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Fin 308 test 1 answer key

Interest rate change answer true page 70 71 level

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Unformatted text preview: 0 year bond's price change. Answer: False Page: 69 Level: Medium 13. Any security that returns a greater percentage of the price sooner is less price volatile. Answer: True Page: 71 Level: Easy 14. Duration is the elasticity of a security's value to small coupon changes. Answer: False Page: 73-74 Level: Medium 15. A coupon bond with a 3.5 year duration has the same price volatility as a 3.5 year maturity zero coupon bond. Answer: True Page: 78-80 Level: Medium Saunders, Financial Markets and Institutions, 2/e 19 16. The lower the level of interest rates, the greater is a bond's price sensitivity to interest rate changes. Answer: True Page: 83-84 Level: Difficult Multiple Choice Questions 17. The interest rate used to find the fair present value of a financial security is the A) Expected rate of return B) Required rate of return C) Realized rate of return D) Realized yield to maturity E) Current yield Answer: B Page: 63 Level: Easy 18. A security has an expected return greater than its required return. This security is A) Selling at a premium to par B) Selling at a discount to par C) Selling for more than its FPV D) Selling for less than its FPV E) A zero coupon bond Answer: D Page: 63-64 Level: Medium 19. A bond that you held to maturity had a realized return of 8%, but when you bought it, it had an expected return of 6%. If no default occurred, which one of the following must be true? A) The bond was purchased at a premium to par B) The coupon rate was 8% C) The required return was greater than 6% D) The coupons were reinvested at a higher rate than expected E) The bond must have been a zero coupon bond Answer: D Page: 63-64 Level: Medium 20 Saunders, Financial Markets and Institutions, 2/e Chapter 1 Introduction 20. You would want to purchase a security if P _____ FPV or Err _____ rrr. A) u , e B) u , u C) e , u D) e , e Answer: C Page: 63-64 Level: Difficult 21. A 6 year annual payment corporate bond has a market price of $1050. It pays annual interest of $100 and its required rate of return is 9%. By how much is the bond mispriced? A) $0.00 B) Overpriced by $5.14 C) Underpriced by $5.14 D) Overpriced by $11.32 E) Underpriced by $11.32 Answer: B Page: 63-64 Level: Medium Response: FPV = 100 v PVIFA[r%,6yrs] + 1000 v PVIF(r%,6 yrs) = $1044.86 22. A 10 year corporate bond pays $75 interest semiannually. What is the bond's price if the required return is 7%? A) $1175.32 B) $1181.47 C) $1035.53 D) $1052.97 E) $1222.18 Answer: C Page: 67 Level: Medium Response: 1 = 37.50 v PVIFA(3.5%,20) + 1000 v PVIF(3.5%,20) 23. A corporate bond has a coupon rate of 10% and a required return of 10%. This bond's price is A) $924.18 B) $1000.00 C) $879.68 D) $1124.83 E) Not possible to determine from the information given Answer: B Page: 66 Level: Easy Saunders, Financial Markets and Institutions, 2/e 21 24. A 10 year annual payment corporate coupon bond has an expected return of 11% and a required return of 10%. The bond's market price is A) Greater than its FPV B) Le...
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