1. Yield to Maturity (YTM) of a bond is the rate that equates:
Issue Price with Redemption Value.
Present Value of future cash flows (Interest + Principal) with the Current Market Price.
Current Price with Face Value.
Coupon Rate with Inflation.
Explanation:
YTM is the Internal Rate of Return (IRR) of the bond. It discounts all future coupon payments and principal repayment to the current market price of the bond.
2. "Macaulay Duration" measures:
The weighted average time until cash flows are received.
The profit from the bond.
The coupon rate.
The total life of the bond.
Explanation:
Macaulay Duration is a measure of a bond's interest rate sensitivity. It represents the weighted average time to receive the bond's cash flows.
3. If the Coupon Rate of a bond is LESS than its Yield to Maturity (YTM), the bond will trade at:
Face Value
Discount
Premium
Par Value
Explanation:
If the bond pays less interest (Coupon) than the market expects (YTM), its price must fall below face value to offer a competitive yield to the investor.
4. For a Zero Coupon Bond, the Duration is:
Greater than its maturity.
Equal to its maturity.
Zero.
Less than its maturity.
Explanation:
Since there are no interim coupon payments, the entire cash flow occurs at maturity. Thus, the weighted average time to receive cash flow is exactly the maturity period.
5. A bond will sell at a "Premium" when:
Coupon Rate = Required Rate of Return (YTM).
Coupon Rate > Required Rate of Return (YTM).
It is a zero-coupon bond.
Coupon Rate < Required Rate of Return (YTM).
Explanation:
If the bond pays more interest than the market demands, investors will pay more than the face value to acquire it.
6. The relationship between Bond Price and Market Interest Rate (Yield) is:
Direct (Positive).
Linear.
Unrelated.
Inverse (Negative).
Explanation:
When interest rates rise, existing bonds with lower coupon rates become less attractive, so their price falls. Conversely, when rates fall, bond prices rise.
7. Current Yield of a bond is calculated as:
Annual Coupon Interest / Face Value
Annual Coupon Interest / Current Market Price
YTM / Coupon Rate
Total Interest / Maturity Period
Explanation:
Current yield measures the return based on the current market price, ignoring capital gains/losses upon maturity.
8. The value of a Perpetual Bond (Console) paying annual interest 'I' is calculated as:
I * Required Rate of Return
I + Maturity Value
I / Required Rate of Return (kd)
I / (1 + kd)^n
Explanation:
A perpetual bond has no maturity. Its value is simply the annual interest divided by the yield (discount rate), based on the perpetuity formula.
9. While "Duration" estimates the linear relationship between bond price and yield, "Convexity" accounts for:
The tax impact on bond interest.
The liquidity risk.
The credit risk of the issuer.
The curvature in the price-yield relationship, providing a more accurate price change estimate for large yield changes.
Explanation:
Duration assumes a straight line relationship, which is inaccurate for large rate changes. Convexity measures the curvature, showing that bond prices rise more when rates fall than they drop when rates rise.
10. The Price-Earnings (P/E) Ratio is calculated as:
Book Value / EPS
EPS / Market Price per Share
Market Price per Share / Dividend per Share
Market Price per Share / Earnings per Share (EPS)
Explanation:
The P/E ratio indicates how much the market is willing to pay for every rupee of earnings generated by the company. A high P/E suggests high growth expectations.
11. "Book Value per Share" is calculated as:
Total Assets / Number of Shares.
(Share Capital + Reserves - Accumulated Losses) / Number of Equity Shares.
Market Capitalization / Number of Shares.
EPS * P/E Ratio.
Explanation:
Book Value represents the net worth attributable to equity shareholders based on the historical accounting figures, not market value.
12. Which bond is MORE volatile (sensitive) to interest rate changes?
A bond with a low coupon rate (or Zero Coupon).
A bond with a high coupon rate.
A floating rate bond.
A bond with a short maturity.
Explanation:
Lower coupon bonds have higher Duration (more of their value comes from the distant principal repayment). Higher duration means higher price volatility when rates change.