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
Answers
1. C. When a bond is sold at a discount, it generally means that interest rates have risen since the bond was issued. If that is the case, then the yield to maturity will be higher than the coupon rate and the current yield. A discounted bond also has a current yield that is higher than its coupon rate, again, because interest rates have risen.
2. B. Because there is more time for interest rat