1. Suppose the nominal interest rate is 8.50% compounded quarterly. The effectiv
ID: 2650475 • Letter: 1
Question
1. Suppose the nominal interest rate is 8.50% compounded quarterly. The effective interest rate would be
a) 2.1250% b)34.000% c) 8.77% d) 8.50%
2. The current market interest rate is more than the coupon rate of a bond. This bond must be sold at
a) Premium b) Discount c) Par d) Market
3. The interest rate risk relates to
a) the income from the bond b) the value of the bond c) both a and b d) neither a nor b
4. Which of the following risks cannot be diversified?
a) Company-specific b) Systematic c) A law suit against the company d) Unsystematic
Explanation / Answer
1) Interest Rate Per Quarter=8.50/4= 2.125%
Effective Intertest Rate= (1+ Interest Rate)4n - 1
=(1+0.02125)4n - 1
=8.77%
So the answer is C) 8.77%
B) If the current market interest rate is more than the coupon rate of a bond. This bond must be sold at a Discount. Because when the current market interest is more than the coupon rate of Interest,then Security value is less than its face value.Thats why it sells at a Discount.
Another situation is when the current market interest is less than the coupon rate of Interest,then Security value is more than its face value.Thats why it sells at a Premium.
And When Both rates are equal,then security is traded as par.
So the Answer is b) Discount
3) The interest rate risk relates to The Value of the bond.
When Interest rate risk occurs value of the bond get affected. As when Interest rate increase value of the bond decreases and when Interest rate decreases value of the bond Increase. So Interest Rtae risk is relates to the value of the bond.
So the answer is b) the value of the bond
4) Systematic risk termed as Market risk or Undiversified risk. As Systematic risk affects the entire market not any particular stock or Commpany,So risk cannot be diversified. It is also very uncertain in nature. So it is not Diversifiable.
So the answer is b)Systematic
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