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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 2012 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 promises to pay a coupon of $6 for each of the next 5 years at which time its holder will receive its face value of $100 together with the final coupon. Its yield to maturity as of today is 3%. A. The price of the bond today equals the net present value of the coupons plus the final $100, discounted at 3% per annum. B. In a frictionless market, the bonds price today equals the net present value of the coupons alone (i.e. excluding the final $100), discounted at 3% per annum. C. An investor who buys the bond today is guaranteed a return of 6% per annum (coupon/face value = 6 / 100 ) if the bond is held to maturity. D. An investor who buys the bond today is guaranteed a return of 3% per annum if the bond is held to maturity. 2. A bond with face value $100 will mature one year from the present at which time the holder will receive the face value plus a single coupon of $20. A. If todays market price for the bond is less than $120, there must be an arbitrage opportunity. B. In a frictionless market and in the absence of arbitrage opportunities, the price of the bond today must equal $120. C. The bonds spot yield equals 20% irrespective of todays market price. D. If todays market price for the bond equals $96, the bonds yield to maturity (its spot yield, in this case) is 25%. 3. Two zerocoupon bonds, N and R mature 8 years from today. At maturity N pays 100, while R pays 100 times the factor by which goods prices increase over the next 8 years. Todays bond prices are 50 and 80 for N and R , respectively. An investor expects the goods price index to increase from 250 to 450 over the next 8 years. Assume that bond markets are frictionless. A. The investor has an arbitrage oppotunity: issue N bonds, and buy R bonds. B. The investor has an arbitrage oppotunity: issue R bonds, and buy N bonds. C. The investor could expect to gain by issuing N bonds, using the proceeds to buy R bonds....
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 Spring '12
 R.E.Bailey
 Economics

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