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1.
Shorter bond maturities mean longer bond durations.
False. Longer, not shorter, bond maturities mean longer durations. Imagine a fixed amount of money--for example, $1,000--being mailed to you in small payments over time. If these payments were spread over a one-year period, you would recover your money faster than if the same dollar amount were spread over a five-year period.
2.
Which of the following best describes interest rate risk?
Rising interest rates will make bonds less valuable. The higher that interest rates go, the less attractive fixed-rate bonds will be on the secondary market.
3.
How will the market price of a 5 percent coupon bond most likely respond if newer bonds are issued at 7 percent?
It will fall. Investors will be able to choose between the 5 percent bond and new 7 percent bonds. To entice someone to buy the 5 percent bond, the seller will have to discount its price so that the new owner will earn the same dollar amount in interest, but will have paid less than $1,000 to buy it, thus raising his or her yield closer to 7 percent.
4.
A bond's duration is the number of years required to recover the true cost of the bond.
True. A bond's duration is the number of years required to recover its true cost, considering the present value of all coupon and principal payments received in the future.
5.
Which of the following best describes a bond's par value?
It remains fixed for the life of the bond. While a bond's current value can and usually does fluctuate during the life of the bond, its par value remains fixed.
