Question

# 1. A Treasury bond has a 10% annual coupon and a 10.5% yield to maturity. Which...

1. A Treasury bond has a 10% annual coupon and a 10.5% yield to maturity. Which of the following statements is CORRECT? *
a. The bond sells at a price below par.
b. The bond has a current yield less than 10%.
c. The bond sells at a discount.
d. a & c.
e. None of the above
2. J&J Company's bonds mature in 10 years, have a par value of \$1,000, and make an annual coupon interest payment of \$75. The market requires an interest rate of 8% on these bonds. What is the bond's price? *
a. \$966.45
b. \$925.62
c. \$948.76
d. \$972.48
e. None of the above
3. Film Co. non-callable bonds currently sell for \$1,150. They have a 10-year maturity, an annual coupon of \$100, and a par value of \$1,000. What is their yield to maturity? *
a. 5.84%
b. 6.15%
c. 7.91%
d. 6.81%
e. None of the above
4. Tosh. Inc.'s bonds currently sell for \$980 and have a par value of \$1,000. They pay a \$95 annual coupon and have a 12-year maturity, but they can be called in 3 years at \$1,150. What is their yield to call (YTC)? *
a. 7.73%
b. 7.50%
c. 7.91%
d. 8.12%
e. None of the above
5. An investor has a bond with face value of \$1000 and coupon rate of 10% and maturity of 5 years, is selling at par. What would be the yield to maturity for this bond? *
a. 5%
b. 10%
c. 6%
d. 8%
e. None of the above
6. OSM Co. bonds have a 15-year maturity, an 8.4% semiannual coupon, and a par value of \$1,000. The going interest rate (rd) is 6.40%, based on semiannual compounding. What is the bond’s price? *
a. \$1,047.19
b. \$1,074.05
c. \$1,191.03
d. \$1,129.12
e. None of the above
7. Jack has now \$1,000. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding? *
a. \$1,378.84
b. \$1,622.20
c. \$1,654.95
d. \$1,678.84
e. None of the above
8. Suppose a State of New Jersey bond will pay \$1,000 eight years from now. If the going interest rate on these 8-year bonds is 6%, how much is the bond worth today? *
a. \$627.41
b. \$634.70
c. \$645.44
d. \$677.71
e. None of the above
9. You plan to invest in bonds that pay 4.0%, compounded annually. If you invest \$20,000 today, how many years will it take for your investment to grow to \$30,000? *
a. 10.34
b. 7.74
c. 8.27
d. 9.97
e. None of the above
10. You just inherited some money, and a broker offers to sell you an annuity that pays \$10,000 at the end of each year for 30 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity? *
a. \$150,753.0
b. \$153,724.5
c. \$156,236.2
d. \$159,195.5
e. None of the above
11. Your father is about to retire, and he wants to buy an annuity that will provide him with \$85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today? *
a. \$1,063,968
b. \$1,119,966
c. \$1,178,912
d. \$1,240,960
e. None of the above
12. Your grandmother just died and left you \$100,000 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account? *
a. \$24,736
b. \$26,038
c. \$27,409
d. \$28,779
e. None of the above
13. You inherited an oil well that will pay you \$25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it? *
a. \$284,595
b. \$299,574
c. \$314,553
d. \$330,281
e. None of the above
14. Candia Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Candia's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) *0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Candia's bonds? *
a. 1.50%
b. 1.56%
c. 1.10\$
d. 2.09%
e. None of the above
15. A 5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*? *
a. 2.59%
b. 2.88%
c. 3.55%
d. 3.20%
e. None of the above
16. Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate? *
a. 15.27%
b. 16.08%
c. 16.88%
d. 17.72%
e. None of the above
17. Your colleague has just invested in a discount bond that offers an annual coupon rate of 10%, with interest paid annually. The face value of the bond is \$1,000 and the difference between the bond’s yield to maturity and coupon rate is 2%. The bond matures in 5 years. What is the bond’s price? *
a. \$808.05
b. \$990.50
c. \$928
d. \$298
e. None of the above
18. AKEA Company has a bond issued outstanding with a 10% semi-annual coupon and 5 years remaining until maturity. The par value of the bond is \$1,000 and the yield to maturity is 11%. What would be the price of the bond? *
a. \$1000
b. \$962
c. \$1100
d. \$850
e. None of the above
19. A bond has a par value of \$1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is \$750, what is the capital gain yield of this bond over the next year? *
a. 1.85%
b. 8%
c. 10%
d. 3.5%
e. None of the above
20. What is the approximate yield to maturity of a 14 percent coupon rate, \$1,000 par value bond priced at \$1,160 if it has 16 years to maturity? *
a. 10%
b. 11.8%
c. 14%%
d. 20%
e. None of the above

1. When the coupon rate of a bond are selling at a lower value than the yield to maturity, it will mean that a bond is selling at a discount and selling at a discount will mean that the bond is selling below its par value. It will always be assumed that when the bonds coupon rate are lower than the yield to maturity of the bond, it will be selling at a discount to it's face value.

Other statements are not appropriate because they are not starting the correct facts.

Correct answer is option ( d) a & c.

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