Quiz: Bond Valuation 4 questions · 80% to pass 1. A bond with a duration of 7 years will lose approximately what percentage of its price if interest rates rise by 1%?1%3.5%7%14%Duration measures interest rate sensitivity. A bond with a duration of 7 years will lose approximately 7% of its price for every 1% increase in interest rates, and gain approximately 7% for every 1% decrease.2. Yield to maturity (YTM) captures:Only the coupon payments over the bond's lifeThe total return if held to maturity, including coupons and the difference between purchase price and par valueThe current market price of the bondThe credit rating of the bond issuerYTM is the total return you earn if you hold the bond to maturity. It accounts for coupon payments, the difference between your purchase price and the par value you receive at maturity, and the time value of money. It is the bond equivalent of a stock's expected total return.3. When interest rates rise, existing bond prices:Rise, because higher rates make all bonds more valuableStay the same, because the coupon is fixedFall, because new bonds offer higher coupons, making existing bonds less attractiveAre unaffected unless the bond issuer defaultsBond prices and interest rates move inversely. When new bonds offer higher coupons, existing bonds with lower coupons must trade at a discount to offer competitive yields. This inverse relationship is the most important concept in fixed income.4. A bond trading at $1,050 with a $50 annual coupon on $1,000 par is trading at:A discount, because the coupon is only 5%Par, because the coupon matches the face valueA premium, because the price exceeds par valueAt fair value regardless of market conditionsA bond trades at a premium when its market price ($1,050) exceeds par value ($1,000). This happens when the bond's coupon rate (5%) is higher than the current market rate, making the bond's cash flows more attractive than newly issued bonds. Check answers Retake quiz Back to lesson Next lesson →