FINA 3317 - Chapter 3 | Questions with 100% Verified Answers |
Latest Update 2026/2027
Question: The required rate of return on a bond is:
A) the interest rate that equates the current market price of
the bond with the present value of all future cash flows received.
B) equivalent to the current yield for nonpar bonds.
C) less than the expected return for discount bonds and
greater than the expected return for premium bonds.
D) inversely related to a bond's risk and coupon.
E) None of these choices are correct.
Answer: E) None of these choices are correct.
Question: Duration is:
Answer: the weighted average time to maturity of the bond's cash flows.
Question: Which of the following bond terms are generally positively related to bond price volatility? I. Coupon
rate II. Maturity III. YTM IV. Payment frequency
Answer: II only
Question: The interest rate used to find the present value of a financial security is the:
Answer: required rate of return
Question: A security has an expected return less than its required return. This security is:
Answer: selling for more than its present value.
Question: A bond that you held to maturity had a realized return of 8 percent, but when you bought it, it had an
expected return of 6 percent. If no default occurred, which one of the following must be true?
Answer: The coupons were reinvested at a higher rate than expected.
Question: You would want to purchase a security if the price is ________ the present value or if the expected
return is ________ the required rate of return.
Answer: less than or equal to; greater than or equal to
Question: A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of
$100 and its required rate of return is 9 percent. Is the bond correctly priced, overpriced, or underpriced? If it is
overpriced or underpriced, then list by how much.
Answer: Underpriced by $14.18
Question: A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60
and its required rate of return is 7 percent. Is the bond correctly priced, overpriced, or underpriced? If it is
overpriced or underpriced, then list by how much.
Answer: Overpriced by $4.43
Question: An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the
required return is 6 percent and the bond pays interest semiannually?
Answer: $1,062.81
, Question: A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's
promised YTM is 5.5 percent?
Answer: $1,253.12
Question: A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's
price is:
Answer: $1,000.00.
Question: A 10-year, annual payment corporate coupon bond has an expected return of 11 percent and a
required return of 10 percent. The bond's market price is:
Answer: less than its present value.
Question: An eight-year, annual payment, 7 percent coupon Treasury bond has a price of $1,075. The bond's
annual expected rate of return must be:
Answer: 5.80 percent.
Question: A six-year, annual payment corporate bond has a required return of 9.5 percent and an 8 percent
coupon. Its market value is $20 over its present value. What is the bond's expected rate of return?
Answer: 9.03%
Question: Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75
percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the
first five years and 60 percent of its cost in the sixth year. If A and B have the same required return, which of
the following is/are true? I. Bond A has a bigger coupon than Bond B. II. Bond A has a longer duration than Bond
B. III. Bond A is less price-volatile than Bond B. IV. Bond B has a higher PV than Bond A.
Answer: II and IV only
Question: A corporate bond returns 12 percent of its cost (in present value terms) in the first year, 11 percent
in the second year, 10 percent in the third year, and the remainder in the fourth year. What is the bond's
duration in years?
Answer: 3.32 years
Question: A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a 7 percent
promised yield to maturity, and 10 years to maturity. What is the bond's duration?
Answer: 7.35 years
Question: An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate, a 6 percent
promised yield to maturity, and six years to maturity. What is the bond's duration?
Answer: 5.31 years
Question: If an N-year security recovered the same percentage of its cost in present value terms each year, the
duration would be:
Answer: sum of the years/ N.
Latest Update 2026/2027
Question: The required rate of return on a bond is:
A) the interest rate that equates the current market price of
the bond with the present value of all future cash flows received.
B) equivalent to the current yield for nonpar bonds.
C) less than the expected return for discount bonds and
greater than the expected return for premium bonds.
D) inversely related to a bond's risk and coupon.
E) None of these choices are correct.
Answer: E) None of these choices are correct.
Question: Duration is:
Answer: the weighted average time to maturity of the bond's cash flows.
Question: Which of the following bond terms are generally positively related to bond price volatility? I. Coupon
rate II. Maturity III. YTM IV. Payment frequency
Answer: II only
Question: The interest rate used to find the present value of a financial security is the:
Answer: required rate of return
Question: A security has an expected return less than its required return. This security is:
Answer: selling for more than its present value.
Question: A bond that you held to maturity had a realized return of 8 percent, but when you bought it, it had an
expected return of 6 percent. If no default occurred, which one of the following must be true?
Answer: The coupons were reinvested at a higher rate than expected.
Question: You would want to purchase a security if the price is ________ the present value or if the expected
return is ________ the required rate of return.
Answer: less than or equal to; greater than or equal to
Question: A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of
$100 and its required rate of return is 9 percent. Is the bond correctly priced, overpriced, or underpriced? If it is
overpriced or underpriced, then list by how much.
Answer: Underpriced by $14.18
Question: A 12-year annual payment corporate bond has a market price of $925. It pays annual interest of $60
and its required rate of return is 7 percent. Is the bond correctly priced, overpriced, or underpriced? If it is
overpriced or underpriced, then list by how much.
Answer: Overpriced by $4.43
Question: An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the
required return is 6 percent and the bond pays interest semiannually?
Answer: $1,062.81
, Question: A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's
promised YTM is 5.5 percent?
Answer: $1,253.12
Question: A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's
price is:
Answer: $1,000.00.
Question: A 10-year, annual payment corporate coupon bond has an expected return of 11 percent and a
required return of 10 percent. The bond's market price is:
Answer: less than its present value.
Question: An eight-year, annual payment, 7 percent coupon Treasury bond has a price of $1,075. The bond's
annual expected rate of return must be:
Answer: 5.80 percent.
Question: A six-year, annual payment corporate bond has a required return of 9.5 percent and an 8 percent
coupon. Its market value is $20 over its present value. What is the bond's expected rate of return?
Answer: 9.03%
Question: Corporate Bond A returns 5 percent of its cost in PV terms in each of the first five years and 75
percent of its value in the sixth year. Corporate Bond B returns 8 percent of its cost in PV terms in each of the
first five years and 60 percent of its cost in the sixth year. If A and B have the same required return, which of
the following is/are true? I. Bond A has a bigger coupon than Bond B. II. Bond A has a longer duration than Bond
B. III. Bond A is less price-volatile than Bond B. IV. Bond B has a higher PV than Bond A.
Answer: II and IV only
Question: A corporate bond returns 12 percent of its cost (in present value terms) in the first year, 11 percent
in the second year, 10 percent in the third year, and the remainder in the fourth year. What is the bond's
duration in years?
Answer: 3.32 years
Question: A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a 7 percent
promised yield to maturity, and 10 years to maturity. What is the bond's duration?
Answer: 7.35 years
Question: An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate, a 6 percent
promised yield to maturity, and six years to maturity. What is the bond's duration?
Answer: 5.31 years
Question: If an N-year security recovered the same percentage of its cost in present value terms each year, the
duration would be:
Answer: sum of the years/ N.
