finalpartasolution

finalpartasolution - FIN 4243 Fall 2009 Final Exam Part I...

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1 FIN 4243 Fall 2009 Final Exam Part I Solution (Version A) Name: UFID: Section (circle one): 3027 or 3038 DO NOT BEGIN UNTIL YOU ARE TOLD TO DO SO.
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Part I. Multiple Choice. 4 points per question. (Total 80 pts) 1. All else equal, which of the following is least likely to increase the interest rate risk of a bond? A. A longer maturity B. Inclusion of a call feature C. A lower coupon D. A decrease in the YTM Answer: B 2. Which of the following statements about the risks associated with investing in bonds is least accurate? A. Credit risk is the likelihood that an investor will be unable to sell the security quickly and at a fair price. B. Reinvestment risk is the uncertainty about the rate at which cash flows from the security can be reinvested. C. Volatility risk is the risk that the price of a bond with an embedded option will decline when expected yield volatility changes. D. Interest rate risk is the risk that a bondholder faces if the price of a bond held in a portfolio will decline due to rising market interest rates. Answer: A 3. Which of the following is least likely a disadvantage of a callable bond to an investor? The: A. Investor is exposed to reinvestment rate risk B. Cash flow pattern of a callable bond is not known with certainty C. Issue often offers a higher coupon rate than a comparable option-free bond D. Price appreciation potential of callable bond will be reduced relative to an otherwise comparable option-free bond Answer: C 4. A company has two $1,000 face value bonds outstanding both selling for $701.22. The first issue has an annual coupon of 8% and 20 years to maturity. The second bond has the same yield as the first bond but has only five years remaining until maturity. The second issue pays coupon annually as well. What is the annual coupon payment on the second issue? A. $13.59 B. $18.56 C. $27.18 D. $37.12 Answer: D 5. A 20-year, 10% annual-pay bond has a par value of $1,000. What would this bond be trading for if it were being priced to yield 15% as an annual rate? A.
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finalpartasolution - FIN 4243 Fall 2009 Final Exam Part I...

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