quiz 2 B solutions 2011 6 fall 2011.10.14

quiz 2 B solutions 2011 6 fall 2011.10.14 - FNAN 301, fall...

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FNAN 301, fall 2011, quiz 2, version B, solutions 1. Bonds A, B, C, and D have face values of $1000, pay semi-annual coupons with the next coupon due in 6 months, and mature in T years. Bond A and B have different coupon rates, and bonds C and D have different yields-to-maturity. Which assertion is true if PB > PA > 0, PD > PC > 0, T > 0, Y > 0, and C > 0? Note that all bonds with a time-to-maturity of T have the same time-to-maturity, all bonds with a yield-to-maturity of Y have the same yield-to-maturity (YTM), and all bonds with a coupon rate of C have the same coupon rate. Bond Bond Price Time-to-maturity Yield-to-maturity A PA T Y B PB T Y Bond Bond Price Time-to-maturity Coupon rate C PC T C D PD T C A. Bond A has a higher coupon rate than bond B and bond C has a higher YTM than bond D B. Bond A has a higher coupon rate than bond B and bond D has a higher YTM than bond C C. Bond B has a higher coupon rate than bond A and bond C has a higher YTM than bond D D. Bond B has a higher coupon rate than bond A and bond D has a higher YTM than bond C E. None of the above assertions is true Bond A and bond B If two bonds have the same YTM, face value, time to maturity, and coupon payment schedule, but different coupon rates, then the only difference between the two bonds would be their regular coupon payments. The one with the higher coupons would be worth more than the one with the lower coupons. Therefore, the bond with the higher coupon rate would have the greater value and the bond with the lower coupon rate would have the lower. Since bonds A and B are alike in all respects except for their coupon rates and since PB > PA, the coupon rate of bond B is greater than the coupon rate of bond A. Coupon rate of B > coupon rate of A Bond C and bond D If two bonds have the same coupon rate, face value, time to maturity, and coupon payment schedule, but different YTMs, then the bond with the higher YTM has the lower value and the bond with the lower YTM has the higher value. Since bonds C and D are alike in all respects except for their YTMs and since PD > PC, the yield-to-maturity of bond C is greater than the yield-to-maturity of bond D. YTM of C > YTM of D Answer: C. Bond B has a higher coupon rate than bond A and bond C has a higher YTM than bond D 1
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FNAN 301, fall 2011, quiz 2, version B, solutions 2. Syed wants to create a scholarship trust fund that will make its first scholarship payment in 6 years from today. He plans to save $90,000 per year in a trust fund for 5 years. His first savings donation to the trust fund is expected in 1 year from today. How much can the annual payments from the trust fund be expected to grow each year if the fund is expected to earn 11.8 percent per year, make its first scholarship payment in 6 years from today, have that first payment be $42,000, and have all subsequent payments grow annually at a constant rate forever? A. A rate equal to or greater than 5.00% but less than 6.00%
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This note was uploaded on 12/05/2011 for the course FNAN 301 taught by Professor Staff during the Fall '08 term at George Mason.

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quiz 2 B solutions 2011 6 fall 2011.10.14 - FNAN 301, fall...

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