You purchase a bond that has no maturity date. The bond has an annual coupon pay

Question

You purchase a bond that has no maturity date. The bond has an annual coupon payment of $75 and is currently selling at price of $1250. What is your rate of return?

12.50%

16.67%

5.87%

6.67%

6.00%

You invest a dollar for two years. The current rate (year 1) is 5%. At the end of year 2 you have $1.08. What is the rate in year 2.

0.0850

0.0500

0.0532

0.0286

0.0300

Treasury STRIPS are

tax-exempt bonds.

simple loans.

discount bonds.

fixed payment loans.

At an interest rate of 3%, what is the present value of $1000 to be received five years from now?

A $1,667

B $863

C $1,159

D $850

The current price of a bond is $952.40. Its price next year is $925.90. What is the discount factor?

A 0.9451

B 0.9722

C 0.8390

D 0.6794

E 0.8673

You purchase a two-year $1000 face value bond at par. The bond has a 6% coupon rate.However, do to cashflow problems, the company misses the first coupon payment, but pays both coupons payments in year 2. What is your rate of return?

A 0.0583

B 0.0653

C 0.0300

D 0.0600

E 0.0428

Using the information, in the previous question, suppose the company pays all of the coupon payments on time. What is your rate of return?

0.1200

0.0600

0.0300

0.0500

0.0800

12.50%

16.67%

5.87%

6.67%

6.00%

Explanation / Answer

(1) (E)

Rate of return = Annual coupon payment / bond price = $75 / $1250 x 100 = 6%

(2) (D)

$1 x 1.05 x (1 + r) = $1.08

1.05 x (1 + r) = 1.08

1 + r = 1.02857

r = 0.02857 = 2.86%

(3) (A)

Interest on STRIPS are tax exempt.

(4) (C)

FV = $1,000 x (1.03)5 = $1159

(5) (B)

Discount factor = Next year's bond price / current year bond price

= $925.9 / $952.4 = 0.9722

Note: Out of 7 questions, the first 5 are answered.

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