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Suggested answers to Test 1
TOTAL MARKS: 30
This is version 111. Questions in Version 222 are in a diﬀerent order.
Questions 110
: 1 mark for each question, 10 marks in total.
1. Which of the following presents the correct relationship? As the coupon rate
of a bond increases, the bond’s:
A) face value increases.
B) current price decreases.
C)
interest payments increase.
D) maturity date is extended.
2. If an investor purchases a bond when its current yield is less than the coupon
rate, then the bond’s price will be expected to:
A)
decline over time, reaching par value at maturity.
B) increase over time, reaching par value at maturity.
C) be less than the face value at maturity.
D) exceed the face value at maturity.
3. What is the yield to maturity for a bond paying $100 annually that has six
years until maturity and sells for $1,000?
A) 6.0 percent
B) 8.5 percent
C)
10.0 percent
D) 12.5 percent
4. How much more is a perpetuity of $1,000 worth than an annuity of the same
amount for 20 years? Assume a 10 percent interest rate and cash ﬂows at end
of period.
A) $297.29
B)
$1,486.44
C) $1,635.08
D) $2,000.00
5. What happens when a bond’s expected cash ﬂows are discounted at a rate
lower than the bond’s coupon rate?
A)
The price of the bond increases.
1
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View Full DocumentB) The coupon rate of the bond increases.
C) The par value of the bond decreases.
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 Fall '11
 UsmanAliHannan

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