Unformatted text preview: ss than par
C) Less than its Err
D) Less than its FPV
E) $1000.00
Answer: D Page: 6667 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: 6768 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: 7475 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: 7476 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: 7476 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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 Fall '08
 Spivey
 Monetary Policy, Financial Markets, Federal Reserve System

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