THE PRICE OF A BOND IS THE PRESENT VALUE OF THE COUPON PAYMENTS AND THE FACE VALUE.

12 Jul THE PRICE OF A BOND IS THE PRESENT VALUE OF THE COUPON PAYMENTS AND THE FACE VALUE.

Multiple choice, please read many times…

1. Which answer is FALSE regarding bond prices and interest rates?

a. Bond prices and interest rates move in opposite directions.

b. The price of a bond is the present value of the coupon payments and the face value.

c. The prices of short-term bonds display greater price sensitivity to interest rate changes than do the prices of long-term bonds.

d. Interest rate risk can be described as the risk that changes in market interest rates will cause fluctuations in the bond’s price.

2 A bond is priced such that it has a 9% yield to maturity. However, inflation is expected to be 2% per year over the remaining life of the bond. What is the real return for this investment?

a. 4.50%

b. 6.86%

c. 7.00%

d. 9.00%

3 A bond issued by the Federal Home Loan Bank or the Federal Home Loan Mortgage Corporation are examples of what type of bond?

a. Treasury bond

b. Corporate bond

c. Municipal bond

d. Agency bond

4 The Treasury Department sells a zero-coupon bond that will mature in two years. The bond has a face value of $10,000, and sold at auction for $9,400. What is the annual return for an investor buying the bond?

a. 3.00%

b. 3.14%

c. 6.38%

d. 7.00%

5 A bond is trading on the secondary market and will mature in 10 years. The bond has a face value of $1,000 that will be paid at maturity. Further, the bond pays an annual coupon at 9% of face value. What should the trading price be for the bond if investors seek a 12% on their investment?

a. $1,192.53

b. $830.49

c. $827.95

d. $508.52

6 Which type of bond has the highest daily trading volume in our economy?

a. Treasury bonds

b. Agency bonds

c. Corporate bonds

d. Municipal bonds

7 A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and pays an annual coupon at 9% of face value. The face value of the bond is $1,000. What is the yield to maturity for this bond?

a. 8.86%

b. 9.00%

c. 9.23%

d. 9.40%

8 A bond currently trades at $980 on the secondary market. The bond has 10 years until maturity and pays a semi-annual coupon at 9% APR of face value. The face value of the bond is $1,000. What is the yield to maturity for this bond?

a. 9.00%

b. 9.18%

c. 9.25%

d. 9.31%

9 A bond currently trades at $975 on the secondary market. The bond has 10 years until maturity and pays an annual coupon at 9% of face value. The face value of the bond is $1,000. What is the coupon yield for this bond?

a. 8.86%

b. 9.00%

c. 9.23%

d. 9.40%

10 Your friend wants you to invest in his new sporting goods store. For an initial investment, he will pay you $2,000 per year for the next twenty years. All payments are at the end of the year. You realize that this is a very risky investment and want a 20% return on each invested dollar. How much are you willing to loan him today for his new store?

a. $5,946

b. $9,739

c. $10,000

d. $17,027