2. Four coupon bonds are sold in the market with the following information:

Bond 1 Face value $1000 Coupon rate 5% Maturity 10 years

Bond 2 Face value $1000 Coupon rate 9% Maturity 10 years

Bond 3 Face value $1000 Coupon rate 7% Maturity 10 years

Bond 4 Face value $1000 Coupon rate 9% Maturity 30 years
(1) Without calculation, order the present values of the bonds from high to low under the constant interest rate of 7%. Hint: Your explanation is crucial because we require no calculation.
(2) Calculate the present value of the bonds under the constant interest rate of 7%.
(3) Now that all four bonds are sold at a same price. Is it true that people will surely buy the one with the highest present value calculated in (2)? If your answer is no, explain your reason.

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Nelly StrackeLv2

28 Sep 2019

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Arthur plans to invest 10,000 dollars in a ten-year bond of a technology company: Face Tech. Inc. The bond offers an 8 percent annual coupon and a yield to maturity of 10 percent. He plans to sell the bond in 4 years and invest the proceeds in a 3-year default-free zero coupon bond and cash. All bonds have a face value of $1000 per unit. The yield curve for the default free zero coupon bonds is provided in the following table:

Default free zero coupon bond with face value of $1000	Yield to Maturity
1-year Bond	7%
2-year Bond	8%
3-year Bond	9%
4-year Bond	10%
5-year Bond	12%
6-year Bond	13%
7-year Bond	14%
8-year Bond	15%

(a) If Arthur can invest the coupons at an annual rate of 7 percent, and 4 years later, this coupon bond of Face Tech. Inc. can sell at a yield to maturity of 8.5%, what is his annualized holding period return on this bond?

(b) After Arthur collected his proceeds from his investments in Face Tech. Inc. 4 years later, he will use the money to purchase 8 units of a 3-year default-free zero coupon bond and put the rest in cash. What are the percentage weights in the 3-year default-free zero coupon bond and cash (out of Arthur's total proceeds), respectively? Assume that the yield curve on zero coupon bonds stays the same and you can ignore the liquidity premium.

rubywater-buffalo142

Money, Banking, and Financial Markets, 3/e- quiz, Stephen G.Cecchetti, Kermit L. Schoenholtz
Question Details
Pls solve the quiz and EXPLAIN YOUR ANSWERS, I NEED TO LEARN THECALCULATIONS. Thank you.

Multiple Choice Quiz
1
If the annual interest rate is 5% (.05), the price of a one yearTreasury bill would be:
(Hint: T-Bills have $100 face value)
A) $95.00
B) $97.50
C) $95.24
D) $96.10
2
If the annual interest rate is 5%, the price of a three-monthTreasury bill would be:
(Hint: T-Bills have $100 face value)
A) $98.79
B) $95.00
C) $98.75
D) $97.59
3
If a consol is offering an annual coupon of $50 and the annualinterest rate is 6%, the price of the consol is:
A) $47.17
B) $813.00
C) $833.33
D) None of the above
4
A $1000 face value bond purchased for $965.00, with an annualcoupon of $60, and 20 years to maturity has:
A) A current yield equal to 6.22%.
B) A current yield equal to 6.00%.
C) A coupon rate equal to 6.22%.
D) A yield to maturity and current yield equal to 6.00%.
E) A yield to maturity and coupon rate equal to 6.00%.
5
A $1000 face value bond, with an annual coupon of $40, one year tomaturity and a purchase price of $980:
A) Has a current yield that equals 4.00%.
B) Has a coupon rate that equals 4.80%.
C) Has a current yield that equals 4.08% and a yield to maturitythat equals 6.12%.
D) Has a current yield that equals 4.08% and a yield to maturitythat equals 4.0%.
6
If a one year bond has a face value of $100 and is purchased for$94, and is held to maturity:
A) The holding period return will equal the yield tomaturity.
B) The yield to maturity will exceed the holding periodreturn.
C) The yield to maturity will be 6.38%.
D) a and c.
7
A 30-year Treasury bond as a face value of $1,000, price of $1,200with a $50 coupon payment. Assume the price of this bond decreasesto $1,100 over the next year. The one-year holding period return isequal to:
A) -9.17%
B) -8.33%
C) -4.17%
D) -3.79%

8
If a one-year zero-coupon bond has a face value of $100, ispurchased for $94, and is held to maturity:
A) The holding period return will exceed the yield tomaturity.
B) The yield to maturity will exceed the holding periodreturn.
C) The yield to maturity will be 6.38%.
D) The holding period return will be 6.38%.

9
Consider a zero-coupon bond with a $1,100 payment in one year.Suppose the interest rate decreases from 10% to 8%. The price ofthis bond:
A) Increases from $1,000 to $1,018.
B) Increases from $1,000 to $1,375.
C) Decreases from $110 to $88.
D) Decreases from $1,210 to $1,188.
10
Consider a $1,000 face value bond with a $55 coupon payment and 1year to maturity. Calculate the current yield, coupon rate and theyield to maturity if the bond is purchased for $940.
A) Current yield = 5.50%, coupon rate = 5.50%, yield to maturity =12.23%.
B) Current yield = 5.85%, coupon rate = 5.50%, yield to maturity =12.23%.
C) Current yield = 5.85%, coupon rate = 5.00%, yield to maturity =6.38%.
D) Current yield = 5.50%, coupon rate = 5.00%, yield to maturity =6.38%.

11
Consider a $1,000 face value bond with a $55 coupon payment and 1year to maturity. Calculate the current yield, coupon rate and theyield to maturity if the bond is purchased for $1,130.
A) Current yield = 5.50%, coupon rate = 4.87%, yield to maturity =5.00%.
B) Current yield = 5.50%, coupon rate = 5.50%, yield to maturity =-6.64%.
C) Current yield = 4.87%, coupon rate = 5.50%, yield to maturity =-6.64%.
D) Current yield = 4.87%, coupon rate = 5.00%, yield to maturity =-5.00%.

12
If the U.S. government's borrowing needs increase, all otherfactors constant:
A) The demand for bonds will decrease.
B) The price of bonds will increase.
C) The supply of bonds will increase.
D) The yields on bonds will decrease.
13
Consider a two-year, 4.5% coupon bond with a $500 face value thatis originally purchased for $475. Calculate the holding periodreturn of this bond if it is sold after one year at a price of$485.
A) 6.84%
B) 6.50%
C) 11.58%
D) 3.05%
14
Consider a two-year, 8% coupon bond with a $1,500 face value thatis originally purchased for $1,490. Calculate the holding periodreturn of this bond if it is sold after one year at a price of$1,505.
A) 8.67%
B) 9.06%
C) 1.54%
D) 6.38%
15
If the risk on foreign government bonds increases relative to U.S.government bonds, the price of U.S. government bonds should:
A) Not change since U.S. government bonds are free of defaultrisk.
B) Decrease since people will bail out of all governmentbonds.
C) Increase as the demand for these bonds increases.
D) Not be affected because the two types of bonds are traded indifferent markets.

1. You have a ten year bond that you purchased for $1000, it has a face value of $1000 and a coupon rate of 10% a. What is the yield to maturity? b. Is it selling for face value or at a discount or at a premium? 2. One year later you want to sell the bond in number 1. The market yield for that type of bond is now 13%. a. What will happen to the price of that bond? Will it go up or down? b. Is it selling for face value or at a discount or at a premium? 3. What is a zero coupon bond? Explain how investors get their return 4. What is difference between Muni Bonds and Corporate Bonds? 5. What is a general obligation bond? A revenue bond? 6. There is a bond that pays a 12% coupon, has three years left to maturity, a face value of $1,000 and market yields are 10%. What is the price this bond should sell for? What is the current yield? 7. A two year bond that yields 10% has a coupon rate of 10% a. What is the price this bond will sell for? (Hint you do not need to do any math here) b. What is the dollar value of the coupon that is paid? c. What is the price it should pay for if the market yields now drop to 8%?

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