Exam 1 High Priority Practice Problems
1.
A bank wishes to earn an annual rate (EAR) of 10.6% on its loan to you. The loan
requires monthly payments. What APR (compounded monthly) must the bank
disclose on this loan?
Find the rate per month.
(1 + r monthly)
12
=
(1 + r annual)
1
=
1.106
1 + r monthly
=
1.106
1/12
=
1.106
y
x
(1÷12)
1 + r monthly
=
1.0084
R % monthly
=
1.0084
– 1 × 100
=
0.8431
APR
=
R × m
=
.8431 × 12
=
10.12% compounded monthly
2.
Which of the following statements are true about bonds?
3.
For a bond making semiannual payments, multiply the YTM by 2 and use that rate to
compute the price.
4.
For a bond making semiannual payments, divide the number of years by 2 and use
that time to maturity to compute the price.
5.
All else equal, a bond offering a higher yield will command a higher price.
6.
All else equal, a bond offering higher coupon payments will command a higher price.
7.
Bonds with lower coupon rates have higher interest rate risk.
Answer:
D and E are true
. A, B and C are false.
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 Spring '12
 T
 real percent change

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