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Fin201 Fall: Quiz and Final Preparation questions Chap 7
Preparation Question for Quiz and Final Exam
H1: Which one of the following applies to a premium bond?
A) Yield to maturity > Current yield > Coupon rate
B) Coupon rate = Current yield = Yield to maturity
C) Coupon rate > Yield to maturity > Current yield
D) Coupon rate < Yield to maturity < Current yield
E) Coupon rate > Current yield > Yield to maturity
H2: The price sensitivity of a bond increases in response to a change in the market rate of
interest as the:
A) coupon rate increases.
B) time to maturity decreases.
C) coupon rate decreases and the time to maturity increases.
D) time to maturity and coupon rate both decrease.
E) coupon rate and time to maturity both increase.
H3: You expect interest rates to decline in the near future even though the bond market is not
indicating any sign of this change. Which one of the following bonds should you purchase
now to maximize your gains if the rate decline does occur?
A) Short-term; low coupon
B) Short-term; high coupon
C) Long-term; zero coupon
D) Long-term; low coupon
E) Long-term; high coupon
H4: Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit
the definition of which one of the following terms?
A) Note
B) Discounted
C) Zerocoupon
D) Callable
E) Debenture
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Fin201 Fall: Quiz and Final Preparation questions Chap 7
H5: The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of
return.
A) default
B) market movements
C) interest rate changes
D) inflation
E) the time to maturity
H6: A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value
of \$1,000. What is the percentage change in the price of this bond if the market yield to
maturity rises to 5.7 percent from the current rate of 5.5 percent?
A) −1.79 percent
B) −1.38 percent
C) −1.64 percent
D) 1.79 percent
Explanation: Bond price = \$30({1 − [1/(1 + .055/2)
(13)(2)
]}/(.055/2)) + \$1,000/(1 +
.055/2)
(13)(2)
Bond price = \$1,046.01
Bond price = \$30({1 − [1/(1 + .057/2)
(13)(2)
]}/(.057/2)) + \$1,000/(1 +.057/2)
(13)(2)
Bond price = \$1,027.28
% change in price = (\$1,027.28 − 1,046.01)/\$1,046.01
% change in price = −.0179, or −1.79%
H7: The \$1,000 par value bonds of Uptown Tours have a coupon rate of 6.5 and a current
price quote of 101.23. What is the current yield?
Explanation: Current yield = [.065 (\$1,000)]/[1.0123 (\$1,000)]
Current yield = .0642, or 6.42%
H8: A 3.25 percent Treasury bond is quoted at a price of 99.04. The bond pays interest
semiannually. What is the current yield?
Explanation: Current yield = .0325/.9904
Current yield = .0328, or 3.28%
H9: A bond that pays interest annually yielded 7.37 percent last year. The inflation rate for
the same period was 2.4 percent. What was the actual real rate of return?
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Fin201 Fall: Quiz and Final Preparation questions Chap 7
Explanation: r = 1.0737/1.024 − 1
r = .0485, or 4.85%
H10: The outstanding bonds of Winter Tires Inc. provide a real rate of return of 5.6 percent.
If the current rate of inflation is 1.78 percent, what is the actual nominal rate of return on
these bonds?