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1 l} out of
' 10 Points The price ofa pond is determined by:
r the payments promised by the issuer. re the face value ofthe bond, which is the amount ofprincipal oorroweo.
re the sum ofthe present value ofeach payment promised by the issuer. n the sum the present value ofthe oono's coupon payments. HultipleChoice Section: Bond Prices a‘.‘.‘ard' 2 D out of ‘lUUU. anoi .U%.thenthe bono's price Is
0% : Moo on r $2,ooonn
r tampon no
r $10000 MullipleClIoice Section Bond Prices award 3_ 0 DUI of H) Poian
Consider a coupon bond, which an investor plans to hold until the issuer has completed making all the payments, including return ofprincipal Which ofthe lollowing interest rate concepts takes proper account ofthe time value of
money and thus most accurately expresses the yield ofthe ponda r coupon rate
: currentyielo
04. r yieldto maturity r“ the capital gain as a percent ofthe purchase price MullipleChoice Section Elono Yields award: 4_ 0 out 9f 10 ts A bond has an annual coupon payment of C, aface value ot'F‘ alarm to maturity ofn years and a current price ofF' in) 7 $70 00, F 7 $1000 00, n 71 andP r $ 05000, what is the yieldto maturity of'th'e'l'Jond; IIIII " o_( 126%
p 526%
r 7.37%
.— 7.00% Multipleclioice Sedion. Bond Yields award value are notequal"
( When the price oithe bond is less than theface value, the relatively low price means thatthe currentyield is higherthan the yieldto maturity ( When the price oithe bond is greaterthan the face value, theyieldto maturity exceeds the coupon rate since the coupon rate does nottake the market price into account
( When the price oithe bond is greaterthan the face value, the curientyield eiiCeeds the coupon rate siHCe the coupon rate does nottake the market price into account °_ ( When the price oithe bond is less than theface value, the relatively low price means thatthe yieldto maturity, bytakind into accountthe capital gains that Will acnrue, is greaterthan both the coupon rate andthe current yield
Multiplechoice Section Elond Yields
award'
6 00m (if
I 19. .... .. . . . . . . . . . . .. .... .. ..................... .. .... .. . . . . . . . . . . .. . . . . . . . . . . ..
Consider a2—year coupon bondWith coupon payments of$100 00 and aface value of$2,000 The initial interest rate is 5% One year later. the interest rate is 6% What is the price ofthe bond aﬂerthe interest rate change?
r 01.96333
$2,100.00 r.
r‘ $2,000.00
f. o_ $1,931 13 Multiplechoice Section Bond Vields award' 7 Gout of u
i:
o
m
a E
3
:5 Quantity uf E ands An eqmlibrium In the bond market is indicated at point E In the diagram above. With eqmlibrium price P0. Which ofthe following statements about now the market arrived at this equilibrium is correct?
r ifthe price was initially higherthan P0. bond purchasers were unable to buy the quantity they wanted at this initial price, andthe interest rate andthe bond price declinedto PD.
°_. r ifthe price was initially higherthan P0. bond issuers were unable to sell the quantity they wanted at this initial price, so the bond price declined andthe interest rate rose.
r ifthe price was initially Iowertnan PD, savers wantedto buy fewer bonds than were oﬁered by bond issuers, so the price of bonds and interest rates rose. r ifthe price was initially Iowertnan PD, there was an excess supply of bonds, so bond prices rose and interest rates fell. HJuLnleLllnine FF‘ilUﬂltLeﬂﬂﬂﬂMﬂLkﬁLaﬂﬂJhﬁDﬁleLmlﬂﬁﬂﬂﬂjﬂulaLF lRaie interest rates 0% b lower‘ nigner r“ nrgner; lower * nrgner, nrgner * lnwer‘ rower Mullrprechoice Section: The Bond Market and the Determination oHnterest Rates 3 wa rd 9 I) out of perrud‘tne price nftna Treasury hand wrrlne highertnanlnaluflne curpnrate hand becausalne unlne Treasurylmnd rs than mine Curpnrala hand
I“ rlqurdrtyrrskmrgher r rnnalmn rrsk; Inwer r rnleresl rate “SK arways nrgner v“ default risk‘ lower MulerleClIorce Sermon Why Bonds are Rrsky Hnweuen rfhond defaurls‘ tne securitywrlr pay $50 ﬁn to the homer Inna prnhahrlity nfdefault r5 0 20 and iflne rnleresl rate on a aneiyearTreasury hirl rs 5 00%, "1'9 defaurl rrsk premium on the MEIS is annmxrmalery
°_ : 12 9% p 50% '1 17 9% 13% '3 MullrpleCllorce Searun:wny Bonds are RISKy ...
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 Spring '05
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 Interest Rates, Multiplechoice Section Bond Vields

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