates.

III. Long-term bonds tend to be more liquid than short-term bonds.

IV. Short-term bonds tend to be more liquid than long-term bonds.

A. I and III

B. II and IV

C. I and IV

D. II and III

3. A bond will be more likely to be called when:

A. Interest rates rise

B. Interest rates fall

C. Interest rates are flat

D. There is no relation between interest rates and when a bond is called

4. What two types of risk are callable bonds most susceptible to?

I. Call risk

II. Default risk

III. Reinvestment risk

IV. Market risk

A. I and IV

B. II and III

C. III and IV

D. I and III

5. When is advance refunding most likely to occur?

A. When interest rates are low and the bond issue has not reached its call date

B. When interest rates are low and the bond is past its call date

C. When interest rates are high and the bond issue has not reached its call date

D. When interest rates are high and the bond issued has passed its call date

Answers

1. C. The yield to maturity is higher than the coupon rate and the current yield when a bond is selling at a discount. A discounted bond also has a current yield that is higher than its coupon rate.

2. B. Because there is more time for interest rates to move in an undesirable way, the prices of long-term bonds are more sens