Exercise2 Ch7&6

Exercise2 Ch7&6 - FIN350 In Class Work No. 2-Bond&...

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FIN350 1. The discount rate that makes the present value of a bond’s payments equal to its price is termed the: A) capital gain yield. B) yield to maturity. C) current yield. D) coupon rate. 2. The coupon rate of a bond equals: A) its yield to maturity. B) coupon as a percentage of its face value. C) the maturity value. D) coupon as a percentage of its price. 3. The face value of a bond is received by the bondholder: A) at the time of purchase. B) annually. C) whenever coupon payments are made. D) at maturity. E) none of the above 4. How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 7%? A) $696.74 B) $1,075.82 C) $1,082.00 D) $1,123.01 PV = $90 1 .07 1 .07(1.07) $1,000 (1.07) 5 5 - + = $90 [14.2857 – 10.1855] + $1,000 1.4026 = $369.02 + $712.98 = $1,082.00 5. Which of the following is correct for a bond currently selling at a premium to par? A) Its current yield is higher than its coupon rate. B) Its current yield is lower than its coupon rate. C) Its yield to maturity is higher than its coupon rate. D) Its default risk is extremely low. 1
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6. Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk? That is, which bond's price will be most sensitive to changes in interest rate? A) A zero-coupon bond with 30 years until maturity. B) A coupon-paying bond with 20 years until maturity. C) A floating-rate bond with 20 years until maturity. D) A zero-coupon bond with 20 years until maturity. 7. U.S. Treasury bond yields do not contain a: A) coupon interest payment. B) nominal interest rate. A) yield to maturity. C) default premium. 8. What is the current yield of a bond with a 6% coupon, four years until maturity, and a price of $750? A) 6% B) 8% C) 12% D) 14.7% a. Junk bond b. James Bond. c. High GPA bond. d. Barry's bond. e. Investment grade bond. 10. When the yield curve is upward-sloping, then: A) short-maturity bonds offer high coupon rates. B) long-maturity bonds are priced above par value. C) short-maturity bonds yield less than long-maturity bonds. D) long-maturity bonds increase in price when interest rates increase. 11. Palmer Products has outstanding bonds with an annual 8 percent coupon. The bonds have a par value of $1,000 and a price of $865. The bonds will mature in 11 years. What is the yield to maturity on the bonds? A) 10.09% B) 11.13% C) 9.25% 2
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D) 9.89% 12. Assume interest rates on long-term Treasury bond and two corporate bonds are as follows: Treasury bond : 7.72% Corpate bond with rating A : 9.64% Corpate bond with rating BBB : 10.18% All three bonds will mature in 20 years ; they all have very good liquidity. The differences in interest rates among these bonds are caused primarily by
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Exercise2 Ch7&6 - FIN350 In Class Work No. 2-Bond&...

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