Question

2. A bond with a $2,000 face value, a 4% coupon rate and 3 years to maturity will pay the following cash flow if current market interest rates are 7%: In 1 year: _____, in 2 years: ______, in 3 years: ____.

Question options:

	$40, $40, $2,000
	$80, $80, $2080
	$140, $140, $2,140

3.What is the present value of a bond with $1,000 face value, a 4% coupon rate, and 2 years to maturity if the current interes rate on assets with similar risk is 5%?

Question options:

	$981.41
	$1,000
	$2,000

6. If market interest rates increase:

Question options:

	you are happy that you bought bonds before the increase, so you can enjoy the higher interest rate.
	you are happy that you bought bond before the increase, since bond prices will increase and you will get a capital gain.
	you are unhappy that you bought bonds before the increase, since bond prices will fall and you will have a capital loss.

Answer 1

2. Face value = 2000, Coupon rate = 4%, maturity = 3 yrs

Coupon payment = 4% * 2000 = 80

Bond will pay 80 per year and in 3rd year it will also pay face value

So second option is correct

3.

Face value = 1000, Coupon rate = 4%, maturity = 2 yrs, market int rate = 5%

Coupon payment = 4% * 1000 = 40

Present value = 40/1.05 + 1040/1.05^2

= 38.09 + 943.31

= 981.4006

= 981.40

So first option is correct

6.

if market rate rises, bond prices will fall and you make a capital loss

So third option is correct