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How do you price a bond; practice exam questions

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1. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the present value of the bond? (Use annual analysis, based on 20 yrs-- and a decrease in the inflation premium as shown.)
Answer

over $1,000
under $1,000
over $1,200
$1,000

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

stays the same.
goes down.
goes up.
cannot be determined.

3. You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?
Answer

Present value of an annuity of $1
Future value of an annuity
Present value of $1
Future value of $1

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

risk premium
real rate of return
inflation premium
maturity payment

5. Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?
Answer

Present value of an annuity
Present value of a single amount
Future value of an annuity
Future value of a single amount

6. Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period? (You will use one of the Appendix tables, in the back of your text, to help calculate the answer)
Answer

$2,915
$3,570
$6,254
$8,570

7. To save for her newborn son's college education, Lea Wilson will invest $1,000 at the beginning of each year for the next 18 years. The interest rate is 12 percent. What is the future value? (You will use one of the Appendix tables, in the back of your text, to help calculate the answer)
Answer

$7,690.
$34,931.
$63,440.
$55,750.

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

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

9. The market allocates capital to companies based on all of the following; EXCEPT
Answer
risk.
efficiency.
expected returns.
number of employees.

10. 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?
Answer
Present value of $1
Future value of $1
Present value of an annuity of $1
Future value of an annuity of $1

Solution Preview

I put explanations below each question below and **attached** a model in excel for you to play with. Explanations about how bond pricing works are in excel too.

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1.
A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the present value of the bond? (Use annual analysis, based on 20 yrs-- and a decrease in the inflation premium as shown.)
See excel spreadsheet

over $1,000
under $1,000
>>> over $1,200
$1,000

2. If the inflation premium for a bond goes up, the price of the bond...
Buyer now wants a higher return to cover inflation and a real return. Change the market rate to higher than 9% in the excel model and see what happens to prive!

stays the same.
>>> goes down.
goes up.
cannot be determined.

3. You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?
PV.......add interest.....--> ...

Solution Summary

In addition to responding to questions given, the response includes an excel template on how bond pricing works for use in future work. Instructional comments are in Excel spreadsheet.

$2.19