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1.
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.
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.
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.
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.
5.
The higher a bond's yield, the faster the bondholder should recover its cost.
True. Just as with coupon rates, the higher a bond's yield, the faster will be the recovery of its cost.
