ECON 303 – Which of the following $4,000 face-value securities

Subject: Economics    / General Economics
Question
ECO 303 AS 4 (Ch. 4) Name__________________ Multiple choice @ ½ point each. Select the best answer available.
1. Which of the following $4,000 face-value securities would you prefer to be selling? Assume n = 20 for all instruments.
A) A 6% coupon bond selling for $6,500.
B) A 6% coupon bond selling for $3,000.
C) A 10% coupon bond selling for $4,500.
D) A 10% coupon bond selling for $5,000.
E) A 12% coupon bond selling for $4,500.
2. Which of the following bonds would you prefer to be buying? Assume n = 30 for all bond maturities.
A) A $10,000 face-value security with a 6% coupon rate selling for $9,000.
B) A $10,000 face-value security with a 6% coupon rate selling for $10,000.
C) A $10,000 face-value security with a 6% coupon rate selling for $11,000.
D) A $10,000 face-value security with a 7% coupon rate selling for $9,500.
E) A $10,000 face-value security with a 7% coupon rate selling for $11,500.
3. If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you expect that
A) the coupon payments on your bond will rise.
B) the par value of your bond will rise.
C) the market price of your bond will rise.
D) the market price of your bond will fall.
4. In the United States the interest rate is 4% and in Mexico it is 10%, the present value of $100 received in one
year is ________ in ________ .
A) lower; the United States
B) higher; the United States
C) higher; Mexico
D) There is not enough information to answer the question. The market interest rate is ________ than the ________ rate when the bond price is ________ its face value.
A) greater; discount; above
B) greater; coupon; above
C) greater; coupon; below
D) greater; perpetuity; above
6. Which of the following statements about the holding period return on a coupon bond is correct?
A) The total rate of return may never be negative.
B) The total rate of return may be greater or less than the rate of capital gain.
C) The total rate of return may be greater or less than the current yield.
D) The total rate of return is greater than the coupon, holding everything else constant.
7. The key to present value calculations is that they
A) allow easy comparison of taxable and non-taxable investments.
B) provide a common unit for measuring funds at different times.
C) provide accurate answers only in a low-inflation environment.
D) provide accurate answers only in a high-inflation environment.
8. If the interest rates on all bonds falls by 75 basis points, which of the following bonds would you
prefer to own if you decide to stop lending?
A) A bond with two years to maturity
B) A bond with five years to maturity
C) A bond with ten years to maturity
D) A bond with twenty years to maturity
9. Interest-rate risk can best be characterized as the risk that
A) you could have earned a higher interest rate if you waited to purchase a bond.
B) fluctuations in the price of a financial asset in response to changes in market interest rates.
C) you could have gotten a lower interest rate if you waited to lock in a mortgage. D) short-term interest rates may exceed long-term interest rates. 10. Which of the following payment terms should a professional athlete prefer in a “ten million dollar” five-year contract if
the athlete wants to obtain the greatest present value of income?
A) Receive $2 million each of the next five years.
B) Receive $6 million next year and then receive $1 million in each of the subsequent four years.
C) Receive $1 million in each of the next four years and then receive $6 million in the subsequent year.
D) All of the above have the same present value of income.
11. Which of the following options would you choose to have if the rate of discount is 12 percent?
A) $500 in one year
B) $750 in two years
C) $920 in three years
D) $1200 in ten years
12. Consider a three-year $2,000 par value coupon bond that has a present value of $2,140. If the annual rate of
discount is 7 percent, and the payment made at the end of each year is $140, the principal amount to be repaid at
the end of three years is
A) $1,860.00.
B) $2,000.00.
C) $2,140.00.
D) none of the preceding.
13. The only case for which the bond price does not react to a change in the market interest rate is when
A) The bond is FDIC insured.
B) the bond’s coupon rate equals its current yield.
C) the bond’s market price equals its par value.
D) the bond’s holding period is the same as the number of years to maturity.
E) the bond is a U.S. Treasury security.
14. The present value of a series of future payments is
A) inversely related to the future value.
C) directly related to the market interest rate. B) unrelated to the discount factor.
D) inversely related to the discount factor. 15. The present value of a coupon bond is
A) directly related to the discount rate.
C) directly related to the coupon rate. B) inversely related to the time until maturity.
D) directly related to the market interest rate. 16. In a world without risk or inflation, the real interest rate reflects
A) the degree of risk.
B) differing time patterns of individuals’ consumption preferences.
C) economic growth.
D) qualifications of borrowers.
17. The yield to maturity is
A) the interest rate at which the present value of an asset’s returns is equal to its value today.
B) the face value or par value of a coupon bond.
C) any payments received from an asset at the date the asset matures.
D) the interest rate on the asset minus any taxes owed on the interest received.
18. When we say that the present value of $100 received in one year is $97.56, we are also saying that:
A) you prefer receiving $100 dollars in the future than $97.56 today.
B) you prefer receiving $100 dollars today than $100 in one year.
C) you are indifferent between receiving $100 dollars in the future and $97.56 today.
D) you are indifferent between receiving $97.56 dollars in the future and $100 today.

Part II: Short Answer/Problems (2 points each)
Do all of the questions from this section.
Any quantitative questions require showing your work for full credit. Financial calculator answers not accepted.
Problems involving money should be rounded to the nearest cent.
All interest rate problems must be carried at least 5 decimal places and left in % form.
All answers must be legible to receive credit. Partial credit is awarded.

1. A deep discount bond is expected to grow from $75,325 to $150,000 over ten years. What is the yield to maturity on this instrument?

2. What is the price of a 6.15%, $250,000 coupon bond that matures in twelve years i f the annual rate of
discount is 5.35%?

3. Do both of the following
a) Determine the future value of $1500 in twenty-five years with a market interest rate of 6%. b) Determine the coupon rate on a $50,000 bond with an annual coupon payment $2,800.

4. Determine both the current yield and the approximate yield to maturity for a $250,000 coupon bond with a 5.5%
coupon rate selling for $236,600 and maturing in 12 years.

5. A perpetuity with a market price of $24,255 paying $950 annually has a market interest rate of

6. What was the % return on a 20-year, 6.2%, $100,000 coupon bond that was purchased one year ago at par and just
sold for $98,133?

7. Determine the nominal rate you would have to be paid on a 15-year municipal bond to be indifferent between it
and a 15-year corporate bond if the corporate bond has a nominal 6.28% yield. Assume you are in a 39.6% federal
and 8.7% state tax bracket and inflation is expected to be 1.75%.

PART III: Do the following problem. Show all set up and work for full credit. All interest rate problems must
be carried at least 5 decimal places and left in % form. Formulas from class must be utilized and financial
calculator answers will not be accepted. (7 points)
Suppose you purchased a 20-year, $750,000 deep discount bond when it was initially offered. Four years later you
sell the bond and market interest rates have risen from 6.25% to 8.54%.
a. Calculate the initial price of the bond.
b. Calculate the current price of the bond.
c. Calculate the annual holding period return on this instrument and compare it to the annual return you were expecting.
d. Explain whether your return would have been relatively greater or less if you had purchased a 10-year instrument.
Support your conclusion with numerical evidence.