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Fin 308 test 1 answer key

2e 21 24 a 10 year annual payment corporate coupon

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Unformatted text preview: ss than par C) Less than its Err D) Less than its FPV E) $1000.00 Answer: D Page: 66-67 Level: Medium 25. An 8 year annual payment corporate bond has a required return of 10% and a 9% coupon. Its market value is $15 over its FPV. What is the bond's Err? A) 10.11% B) 9.85% C) 9.71% D) 10.23% E) 8.73% Answer: C Page: 67-68 Level: Difficult Response: FPV = 946.65 = 90 v PVIFA(10%,8yrs) + 1000 v PVIF(10%,8yrs) ; (946.65+15) = 90 v PVIFA(Err,8yrs) + 1000 v PVIF(Err,8yrs), trial and error or calculator 26. Corporate Bond A returns 5% of its cost in PV terms in each of the first five years and 75% of its value in the sixth year. Corporate Bond B returns 8% of its cost in PV terms in each of the first five years and 60% of its cost in the sixth year. If A and B have the same required return, which of the following is/are true? I. Bond A has a bigger coupon than Bond B II. Bond A has a longer duration than Bond B III. Bond A is less price volatile than Bond B IV. Bond B has a higher FPV than Bond A. A) III only B) I, III and IV only C) I, II and IV only D) II and IV only E) I, II, II and IV are all true Answer: D Page: 76 Level: Difficult 22 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 27. A corporate bond returns 6% of its cost (in PV terms) in the first year, 5% in the second year, 4% in the third year and the remainder in the fourth year. What is the bond's duration in years? A) 3.68 years B) 2.50 years C) 4.00 years D) 3.75 years E) 3.88 years Answer: A Page: 76 Level: Medium Response: 3.68 = (6% v 1) + (5% v 2) + (4% v 3) + (85% v 4) 28. If an N year security recovered the same percentage of its cost in PV terms each year the duration would be A) N B) 0 C) N/2 D) N!/N2 E) None of the above Answer: C Page: 74-75 Level: Difficult 29. The _____ the coupon and the _____ the maturity; the _____ the duration of a bond, ceteris paribus. A) Larger, longer, longer B) Larger, longer, shorter C) Smaller, shorter, longer D) Smaller, shorter, shorter E) None of the above Answer: E Page: 79 Level: Difficult 30. A 4 year maturity 12% coupon annual payment corporate bond with a required rate of return of 12% has a duration of (years): A) 3.05 B) 2.97 C) 3.22 D) 3.71 E) 3.40 Answer: E Page: 74-76 Level: Medium Saunders, Financial Markets and Institutions, 2/e 23 31. A decrease in interest rates will A) Decrease the bond's FPV B) Increase the bond's duration C) Lower the bond's coupon rate D) Change the bond's payment frequency E) Not affect the bond's duration Answer: B Page: 74-76 Level: Medium 32. A 10 year maturity coupon bond has a 6 year duration. An equivalent 20 year bond with the same coupon has a duration A) Equal to 12 years B) Less than 6 years C) Less than 12 years D) Equal to 6 years E) Greater than 20 years Answer: C Page: 79 Level: Easy 33. A six year maturity bond has a five year duration. Over the next year maturity will decline by 1 year and duration will decline by A) Less than one year B) More than one year C) 1 year D) N year...
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