Bond Valuation

The real rate of interest is the risk free rate plus the inflation premium.

• True

• False

Changes in the inflation rate have a direct and pronounced effect on market interest rates.

• True

• False

The single most important factor that influences the behavior of market interest rates is ...

• business profits

• inflation

• the supply of new bonds

• the stock market

Long-term bonds are ... than short-term bonds.

• more liquid

• less risky

• less sensitive to interest rate changes

• subject to more uncertainty

If a bond's yield to maturity is lower than its coupon rate, the bond will sell at a discount.

• True

• False

As a bond approaches its maturity date, its price necessarily approaches par value.

• True

• False

A bond has a coupon rate of 6%, matures in 6 years, and currently sells for $1,000 (par value). Therefore the yield to maturity is also 6%.

• True

• False

Generally speaking, short-term bonds have lower yields than long-term bonds.

• True

• False

Bond duration refers to the remaining life of a bond.

• True

• False

A major advantage of passive bond strategies is low transaction costs.

• True

• False