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Bond, Yield to Maturity and Coupon Interest Rate

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

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.

$2.19