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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 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.
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.
4.
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.
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.
