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1.
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.
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.
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.
4.
A bond is issued with a stated value, known as its par value.
True. A bond's stated value is its par, or face value. This is the value at which the bond will be bought back by the issuer upon its maturity.
5.
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.
