HW2 - FIN 501, HW2 (Please record your answers on Scantron...

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FIN 501, HW2 (Please record your answers on Scantron Form 882, due on Aug. 22) 1. Which of the following statements regarding a 30-year, $100,000 mortgage with a nominal interest rate of 10%, compounded monthly, is NOT CORRECT? A) The monthly payments will be the same over time. B) The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan. C) The dollar amount of principal being paid off each month gets larger as the loan approaches maturity. D) The amount paid toward interest in the first payment would be lower if the nominal interest rate were 8%. E) Over 90% of the first payment goes toward principal reduction. 2. The Howe family recently bought a house. The house has a 30-year, $165,000 mortgage with monthly payments and a nominal interest rate of 8%. What is the total dollar amount that the family can reduce their principal after their first month mortgage? (Assume that all payments are made at the end of the month.) A) $ 1,100.00 B) $ 1,210.71 C) $ 210.71 D) $ 110.71 E) $ 458.33 3. A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today's market. Assuming no changes in risk, which of the following is true? A) The face value of the bond must be $1,100. B) The bond must be within one year of maturity. C) Interest rates must be lower now than they were five weeks ago. D) The bond's current yield has increased from five weeks ago. E) The coupon payment of the bond must have increased. 4. Which bond would most likely possess the highest degree of interest rate risk? A) 8% coupon rate, 10 years to maturity B) 8% coupon rate, 20 years to maturity C) 10% coupon rate, 10 years to maturity D) 10% coupon rate, 20 years to maturity E) 12% coupon rate, 20 years to maturity 5. The ___________ component of the term structure does not influence the shape of the term structure, rather it affects the overall level of interest rates. A) inflation premium
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HW2 - FIN 501, HW2 (Please record your answers on Scantron...

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