1) A bond that makes no coupon payments and is initially priced at a deep discount is called a ________ bond.
A) Treasury
B) municipal
C) floating-rate
D) junk
E) zero coupon
Answer: E
2) The stated interest payment, in dollars, made on a bond each period is called the bond's:
A) coupon.
B) face value.
C) maturity.
D) yield to maturity.
E) coupon rate.
Answer: A
3) The principal amount of a bond that is repaid at the end of the loan term is called the bond's:
Answer: B
4) The specified date on which the principal amount of a bond is repaid is called the bond's:
Answer: C
5) The rate of return required by investors in the market for owning a bond is called the:
Answer: D
6) The annual interest paid by a bond divided by the bond's face value is called the:
7) A bond with a face value of $1,000 that sells for $1,000 in the market is called a ________ bond.
A) par value
B) discount
C) premium
D) zero coupon
E) floating rate
8) A bond with a face value of $1,000 that sells for less than $1,000 in the market is called a ________ bond.
A) par
9) A bond with a coupon rate of 6 percent that pays interest semiannually and is priced at par will have a market price of ________ and interest payments in the amount of ________ each.
A) $1,006; $60
B) $1,060; $30
C) $1,060; $60
D) $1,000; $30
E) $1,000; $60
10) All else constant, a bond will sell at ________ when the yield to maturity is ________ the coupon rate.
A) a premium; greater than
B) a premium; equal to
C) at par; greater than
D) at par; less than
E) a discount; greater than
11) All else constant, a coupon bond that is selling at a premium, must have:
A) a coupon rate that is equal to the yield to maturity.
B) a market price that is less than par value.
C) semiannual interest payments.
D) a yield to maturity that is less than the coupon rate.
E) a coupon rate that is less than the yield to maturity.
12) The market price of a bond increases when the:
A) face value decreases.
B) coupon rate decreases.
C) discount rate decreases.
D) par value decreases.
E) coupon is paid annually rather than semiannually.
13) Aspens is preparing a bond offering with a coupon rate of 5.5 percent. The bonds will be repaid in 10 years. The company plans to issue the bonds at par value and pay interest annually. Which one of the following statements is correct? Assume a face value of $1,000.
A) The bonds will pay 19 interest payments and one principal payment.
B) The bonds will initially sell at a discount.
C) At maturity, the bonds will pay a final payment of $1,027.50.
D) The bonds will pay twenty equal coupon payments.
E) At issuance, the bond's yield to maturity is 5.5 percent.
14) A par value bond offers a coupon rate of 7 percent with semiannual interest payments. The effective annual rate provided by these bonds must be:
A) equal to 3.5 percent.
B) greater than 3.5 percent but less than 4 percent.
C) equal to 7 percent.
D) greater than 7 percent but less than 8 percent.
E) equal to 14 percent.
15) Rosina purchased one 15-year bond at par value when it was initially issued. This bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:
A) the bond issuer to increase the amount of all future interest payments.
B) the yield to maturity to remain constant due to the fixed coupon rate.
C) to realize a capital loss if she sold the bond at today's market price.
D) today's market price to exceed the face value of the bond.
E) the current yield today to be less than 7 percent.
16) Interest rate risk ________ as the time to maturity decreases and ________ as the coupon rate decreases.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases
E) increases; is unaffected
17) A zero coupon bond:
A) is sold at a large premium.
B) has a price equal to the future value of the face amount given a positive rate of return.
C) can only be issued by the U.S. Treasury.
D) has less interest rate risk than a comparable coupon bond.
E) has a market price that is computed using semiannual compounding of interest.
18) Which one of these bonds is the most interest-rate sensitive?
A) 5-year zero coupon bond
B) 10-year zero coupon bond
C) 5-year, 6 percent, annual coupon bond
D) 10-year, 6 percent, semiannual coupon bond
E) 10-year, 6 percent, annual coupon bond
19) The yield to maturity:
A) that is expected will be realized any time a bond is sold.
B) will exceed the coupon rate when the bond is selling at a premium.
C) equals the current yield for all annual coupon bonds.
D) can only be realized if a bond is purchased on the issue date at par value.
E) equals both the current yield and the coupon rate for par value bonds.
20) If a bond's yield to maturity is less than its coupon rate, the bond will sell at a ________, and increases in market interest rates will:
A) discount; decrease this discount.
B) discount; increase this discount.
C) premium; decrease this premium.
D) premium; increase this premium.
E) premium; not affect this premium.
21) The longest term bonds ever issued had an initial maturity date of:
A) 25 years.
B) 50 years.
C) 100 years.
D) 1,000 years.
E) never as the bonds are perpetual.
22) All else held constant, interest rate risk will increase when the time to maturity:
A) decreases or the coupon rate increases.
B) decreases or the coupon rate decreases.
C) increases or the coupon rate increases.
D) increases or the coupon rate decreases.
E) decreases and the coupon rate equals zero.
23) Which one of these combinations of bond ratings represents a crossover situation?
A) BBB; Baa
B) BB; Ba
C) Ba; B
D) Baa; BB
E) B; CCC
24) The interest paid on any municipal bond is:
A) free of default risk.
B) subject to default risk and is exempt from state income taxation.
C) free of both default risk and federal income taxation.
D) exempt from federal income taxation and may or may not be exempt from state taxation.
E) taxable at the federal level and tax exempt at the state and local level.
25) The interest rate for a tax-exempt bond that equates to the rate paid on a taxable bond is computed as:
A) Taxable rate/(1 − T*).
B) Tax-exempt rate × (1 − T*).
C) Taxable rate − (1 + T*).
D) Taxable rate × (1 − T*).
E) Tax-exempt rate/(1 + T*).
26) Bond dealers report all of their trading information using the system known as:
A) SEC-Bond.
B) NASDAQ.
C) FED trades.
D) FINRA.
E) TRACE.
27) Most of the trading in bonds is conducted:
A) in person on the floor of the NYSE.
B) by dealers located in Chicago.
C) by brokers on various trading floors.
D) electronically.
E) on the trade floor in Washington, DC.
28) Which entity provides a daily snapshot of bond prices for the most active issues?
A) Federal Reserve Bank
B) US Treasury Department
C) SEC
D) FINRA
E) NYSE
29) The dirty price of a bond is defined as the:
A) market price minus any taxes due on the accrued interest.
B) market price minus the accrued interest.
C) clean price minus the accrued interest.
D) quoted price plus the accrued interest.
E) clean price minus any taxes due on the accrued interest.
30) A newspaper listing of bond prices has an "Asked yield" column. This yield is based on the asked price and represents the:
A) yield to maturity.
B) difference between the current yield and the yield to maturity.
C) difference between the bond's yield and the yield of a comparable Treasury issue.
D) coupon rate.
E) current yield.
31) A bond is listed in a newspaper at a bid of 105.4844. This quote should be interpreted to mean:
A) the bond will pay semiannual interest payments of $105.4844 per $1,000 of face value.
B) you can sell that bond at a price equal to 105.4844 percent of face value.
C) the bond will pay annual interest payments of $105.4844 per $1,000 of face value.
D) you can buy that bond at a price equal to 105.4844 percent of face value.
E) the bond dealer is willing to sell that bond for a price equal to 105.4844 percent of par.
32) The total price you pay to purchase a premium bond is referred to as the:
A) dirty price or the full price.
B) clean price or the invoice price.
C) invoice price or the par value.
D) dirty price or the par value.
E) clean price or the par value.
33) The profit that is earned on a bond trade by a bond dealer is called the:
A) asked price.
B) spread.
C) bid price.
D) accrued interest.
E) quote value.
34) The Fisher formula is expressed as ________ where R is the nominal rate, r is the real rate, and h is the inflation rate.
A) r = Rh
B) R = rh
C) 1 + h = (1 + r)/(1 + R)
D) 1 + R = (1 + r)/(1 + h)
E) 1 + R = (1 + r)(1 + h)
35) An increase in the rate of inflation will:
A) increase both the real and the nominal rate of interest.
B) decrease both the real and the nominal rate of interest.
C) increase the nominal interest rate while lowering the real interest rate.
D) increase the real interest rate but not affect the nominal interest rate.
E) increase the nominal interest rate but will not affect the real interest rate.
36) If you want to increase your purchasing power by investing in a bond, then:
A) you must purchase that bond at a discount.
B) the nominal rate of return on that bond must be less than the inflation rate.
C) you should purchase a premium bond.
D) the nominal rate of return must equal or exceed the rate of inflation.
E) you must earn a positive real rate of return on that bond.
37) The promised coupon payments on a US TIPS bond are specified in:
A) euros.
B) Canadian dollars.
C) nominal terms.
D) inflated terms.
E) real terms.
38) The monthly returns on US Treasury bills over the past 50 years have:
A) exceeded inflation for all periods.
B) provided consistently positive monthly rates of return for investors.
C) ranged between zero and five percent on an annualized basis.
D) always been positive on a real basis.
E) sometimes been less than the monthly rate of inflation.
39) The relationship between nominal rates, real rates, and inflation is known as the:
A) Miller and Modigliani theorem.
B) Fisher effect.
C) Gordon growth model.
D) term structure of interest rates.
E) interest rate risk premium.
40) The relationship between nominal interest rates on default-free, pure discount securities and the time to maturity is called the:
A) liquidity effect.
C) term structure of interest rates.
D) inflation premium.
41) The ________ premium is that portion of a nominal interest rate or bond yield that represents compensation for expected future loss in purchasing power.
A) default risk
B) taxability
C) liquidity
D) inflation
E) interest rate risk
42) The ________ premium is that portion of the bond yield that represents compensation for potential difficulties that might be encountered should the bond holder wish to sell the bond prior to maturity.
C) inflation
D) liquidity
43) The term structure of interest rates reflects the:
A) real rate of interest.
B) real rate of interest plus the inflation premium.
C) nominal interest rate plus the interest rate risk premium.
D) pure time value of money.
E) real rate, inflation premium, interest rate risk premium, and the liquidity premium.
44) An upward-sloping term structure of interest rates indicates that:
A) longer-term rates are higher than shorter-term rates.
B) investors should expect interest rates to decline in the future.
C) short and intermediate term rates are real rates while long term rates are nominal rates.
D) the Fed is expected to decrease rates in the near term.
E) the larger the investment in dollars, the higher the interest rate paid.
45) The term structure of interest rates:
A) plots interest rates against bond ratings.
B) is just another name for the yield curve.
C) ignores interest rate risk premiums while the Treasury yield curve includes those premiums.
D) ignores both inflation and interest rate risk premiums.
E) is based on pure discount bonds while the Treasury yield curve is based on coupon bond yields.
46) The term structure of interest rates:
A) must be upward-sloping.
B) can be humped in the middle.
C) is downward-sloping when inflation is expected to rise.
D) obtains its slope from the real rate of return.
E) generally has the same degree of steepness each year.
47) Which of these is included in the return on a municipal bond but excluded from the return on a US Treasury bond?
A) Inflation premium and liquidity premium
B) Taxability premium and interest rate risk premium
C) Default risk premium and interest rate risk premium
D) Inflation premium and default risk premium
E) Liquidity premium and taxability premium
48) Consider a bond with a coupon rate of 8 percent that pays semiannual interest and matures in eight years. The market rate of return on bonds of this risk is currently 11 percent. What is the current value of a $1,000 face value bond?
A) $830.58
B) $843.07
C) $893.30
D) $929.17
E) $854.08
49) What is the value of a 20-year, zero-coupon bond with a face value of $1,000 when the market required rate of return is 9.6 percent, compounded semiannually?
A) $153.30
B) $192.40
C) $195.26
D) $168.31
E) $172.19
50) The bonds issued by Manson and Son bear a coupon of 6 percent, payable semiannually. The bond matures in 15 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?
A) 5.87 percent
B) 5.97 percent
C) 6.00 percent
D) 6.09 percent
E) 6.17 percent
51) A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is $1,000 and the current market price is $1,108.15. The bond matures in 14 years. What is the yield to maturity?
A) 6.31 percent
B) 7.82 percent
C) 8.00 percent
D) 8.04 percent
E) 8.12 percent
52) Otto Enterprises has a bond issue outstanding with a coupon of 8 percent that matures in 15 years. The bond is currently priced at $923.60 and has a par value of $1,000. Interest is paid semiannually. What is the yield to maturity?
A) 8.67 percent
B) 9.93 percent
C) 9.16 percent
D) 8.93 percent
E) 8.45 percent
53) Chocolate and More offers a bond with a coupon rate of 6 percent, semiannual payments, and a yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?
A) $889.29
B) $963.88
C) $1,008.16
D) $924.26
E) $901.86
54) Westover's has an outstanding bond with a coupon rate of 5.5 percent that matures in 12 years. The bond pays interest semiannually. What is the market price of one $1,000 face value bond if the yield to maturity is 7.13 percent?
A) $934.59
B) $880.86
C) $870.01
D) $905.92
E) $947.87
55) Guggenheim offers a bond with annual payments and a coupon rate of 5 percent. The yield to maturity is 5.62 percent and the maturity date is 9 years away. What is the market price of one $1,000 face value bond?
A) $942.66
B) $868.67
C) $869.67
D) $957.12
E) $1,009.59
56) The Lo Sun Corporation offers a bond with a current market price of $1,029.75, a coupon rate of 8 percent, and a yield to maturity of 7.52 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?
A) 8.5 years
B) 8.0 years
C) 9.0 years
D) 17 years
E) 16 years
57) Moon Lite Cafe has a semiannual, 5 percent coupon bond with a current market price of $988.52. The bond has a par value of $1,000 and a yield to maturity of 5.68 percent. How many years is it until this bond matures?
A) 1.5 years
B) 1.8 years
C) 2.1 years
D) 2.2 years
E) 1.6 years
58) A firm offers a zero coupon bond with a face value of $1,000 that matures in 10 years. What is the current market price if the yield to maturity is 7.6 percent, given semiannual compounding?
A) $474.30
B) $473.26
C) $835.56
D) $919.12
E) $1,088.00
59) TJ's offers a $1,000 face value, zero coupon bond with a yield to maturity of 11.3 percent, given annual compounding. The bond matures in 16 years. What is the current price?
A) $178.78
B) $180.33
C) $188.36
D) $190.09
E) $192.18
60) The zero coupon bonds of Mark Enterprises have a market price of $394.47, a face value of $1,000, and a yield to maturity of 6.87 percent based on semiannual compounding. How many years is it until this bond matures?
A) 11.08 years
B) 10.49 years
C) 13.77 years
D) 12.64 years
E) 15.42 years
61) A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent?
A) −5.28 percent
B) −4.26 percent
C) −2.38 percent
D) 1.13 percent
E) 4.13 percent
62) Mason's has 5-year, 8 percent annual coupon bonds outstanding with a par value of $1,000. Dixon's has 10-year, 8 percent annual coupon bonds outstanding with a par value of $1,000. Both bonds currently have a yield to maturity of 8 percent. Which one of the following statements is correct if the market rate decreases to 7 percent?
A) Both bonds will decrease in value by 4.10 percent.
B) Mason's bond will increase in value by $52.10.
C) Dixon's bond will increase in value by 4.61 percent.
D) Mason's bond will increase in value by $41.
E) Dixon's bond will increase in value by 6.87 percent. Answer: D
63) A zero coupon bond with a face value of $1,000 is issued with an initial price of $430.84 based on semiannual compounding. The bond matures in 20 years. What is the implicit interest, in dollars, for the first year of the bond's life?
A) $19.08
B) $22.56
C) $18.53
D) $21.47
E) $25.25
64) Allison's wants to raise $12.4 million to expand its business. To accomplish this, it plans to sell 25-year, $1,000 face value, zero-coupon bonds. The bonds will be priced to yield 6.5 percent, with semiannual compounding. What is the minimum number of bonds the firm must sell to raise the $12.4 million it needs?
A) 59,864
B) 52,667
C) 61,366
D) 60,107
E) 60,435
65) Jackson's has $1,000 face value, zero-coupon bonds outstanding that mature in 13.5 years. What is the current value of one of these bonds if the market rate of interest is 7.6 percent? Assume semiannual compounding.
A) $365.32
B) $401.12
C) $360.49
D) $378.17
E) $384.07
66) A corporate bond with a face value of $1,000 matures in 4 years and has a coupon rate of 6.25 percent. The current price of the bond is $932 and interest is paid semiannually. What is the yield to maturity?
A) 9.05 percent
B) 6.67 percent
C) 8.58 percent
D) 8.28 percent
E) 7.92 percent
67) A bond has a coupon rate of 8.2 percent, a $1,000 par value, matures in 11.5 years, has a yield to maturity of 7.67 percent, and pays interest annually. What is the current yield?
A) 7.89 percent
B) 8.21 percent
C) 8.43 percent
D) 7.67 percent
E) 8.52 percent
68) Suzette owns a corporate bond with a yield to maturity of 7.45 percent. She is in the 12 percent tax bracket. What is her equivalent rate of return on a municipal bond? Ignore state taxes.
A) 6.17 percent
B) 5.89 percent
C) 6.56 percent
D) 8.26 percent
E) 8.47 percent
69) Currently, you own a municipal bond with a yield to maturity of 4.86 percent. If you are in the 24 percent tax bracket, what is your equivalent corporate tax rate? Ignore state taxes.
A) 7.17 percent
B) 6.61 percent
C) 6.39 percent
D) 6.59 percent
E) 6.82 percent
70) A corporate bond has a coupon rate of 6 percent, a $1,000 face value, and matures two years from today. The corporation is in a serious financial situation and has announced that no future annual interest payments will be paid and that only 50 percent of the face value will be repaid but that payment will be delayed by one year. What is the current value of this bond to a bondholder with a required rate of return of 14 percent?
A) $374.31
B) $358.40
C) $299.02
D) $337.49
E) $325.08
71) A corporate bond has a coupon rate of 5.5 percent, a $1,000 face value, and matures three years from today. The corporation is in a serious financial situation and has announced that no future annual interest payments will be paid and that the probability the entire face value will be repaid is only 75 percent. If the entire face value cannot be paid, then 60 percent of the face value will be repaid. All payments will be made three years from now. What is the current value of this bond at a discount rate of 15 percent?
A) $591.76
B) $603.10
C) $611.90
D) $617.48
E) $622.04
72) Aivree is buying a $1,000 face value bond at a quoted price of 99.486. The bond carries a coupon rate of 5.6 percent, with interest paid semiannually. The next interest payment is four months from today. What is the clean price of this bond?
A) $994.86
B) $1,004.19
C) $1,013.53
D) $987.21
E) $1,005.73
73) Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond carries a coupon rate of 7.75 percent, with interest paid semiannually. The next interest payment is two months from today. What is the dirty price of this bond?
A) $1,039.47
B) $1,042.15
C) $1,056.02
D) $1,028.18
E) $1,026.56
74) Casey just purchased a $1,000 face value bond at an invoice price of $1,288.16. The bond has a coupon rate of 6.2 percent, semiannual interest payments, and the next interest payment occurs one month from today. Of the amount paid for the bond, what was the dollar amount of the accrued interest?
A) $25.83
B) $5.17
C) $31.00
D) $27.39
E) $6.20
75) A corporate bond is currently quoted at 101.633. What is the market price of a bond with a $1,000 face value?
A) $1,000.28
B) $1,002.77
C) $1,016.33
D) $1,102.77
E) $1,276.70
76) The 5-year bond of XYZ Corp. has a bid quote of 131.2891 and an asked quote of 131.3047. Assume you purchase one of these bonds with a face value of $5,000 and a coupon rate of 7.4 percent, paid semiannually. The next interest payment will be paid two months from today. What will be your invoice price for this purchase?
A) $7,220.01
B) $6,690.68
C) $6,809.47
D) $7,001.32
E) $6,549.30
77) Last year, a bond yielded a nominal return of 7.37 percent while inflation averaged 3.26 percent. What was the real rate of return?
A) 3.42 percent
B) 3.27 percent
C) 3.98 percent
D) 3.71 percent
E) 3.86 percent
78) A $1,000 par value bond carries a coupon rate of 6.5 percent and has a yield to maturity of 7.29 percent. The inflation rate is 3.13 percent. What is the bond's real rate of return?
A) 3.27 percent
B) 4.03 percent
C) 3.37 percent
D) 4.42 percent
79) If a bond provides a real rate of return of 2.89 percent at a time when inflation is 3.21 percent, what is the nominal rate of return on the bond?
A) 6.10 percent
B) 6.13 percent
C) 6.16 percent
D) 6.19 percent
E) 6.22 percent
80) The nominal rate of return on a bond is 7.28 percent while the real rate is 3.09 percent. What is the rate of inflation?
A) 4.06 percent
B) 4.28 percent
C) 4.09 percent
D) 4.13 percent
E) 4.17 percent
81) Stu wants to earn a real return of 3.4 percent on any bond he acquires. The inflation rate is 2.8 percent. He has determined that a particular bond he is considering should have an interest rate risk premium of .27 percent, a liquidity premium of .08 percent, and a taxability premium of 1.69 percent. What nominal rate of return is Stu demanding from this particular bond?
A) 8.34 percent
B) 7.19 percent
C) 8.40 percent
D) 7.38 percent
E) 8.74 percent
82) Define what is meant by interest rate risk. Also, assume the manager of a $100 million portfolio of corporate bonds predicts interest rates will rise in the near future. What adjustments should be made to the portfolio assuming the market has not already adjusted for this prediction?
Answer: Interest rates and bond prices have an inverse relationship. It is this effect on bond prices caused by changes in market interest rates that is referred to as interest rate risk. All else the same, if interest rates are expected to rise, bond prices should be expected to decline. Since short-term, high-coupon bonds are less sensitive to interest rate risk, the portfolio should be moved into these types of securities to limit the downside risk.
83) Interest rate risk is often explained by using the concept of a teeter-totter. Explain interest rate risk and how it is related to the movements of a teeter-totter.
Answer: Interest rates sit on one end of the teeter-totter while bond prices sit on the other end. As interest rates move up, bond prices move down as seen by the movements of a teeter-totter. Likewise, as interest rates move down, bond prices move up. In addition, short-term bonds are located a short distance from the fulcrum while long-term bonds are situated towards the end of the teeter-totter, illustrating that long-term bonds move further in reaction to a change in interest rates than do short-term bonds.
84) Why do corporations issue 100-year bonds, knowing that interest rate risk is highest for very long-term bonds? How does the interest rate risk affect the issuer?
Answer: Essentially, the issuer takes the opposite side of the interest rate risk position. By issuing long-term bonds, the corporation is essentially betting that rates won't fall significantly. If rates do decline, the corporation will incur a loss due to borrowing at rates higher than the future market rates. On the other hand, if rates rise, the corporation benefits by having locked in its borrowing rate for up to 100 years. In addition, these bonds are a source of long-term financing where the interest is tax deductible. If the firm should issue stocks, the dividends would not be tax deductible.
85) Normally, the Treasury yield curve is upward-sloping. Explain the conditions required for a downward-sloping yield curve to exist.
Answer: A downward-sloping yield curve exists when the expected inflation premium is declining over time. The decline in the inflation premium must be sig
86) Explain liquidity risk, default risk, and taxability risk. How does each of these risks affect the yield of a bond?
Answer: Liquidity problems exist in thinly traded bonds making some bonds difficult to sell at their actual value. The greater this difficulty, the higher the liquidity risk, and the higher the premium demanded. Default risk is the likelihood the issuer will default on its bond obligations. The higher this probability, the higher the default risk, and the higher the premium demanded. Taxability risk reflects the fact that some bonds have their interest taxed at the federal, state, and local levels, while others are taxed by only some, or none, of these governmental levels. The more taxes that are applied to a bond's interest payments, the higher the premium demanded.
87) Should investors be indifferent between two bonds which have equal market yields to maturity as long as the bonds have the same bond rating? Can you think of any real-world factors which might make a given investor prefer one of these bonds over the other?
Answer: The question only states the bonds have the same market yield to maturity and bond rating. The market yield is comprised of several factors which may be valued differently by different investors. One key difference is the taxability premium that each investor applies to a bond. Since investors face different tax situations and tax rates, this premium can vary. Also, an investor who plans on holding a bond until maturity will not place as much emphasis on the liquidity premium as will an investor who plans to sell prior to maturity. Individual investors may also differ in their outlook for inflation, causing each to assign a different inflation premium to the same bond. Likewise, individual investors may have differing opinions on a bond's rating as they may view the probability of default differently. Any one of these differences may cause an investor to assign a discount rate to the bond that varies from that assigned by the overall market. This can cause investors to have differing preferences on which bonds they prefer as each bond's value depends on the discount rate used to value the bond's cash flows.
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