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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.
In which of the following ways is a bond's duration expressed?
As a number of years. A bond's duration is expressed as a number of years from the purchase date.
3.
Roughly speaking, the price of a bond will change according to its duration.
True. The price of a bond will change due to interest rates, roughly according to its duration. In other words, if rates move up by one percentage point--for example, from 6 percent to 7 percent--the price of a bond with a duration of 10 (years) will move down by about 10 percent.
4.
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.
5.
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.
