Exercise 3-1: bond valuation 1.The annual coupon rate of a bond equals: A) its y
ID: 2617942 • Letter: E
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Exercise 3-1: bond valuation 1.The annual coupon rate of a bond equals: A) its yield to maturity B) a percentage of its price. C) the maturity value. D the ratio of the annual coupon payment to the par v E) None of the above 2.The face value of a bond is received by the bondholder A) at the time of purchase. B) annually C) whenever coupon payments are made. D) at maturity E) none of the above 3 Which of the following presents the correct relationship? As the coupon rate of a bond decreases, the bond's: A), face value increases. B) bond price tends to increase. C) interest payments increase D) maturity date is extended E) coupon payments decrease 4, How much would an investor expect to pay for a $1,000 par value bond with a 9% annual coupon that matures in 5 years if the interest rate is 9%? A) $696.74 $1,075.00 C $1,000.00 D) $1,123.01 E) None of the above 5. What is the coupon rate for a bond (par value of $1,000) with three years until maturity, a price of $1,000, and a discount rate of 6%? A)696 B)796 C)896 D) 9% E) None of the above 6. What happens to the price of a three-year bond with an 8% coupon when interest rates change from 8% to 6%? A) A price increase of $53.47 B) A price decrease of $51.54 C) A price decrease of $53.47 D) No change in price E) None of the aboveExplanation / Answer
1. Answer = d) the ratio of the annual coupon payment to the par value
The annual coupon rate of a bond equals: the ratio of the annual coupon payment to the par value
Annual coupon rate = Annual coupon payment/ Par value
2. Answer: D
The face value of a bond is received by the bondholder : at Maturity
3. Answer = a) The Face value of the bond Increases
As the coupon rate of the bond Decreases the Face/par value of the bond Increases
4. Answer: C
= 90/(1.09)1 + 90/(1.09)2 + 90/1.093 + 1000 / 1.093
= $1000
5. ANSWER = A) 6%
$1,000 = PMT * ( 1/0.06 - 1/0.06*(1.06)3 ] + $ 1000 /(1.06)3
PMT = $60
$60/$100 = 6% coupon rate
6. Answer: C
PV = $80 ( 1/0.06 - 1/0.06*(1.06)3 ] + $ 1000 /(1.06)3
=80 * [16.667 – 13.994] + $1000/(1.06)3
= 213.84 + 839.63
= 1053.47
This represents a price decrease of $53.47, since the discount rate increases
7. Answer = A) 5%
Rate of Return = [ $70 +($1037.19 - 1054.47)] /$1,054.47 = 5%
8. Answer = A) $1000
= 100/(1.10)1 + 100/(1.10)2 + 100/1.103 + 1000 / 1.103
= $1000
9. Answer= b) 10%
Coupon rate is equal to Discount rate
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