1. The present value of a security is A) directly related to the discount rate.
ID: 1167202 • Letter: 1
Question
1. The present value of a security is
A) directly related to the discount rate. B) inversely related to the time until maturity.
C) inversely related to the principal amount. D) is not related to the discount rate.
2. Which of the following options would you choose to receive if the rate of discount is 7.5%?
A) $1200 in one year B) $1500 in four years C) $1920 in eight years D) $2100 in ten years
3. A higher market interest rate:
A) increases the future value of current money. B) increases the present value of future money.
C) maintains the same present value of future money. D) decreases the future value of future money.
4. If the current price of a bond is less than its face value
A) the coupon rate must be equal to the current yield.
B) the coupon rate must be less than the current yield.
C) the yield to maturity must be less than the coupon rate.
D) a lender will suffer a capital loss by holding the bond until maturity.
5. If a lender is certain that market interest rates will fall in the near future, which of the following will she be most
likely to purchase?
A) A six-month Treasury bill currently yielding 1.45%
B) A five-year Treasury note currently yielding 2.25%
C) A twenty-year Treasury bond currently yielding 3.65%
D) A twenty-year AAA rated corporate bond currently yielding 3.65%
6. Which of the following bonds would you prefer to be selling? 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 $11,500.
7. Suppose you are holding a 5% coupon bond maturing in 15 years with a yield to maturity of 6.5%. If market
interest rates on 15-year instruments fall from 6.5% to 5.2%, what is the expected yearly yield on the
bond you are currently holding?
A) 5% B) 5.2% C) 5.85% D) 6.5 % E) impossible to determine with given information
8. The issuer of a bond is a
A) personal investor. B) borrower. C) lender. D) corporation.
9. Which of the following would NOT cause a shift in the willingness to lend curves?
A) A recession. B) A decrease in marginal income tax rates.
C) A change in the current market interest rate. D) Our unfortunate involvement in another world war.
10. If the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all
other factors constant, we would expect to see:
A) The bond demand curve shift right. B) The bond supply curve shift left.
C) The bond supply curve shift right. D) The bond demand curve shift left.
Explanation / Answer
(1) (B)
As discount rate increases (decreases) or time to maturity increases (decreases), present value decreases (increases).
(2) (B)
Present value, option A ($) = 1200 / 1.075 = 1116
Present value, option B ($) = 1500 / (1.075)4 = 1500 / 1.3355 = 1123
Present value, option C ($) = 1920 / (1.075)8 = 1920 / 1.7835 = 1077
Present value, option D ($) = 2100 / (1.075)10 = 2100 / 2.0610 = 1019
Option (B) has highest present value.
(3) (A)
As interest rate increases (decreases) or time to maturity increases (decreases), future value increases (decreases).
(4) (B)
If current price is less than (more than) face value, the bond is selling at a discount (premium) and coupon rate is less than (more than) current yield.
NOTE: As per Chegg Answering Policy, first 4 questions are answered.
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