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1.
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.
2.
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.
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.
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.
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.
