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Exam1_hipriority

# Exam1_hipriority - Exam 1 High Priority Practice Problems 1...

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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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