# econ423quiz2answer - Econ 423, Summer 2009 Lauren Heller...

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Unformatted text preview: Econ 423, Summer 2009 Lauren Heller Homework Quiz #2 Name PID MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Which of the following are generally true of all bonds? 1) A) Even though a bond has a substantial initial interest rate, its return can turn out to be negative if interest rates rise. B) The longer a bond‘s maturity, the lower is the rate of return that occurs as a result of the increase in an interest rate. C) Prices and returns for long—term bonds are more volatile than those for shorter—term bonds. D) All of the above are true. E) Only A and B of the above are true. 2) With an interest rate of 10 percent, the present value of a security that pays \$1,100 next year and 2) \$1,460 four years from now is approximately A) \$2,560. B) 53,000. C) \$2,000. D) \$1,000. 3) (I) A discount bond requires the borrower to repay the principal at the maturity date plus an 3) interest payment. (Ii) A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value) is repaid. A) (I) is true, (l1) false. B) (I) is false, (II) true. C) Both are true. D) Both are false. 4) When the interest rate on a bond is below the equilibrium interest rate, there is excess in 4) the bond market and the interest rate will . A) demand; rise B) supply,- fall C) demand; fall D) supply; rise 5) Refer to the Table Below. You own a \$1,000—par zero—coupon bond that has 5 years of remaining 5) maturity. You plan on selling the bond in one year, and believe that the required yield next year will have the probability distribution given in the table below. What is your expected price when you sell the bond? A) \$763.07 B) \$770.07 C) \$934.62 D) \$956.69 Required Yield Probability {%) 0.1 6.60% 0.2 6.75% 0.4 7.00% 0.2 7.20% 0.1 7.45% 6) Refer to the Table Above. You own a \$1,000—par zero—coupon bond that has 5 years of remaining 6) maturity. You plan on selling the bond in one year, and believe that the required yield next year will have the probability distribution given in the table above. What is the standard deviation of the bond price? A) \$6.79 B) \$6.86 C) 512.85 D) \$46.09 7) You have paid \$980.30 for an 8% coupon bond with a face value of \$1,000 that matures in five 7) years. You plan on holding the bond for one year. If you want to earn a 9% rate of return on this investment, what price must you sell the bond for? A) \$970.49 B) \$980.30 C) \$988.53 D) \$1090.00 8) The demand curve and supply curve for bonds are estimated using the following equations: 8) 36?: Price = (—2!5)Quantity + 940 BS: Price 2 Quantity + 500 Following a dramatic increase in the value of the stock market, many retirees started moving money out of the stock market and into bonds. This resulted in a parallel shift in the demand for bonds, such that the price of bonds at all quantities increased \$50. Assuming no change in the supply equation for bonds, what is the new market interest rate? A) 15.70% B) 17.65% C) 22.80% D) 40.0% 9) Property taxes in DeKalb County are roughly 2.66% of the purchase price every year. If you just 9) bought a \$100,000 home, what is the PV of all the future property tax payments? Assume that the house remains worth \$100,000 forever, property tax rates never change, and that a 9% discount rate is used for discounting. A) \$2440.37 B) \$8766.80 C) \$29,555.55 D) \$338,345.86 Price of Bonds P {£3 increases 1,} interest Rate, 3 I {3 increases } Quantity of Bonds, B Figure 4.1 10) In Figure 4.1, the mest likely cause of the increase in the equilibrium interest rate from i1 to i2 is 10) a(n) in the A) decrease; government budget deficit B) decrease; expected inflation rate C) increase; government budget deficit D) increase; expected inflation rate Page 2 of 3 ...
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## This note was uploaded on 08/31/2009 for the course ECON 423 taught by Professor Vd during the Summer '08 term at UNC.

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econ423quiz2answer - Econ 423, Summer 2009 Lauren Heller...

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