Bonds and Interest Rates Quiz

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Questions and Answers

What happens to the price of a bond when interest rates decrease?

The price of the bond decreases.

The price of the bond remains the same.

The price of the bond increases. (correct)

The price of the bond fluctuates unpredictably.

How is the price of a bond defined when its coupon rate is equal to the market interest rate?

The bond is sold at par. (correct)

The bond price is subject to fluctuations.

The bond is sold at a discount.

The bond is sold at a premium.

Which factor influences long-term bonds more significantly than short-term bonds?

Bond maturity dates.

Inflation rates.

Market demand for bonds.

Interest rate changes. (correct)

If a 7.50% coupon bond is currently valued at $1,209.43, what can be inferred about the market interest rate?

The market interest rate is lower than the coupon rate. Signup and view all the answers

In bond valuation, what is the relationship between coupon payment (C) and yield rate (R) if a bond is selling at a premium?

C > R Signup and view all the answers

What is the primary purpose of bonds?

To obligate the issuer to make specified payments to the bondholder Signup and view all the answers

How is the coupon rate on a bond expressed?

As an interest payment based on the bond's face value Signup and view all the answers

Which statement regarding the coupon rate and the discount rate is true?

The coupon rate is not the discount rate used in Present Value calculations. Signup and view all the answers

What does the price of a bond represent?

The present value of all cash flows discounted at the required rate of return Signup and view all the answers

In bond calculations, which abbreviation is commonly used for coupon?

cpn Signup and view all the answers

What must be consistent when performing bond calculations on a financial calculator?

The time periods referenced must match. Signup and view all the answers

Given a bond with a $1,000 face value and a 7.50% coupon rate, how would the cash flows be calculated?

By multiplying the face value by the coupon rate Signup and view all the answers

If the required return for a bond is 3.00%, what type of relationship exists with bond prices?

Lower required returns lead to higher bond prices. Signup and view all the answers

What is the price of the 7.50% annual coupon bond with a $1,000 face value maturing in 4 years if the required return is 3.00%?

$1,167.27 Signup and view all the answers

How is the discount rate adjusted when calculating the present value of a bond with semiannual coupon payments?

It is halved to align with the semiannual payment periods. Signup and view all the answers

What is the total cash flow from the 7.50% coupon bond if it pays $37.50 twice each year for 4 years?

$750.00 Signup and view all the answers

If a bond matures in 4 years and pays semiannual coupons of $37.50, how many total coupon payments will the investor receive?

8 Signup and view all the answers

What is the formula to calculate the price of a bond given its par value and price percentage?

Price = Par Value × Price % Signup and view all the answers

Which change occurs when switching from annual to semiannual coupon payments in bond pricing?

The present value must account for a total of twice as many discounting periods. Signup and view all the answers

What will be the price percentage of a $1,000 coupon bond priced at $1,167.27?

116.73% Signup and view all the answers

How does the number of cash flows change when a bond pays coupons semiannually instead of annually?

The number of cash flows doubles. Signup and view all the answers

Study Notes

Bonds

Bond: A security where the issuer is obligated to make specific payments to the bondholder.
Face Value (Par Value, Principal Value): Payment at the maturity of the bond.
Coupon: Interest payments made to the bondholder.
Coupon Rate: Annual interest payment as a percentage of face value.

Interest Rates and Bond Prices

The Price of a Bond: The present value of all cash flows generated by the bond (interest and principal) discounted at the required rate of return.

Formula:

PV = (cpn / (1 + r)^1) + (cpn / (1 + r)^2) + ... + ((cpn + par) / (1 + r)^t)

cpn: Coupon payment
r: Required rate of return
t: Time to maturity

Bond Price Calculation:
- Bond prices are quoted as a percentage of par value (Face Value).
- Par Value x Price % = Price
Semi-Annual Coupon Payments:
- Time periods are doubled (half-years).
- The discount rate becomes the half-year rate.
Inverse Relationship Between Interest Rates and Bond Prices:
- When interest rates rise, bond prices fall.
- When interest rates fall, bond prices rise.

Interest Rate Risk

Long-term bonds are more sensitive to changes in interest rates than short-term bonds.

Premium and Discount Bonds

Par Value: When the coupon rate equals the required rate of return.
Premium Bond: When the coupon rate is greater than the required rate of return.
Discount Bond: When the coupon rate is less than the required rate of return.

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Description

Test your understanding of bonds, coupon payments, and their pricing mechanisms. This quiz covers essential concepts such as bond face value, coupon rate, and the impact of interest rates on bond prices. Perfect for finance students looking to solidify their knowledge.