2010_test_1_an

2010_test_1_an - Suggested answers to Test 1 TOTAL MARKS:...

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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 1-10 : 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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B) The coupon rate of the bond increases. C) The par value of the bond decreases.
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2010_test_1_an - Suggested answers to Test 1 TOTAL MARKS:...

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