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Bond Valuation: Basics and Calculation
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Bond Valuation: Basics and Calculation

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Questions and Answers

What does an upward-sloping yield curve indicate?

  • There is no correlation between maturity and interest rate
  • Long-term interest rates are higher than short-term rates (correct)
  • Short-term interest rates are higher than long-term rates
  • Interest rates are the same for all maturities

    • Which theory suggests that the shape of the yield curve is influenced by expectations of future interest rates?

  • Market Segmentation Theory
  • Liquidity Preference Theory
  • Term Structure Theory
  • Expectations Theory (correct)

    • What is the term for the compound annual rate of return earned on a debt security purchased on a given day and held to maturity?

  • Yield to Maturity (correct)
  • Nominal Rate of Return
  • Effective Rate of Return
  • Real Rate of Return

    • What is the term for a graphic depiction of the term structure of interest rates?

    <p>Yield Curve</p> Signup and view all the answers

    What does a downward-sloping yield curve indicate?

    <p>Short-term interest rates are higher than long-term rates</p> Signup and view all the answers

    What is the main difference between Scenario 1 and Scenario 2?

    <p>The cash flows in Scenario 1 are certain, while those in Scenario 2 are uncertain.</p> Signup and view all the answers

    According to the basic valuation model, what is the value of an asset?

    <p>The present value of all future cash flows it is expected to provide over the relevant time period.</p> Signup and view all the answers

    Why does the value of a bond in the marketplace differ from its par value?

    <p>Because the required return on the bond differs from the bond's coupon interest rate</p> Signup and view all the answers

    What is the purpose of bond valuation models?

    <p>To estimate the present value of the cash flows</p> Signup and view all the answers

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