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Unformatted text preview: UNIVERSITY OF ESSEX DEPARTMENT OF ECONOMICS EC372 Economics of Bond and Derivatives Markets Multiple Choice Test Spring Term 2011 Time allowed: 40 minutes. There are TWENTY questions, ALL of which should be answered. DO NOT START UNTIL YOU ARE ASKED TO BEGIN. Enter your registration number on the answer sheet. For each question, mark the most appropriate option, A, B, C, or D, on the answer sheet. Calculators (hand held, containing no textual information) are permit ted. Only the answer sheet is to be returned. You should keep the question paper (this document). The purpose of the test is solely formative for students to gauge their understanding of the course material. The mark will carry no weight in your overall result for the course. 1. A bond with market price p , pays a coupon of $5 for each of the next 10 years, at which time the bond is redeemed with payment of its facevalue, $100. The bonds yield to maturity : A. Measures the rate of return guaranteed to an investor who holds the bond for the entire 10 years (assuming no default). B. Measures the rate of return such that p equals the Net Present Value of $100 after 10 years, excluding the coupons. C. Measures the rate of return such that p equals the Net Present Value (NPV) of the stream of coupons plus the NPV of $100 received at maturity. D. Is equal to 5% (i.e. 5/100) no matter what the price, p . 2. A zerocoupon bond with market price p matures two years from the present at which time its holder will receive $100. A. If todays market price for the bond equals 90, the bonds spot yield is 10%. B. If todays market price for the bond equals 110, the bonds spot yield is 10%. C. The bonds spot yield, y , is defined by y = 100 (1 + p ) 2 . D. The bonds spot yield, y , is defined by y = 100 p 1 / 2 1 . 3. The following information is provided for bonds A , B and C : Bond A Bond B Bond C Payoff after 1 year: 50 100 Payoff after 2 years: 100 100 Todays price: Not traded 98 95 A. Todays fair value of bond A equals 193. B. Todays fair value of bond A equals 144. C. Todays fair value of bond A equals 100. D. Todays fair value of bond A equals 96.50. 4. Two zerocoupon bonds each have face value $100 but one matures 6 years from today and the other 7 years from today. The current market price of each 6year bond equals $77, while that for each 7year bond equals $70. A. The implied forward rate between years 6 and 7 equals 10%. B. The implied forward rate between years 6 and 7 equals 7%. C. The spot yield on 6year bonds equals 10%. D. The spot yield on 7year bonds equals 7%. Page 1 of 6 (revised 01/03/2011) 5. The main difference between forward and futures contracts is: A. For a futures contract there is never any obligation to deliver, or to receive, the underlying asset....
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 Spring '12
 R.E.Bailey
 Economics

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