Question 1 (3 points) Question 1 Unsaved The maturity of a debt instrument refer

Question

Question 1 (3 points) Question 1 Unsaved The maturity of a debt instrument refers to:

A. The interest rate, expressed as an absolute amount.

B. The interest rate, expressed as a percentage of its principal.

C. The length of time until it expires.

D.The length of time until the first interest payment is due.

Question 2 (3 points) Question 2 Unsaved Assume you own $10,000 in corporate bonds that mature in 10 years. Under which of the following cases can we expect a decrease in the value of the bonds below $10,000:

A.We expect a severe recession in the near future.

B.There is a significant increase in worker productivity.

C. Inflation has risen to a level of concern at the Federal Reserve Board (e.g. 5%).

D.The rating on the bonds increases from A+ to AA+.

Question 3 (3 points) Due to poor management, the rating on a corporation's bonds is reduced from A- to BB. As a result we can expect for the company's outstanding bonds:

A. A reduction in the coupon rate.

B. A decrease in the secondary market price of the bonds.

C. An increase in demand for the bonds in the secondary market.

D. A decrease in the Par Value of the bonds below $1,000.

Question 4 (3 points) The coupon rate is the:

A Yearly coupon payment divided by the market value of the bond.

B. The difference between the market value of the bond and its par value.

C.The difference between the market value of the bond and market interest rates.

D. Yearly coupon payment divided by the face value of the bond.

Question 5 (3 points) The present value of $1 received n years from now has a value today of: r = market interest rate

A ($1 + r)n / r

B. $1 / (1 + r)n

C. $1 / (1 + r)

D.($1 + r) / r

Explanation / Answer

QUESTION 1 – Option C

Maturity refers to the final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid.

QUESTION 2 – Option C

When there is inflation, it is likely that the central bank would increase interest rate. Increase in interest rate would lead to decline in price of bond, since there is an inverse relation between price of bond and interest rates. For other options, when productivity of employees increase or when the credit rating of bond is upgraded, its demand in market would increase and hence the value would increase. For severe recession, in order to counter it, central bank would reduce the interest rates (to fuel the economy back to normal) and hence the value of bond would increase (inverse relation between price and interest rates).

QUESTION 3 – Option B

Coupon and Par value of bond does not change over the life of bond, unless stated in terms and conditions of bond. And demand of a bond would increase if the credit rating is upgraded (and vice-versa). Hence, answer is option B.

QUESTION 4 – Option D

Coupon rate is the annual coupon paid by firm divided by the par value of firm. Annual coupon divided by current market price of a bond is current yield of bond.

QUESTION 5 – Option B

This is based on time value of money function, PV = FV/(1 + r)n

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