QUESTION: 1
Al of the following are true concerning the Yield-to-Maturity (YTM) of a bond EXCEPT:
A. It is sometimes known as the dol ar-weighted return
B. YTM assumes that the investor reinvests all coupons received from a bond at a rate equal to
the computed YTM
C. YTM is the promised rate of return an investor wil receive from a bond at the current market
price if held to maturity
D. The premium or discount on the bond is not an important factor in the calculation of YTM
Answer(s): D
Explanation:
YTM is the promised rate of return an investor wil receive from a bond at the current market
price if held to maturity. YTM takes into account the amount of the premium or discount (if any)
and the time value of the investment. To calculate the YTM you must know the present value of
the bond, future value, time to maturity, and the coupon rate. YTM is similar to the internal rate
of return (IRR) it is also called dol ar- weighted return
QUESTION: 2
An investor that holds a corporate bond until maturity wil be exposed to al of the following risks
EXCEPT:
A. Interest rate risk
B. Credit risk
C. Inflationary Risk
D. Call risk
Answer(s): A
Explanation:
At maturity date, it makes neither difference what the bonds coupon is nor its relationship to
current interest rates. The bond always pays off at par. Inflation, credit risk, and call risk are all
risks associated with buying corporate bonds
QUESTION: 3
You invest $1,000 in a mutual fund for two years. The mutual fund earned 25% in the first year
and lost 10% in the second year. How much is your mutual fund worth at the end of the second
year?
A. $1,125
B. $1,150
C. $1,375
D. $1,250
Answer(s): A
Explanation:
If you invest $1,000 and earn 25% you wil now have $1,250 at the end of the first year ($1,000
times (1+0.25)=$1,250). Now you have $1,250 and earn -10% in the second year, so you are
now left with $1,125 at the end of the second year ($1,250 times (1- .10)=$1,125)