# test1 - FIN 4243 Practice Midterm Fall 2009 Solution Part I...

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1 FIN 4243 Practice Midterm Fall 2009 Solution Part I. Multiple Choice (Total 50 pts or 2 pts each) 1. The current price of a bond is 102.50. If interest rates change by 0.5%, the value of the bond price changes by 2.50. What is the duration of the bond? A. 5.00 B. 2.44 C. 4.88 D. 2.50 Answer: C 2. Which of the following statements about reinvestment risk of a security is least accurate? Reinvestment risk: A. Is minimized with zero-coupon bond issues B. Becomes more problematic for those investors with longer time horizons C. Becomes more problematic when the current coupons being reinvested are relatively small D. Is present to a greater extent for those investors who depend on a bond’s coupon for most of their return Answer: C 3. The duration of a bond is 5.47, and its current price is \$986.30. Which of the following is the best estimate of the bond price change if interest rates increase by 2%? A. -\$109.40 B. -\$107.90 C. \$107.90 D. \$109.40 Answer: B 4. An investor is concerned about interest rate risk. Which of the following four bonds (similar except for yield and maturity) has the least interest rate risk? The bond with: A. 5% yield and 10-year maturity B. 5% yield and 20-year maturity C. 6% yield and 10-year maturity D. 6% yield and 20-year maturity

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3 9. Given two bonds that are equivalent in all respects except tax status, the marginal tax rate that will make an investor indifferent between an 8.2% taxable bond and a 6.2% tax-exempt bond is closest to: A. 24.39% B. 76.61% C. 37.04% D. 43.47% Answer: A 10. An analyst observes a 5-year, 10% semiannual-pay bond. The face amount is \$1000. The analyst believes that the yield to maturity for this bond should be 15%. Based on this yield estimate, the price of this bond would be: A. \$828.40 B. \$832.39 C. \$1189.53 D. \$1193.04 Answer: A 11. Bond A is a 15-year, 10.5% semiannual-pay bond priced with a yield to maturity of 8%, while Bond B is a 15-year, 7% semiannual-pay bond priced with the same yield to maturity.

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## This note was uploaded on 12/02/2009 for the course FIN 4243 taught by Professor Dudley during the Fall '08 term at University of Florida.

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test1 - FIN 4243 Practice Midterm Fall 2009 Solution Part I...

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