BONDS

1. __________ is the nominal rate of interest fixed and printed on the bond
certificate.
a) Yield to call
b) Yield to maturity
c) Coupon rate
d) Current Yield

2. Coupon rate is calculated on the market value of bond. TRUE/FALSE

3. The _________ relates the annual interest receivable on a bond to its current
market price.
a) Yield to call
b) Yield to maturity
c) Coupon rate
d) Current Yield

4. a) The current yield would be higher than the coupon rate when the bond is
selling at premium.
b) The current yield would be lower than the coupon rate when the bond is selling
at discount.

(i) Both statement are TRUE

(ii) Both statement are FALSE
(iii) A is TRUE only
(iv) B is true only

5. ___________ measures the annual return accruing to a bondholder who purchases

the bond from secondary market.
a) Yield to call
b) Yield to maturity
c) Current yield
d) Coupon rate

6. Current yield does not consider the reinvestment of annual interest received from the
bond and the capital gain or loss realized on maturity of the bond. TRUE/FALSE

7. ___________ is a special type of bond which does not pay annual interest rate.
a) Pure discount bond
b) Zero-coupon bond
c) Deep discount bond
d) All of the above
e) None of the above

8. ___________ is the annual interest rate of return on a bond that has only one cash
flow to the investor.
 a) Coupon rate
b) Yield to maturity
c) Spot interest rate
d) Current interest rate

9. ____________ is defined as the compounded rate of return an investor is expected to

receive from a bond purchased at the current market price and held to maturity
a) Coupon rate
b) Yield to maturity
c) Spot interest rate
d) Current interest rate

10. The yield to call is higher than the yield to maturity; it would be advantageous to the
investor to exercise the redemption option at the call date. TRUE/FALSE

11. ___________ is the discount rate that makes the present value of cash inflow fro the
bond equal to the cash outflow for purchasing the bond.
a) Coupon rate
b) Yield to maturity
c) Spot interest rate
d) Current interest rate

12. Bond pricing theorems state that-

a) Bond price will move inversely to market interest changes
b) Bond price volatility is related to the coupon rate, which implies that the
percentage change in a bond’s price due to a change in the market interest rate will be
smaller if its coupon rate is higher.
c) Both statements are true
d) Both statements are False

13. When market interest rate rises, there is a gain on reinvestment but a loss on sale of
bond. TRUE/FALSE

14. A bond may be described in terms of-

a) Par value
b) Coupon rate
c) Maturity date
d) All of the above

15. ___________ give the bond holder the right(option) to convert them into equity
shares on certain terms.

16. ___________ give the issuer the right(option) to redeem the prematurely on certain
term.
17. __________ gives the investor the right to prematurely sell them to the issuer on
certain term.
18. In bond the required yield increases, the present value of the cash flow decreases;
hence the price decreases. TRUE/FALSE

19. If par value of bond is Rs1000 at currently it is selling in market at Rs1100/- that
mean-
a) Bond is selling at premium
b) Interest rate is lower in market as compare to coupon rate
c) Both are True
d) None of the above

20. Interest rate risk bond exposed to are also referred as Market risk. TRUE/FALSE

21. In a period of volatile inflation rates, borrower will be declined to issue long term
fixed –interest rate bonds and investor too will be reluctant to buy such shares.
TRUE/FALSE

22. In a period of volatile inflation rates, floating rate bonds and shorter maturity bonds
become more popular. TRUE/FALSE

23. _________ risk refers to the risk accruing from the fact that a borrower may not pay
interest or principle on time.

24. Price of short term bonds are more sensitive to interest rate change than prices of long
term bonds. TRUE/FALSE

25. Duration of plain vanilla bond is the same as its maturity. TRUE/FALSE

26. Duration of zero coupon bonds is

a) Equal to its term to maturity
b) Less than its term to maturity
c) More than its term to maturity
d) None of above

27. What is true about the characteristics of bond-

a) Long-term bonds are almost always more volatile in terms of price than short-term
bonds for a given change in interest rates
b) Short term bonds are less vulnerable to interest rates fluctuation than long term
bonds
c) Both (a) & (b) are true
d) Both statements are false

28. Duration for a coupon paying bond is always less than its term to maturity.
a) True
b) False
29. A bond’s duration measure which one of the following?
a) The tie structure of a bond’s cash flow
 b) The bond’s interest rate risk
c) Both (a) and (b) above
d) None of the above

30. If the market rate of interest falls, a coupon-Paying bond will

a) Decrease in value
b) Experience a decrease in duration
c) Experience an increase in duration
d) Both a and b above

31. A bond’s reinvestment rate risk:

a) Refer to the problem of being able to purchase another bond with the same or
higher YTM when the existing bond mature or is called\
b) Is the risk of not being able to reinvest the coupons of a bond at the bond’s YTM
c) Is the same as marketability risk
d) None of these

32. If there is an expectation of large decline in interest rates, which of the following
investments should you choose?
a) Money market fund
b) Low-coupon short term bond
c) High-coupon short term bond
d) Long term zero coupon bonds
e) Short term zero coupon bonds

33. Bonds with higher coupons, other things being the same
a) Have more interest rate risk than bonds with smaller coupons
b) Have less interest rate risk than bonds smaller coupons
c) Have higher duration than small coupon bonds
d) Have lower duration than small coupon bonds
e) Both b & D

34. When a bond pays periodic interest there is a risk that the interest payment may have
to be reinvested at a lower interest rate. This is called ___________.

35. Value of bond is equal to the present value of the cash flow expected from it.
TRUE/FALSE

SOLUTION

1 c
2 FALSE
3 Current yield
4 (ii)
5 C
6 TRUE
7 d
8 c
9 b
10 TRUE
11 B
12 C
13 TRUE
14 D
15 Convertible bond
16 Callable bond
17 Puttable bonds
18 TRUE
19 C
20 TRUE
21 TRUE
22 TRUE
23 Default
24 FALSE
25 FALSE
26 A
27 C
28 A
29 C
30 C
31 B
32 D
33 E
34 Reinvestment risk
35 TRUE