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1.
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.
2.
Which of the following best describes the correlation between bond duration and coupon rates?
The higher the coupon rate, the shorter the duration. In other words, the more money coming in now (because of a higher rate), the faster the bondholder will recover its cost.
3.
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.
4.
Investment risk is the threat that _______.
If interest rates fall, the interest payments and principal the investor receives will have to be reinvested at lower rates. This is a common fear among bond investors.
5.
The concept of present value states that a specified sum of money received today will be worth less than the same amount received at some point in the future.
False. Present value is based on the concept that a specified sum of money received today will be worth more--not less--than the same amount received at some point in the future.
