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Bond, Yield to Maturity and Coupon Interest Rate

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1. A bond which has a yield to maturity greater than its coupon interest rate will sell for a price

a. below par.
b. at par.
c. above par.
d. what is equal to the face value of the bond plus the value of all interest payments.

2. If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?

a. Present value of $1
b. Future value of $1
c. Present value of an annuity of $1
d. Future value of an annuity of $1

3. Which of the following is not one of the components that makes up the required rate of return on a bond?

a. risk premium
b. real rate of return
c. inflation premium
d. maturity payment

4. Which of the following does not influence the yield to maturity for a security?

a. required real rate of return
b. risk free rate
c. business risk
d. commission rate to purchase security

5. As the time period until receipt increases, the present value of an amount at a fixed interest rate

a. decreases.
b. remains the same.
c. increases.
d. Not enough information to tell.

6. The market allocates capital to companies based on all of the following; EXCEPT

a. risk.
b. efficiency.
c. expected returns.
d. number of employees.

7. If the inflation premium for a bond goes up, the price of the bond

a. stays the same.
b. goes down.
c. goes up.
d. cannot be determined.

8. Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expects to earn an 8% annual rate of return. How much money will his daughter have when she starts college? (You will use one of the Appendix tables, in the back of your text, to help calculate the answer)-Rounded to a whole number.

a. $11,250
b. $12,263
c. $24,003
d. $23,079

9. The risk premium is likely to be highest for

a. U.S. government bonds.
b. corporate bonds.
c. gold mining expedition.
d. municipal bonds.

10. Valuation of financial assets (bonds) requires knowledge of

a. future cash flows.
b. appropriate discount rate.
c. past asset performance.
a. a and b

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Solution Preview

1. A bond which has a yield to maturity greater than its coupon interest rate will sell for a price
a. below par.
b. at par.
c. above par.
d. what is equal to the face value of the bond plus the value of all interest payments.

Answer: a. below par

Yield to maturity > Coupon rate : Bond sells below par
Yield to maturity = Coupon rate : Bond sells at par
Yield to maturity < Coupon rate : Bond sells above par
Yield and price have an inverse relationship

2. If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?
a. Present value of $1
b. Future value of $1
c. Present value of an annuity of $1
d. Future value of an annuity of $1

Answer: d. Future value of an annuity of $1
Since we are finding ending (future) value of a stream of equal cash payments (annuity)

3. Which of the ...

Solution Summary

MCQs on securities have been answered.

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Bonds and Yield Related Questions

Can you please assist me with theses questions?

3. A bond has a coupon rate of 8.5% and 18 years until maturity. If the yield to maturity is 6.7%, what is the price of the bond?

5. A bond sells for $864.50 and has a coupon rate of 6%. If the bond has 16 years until maturity, what is the yield to maturity of the bond?

8. Sealord Fisheries issues zero coupon bonds on the market at a price of $150 per bond. Each bond has a face value of $1,000 payable at maturity in 20 years. What is the yield to maturity for these bonds?

10. If instead the Sealord Fisheries zero coupon bonds referred to above in question # 8, are callable in 10 years at a call price of $475, what is their yield to call?

11. Dunbar Corp. has bonds on the market with 11.5 years to maturity, a Yield to Maturity of 7.5 percent, and a current price of $1,084. What must the coupon rate be on Dunbar's bonds?

14. A zero coupon bond with a 9%Yield To Maturity has 15 years to maturity. Two years later, the price of the bond remains the same. What going on here?

16. Bond X is a premium bond with an 8% coupon, a Yield to Maturity of 6 percent, and 15 years to maturity. Bond Y is a discount bond with 8% coupon, a Yield to Maturity of 10 %, and also 15 years to maturity. If interest rates remain unchanged, what do you expect the price of these bonds to be 1 year from now? In 5 years? In 10 years? In 14 years? In 15 Years? What's going on here?

18. Bond J is a 4% coupon bond. Bonk K is a 10% coupon bond. Both bonds have 10 years to maturity and have a Yield To Maturity of 7%. If interest rates suddenly rise by 2%, what is the percentage price change of these bonds? What if rates suddenly fall by 2% instead? What does this problem tell you about the interest rate risk of lower-coupon bonds?

25. A bond with a coupon rate of 7% sells at a yield to maturity of 8%. If the bond matures in 13 years, what is the Macaulay duration of the bond? What is the modified duration?

Thank you in advance.

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