Exam 1, version C Total: 42 points, +2 if correct, o if skipped, -1 If incorrect

Question

Exam 1, version C Total: 42 points, +2 if correct, o if skipped, -1 If incorrect 1. Why do bond prices increase when interest rates decrease? a. Par at maturity decreases, so the coupon decreases. b. Par at maturity decreases because the YTM decreases c. Future cash flows become more valuable today d. Future cash flows are discounted more highly than before. 2. What is the price of a corporate bond with 8 years left to maturity, a coupon of 5% pad em- annually, and the market currently discounts this debt at 5%? a. $928.23 b. $966.21 c. $1000.0o d. $1014.77 3. Two weeks ago, EUR/USD 1.1600. On Sept 26, 2018, EUR/USD 1.1750. This means: -a. the USD has become more valuable relative to the EUR b. $1 1.1750 c. both a. and b. d. none of the above 4. The selfish gene hypothesis is one possible reason to explain: a. rpref b. Frisk C. rinf d. all of the above 5. As of Sept 26, 2018, AMZN's current and forward P/E were 157 and 72, respectively. Thisn a. AMZN's earnings are projected to approximately double in one year. b. The average investor is willing to pay $157/share for AMZN today. c. AMZN's share price is projected to decrease. d. AMZN is experiencing multiple contraction. 6. Which of the following component(s) of the discount rate comprise the 'risk free' rate o Treasuries? a. rinf b. pref - d. rinf+ pref risk Why are interest rates on U.S. Treasuries referred to as 'risk-free'? a. because the risk premium is 0 b. because payment is guaranteed by the "full faith and credit guarantee of t c. because the U.S. promises to never default d. all of the above

Explanation / Answer

1.

Future cash flows are discounted more highly than before

Option d

2.

As coupon rate is equal to ytm the bond will be priced at par

Option c

3.

Option c

4.

Option d

5.

Amazon is experiencing multiple contraction

Option d

6.

Option c

7.

because payment is guaranteed by full faith and credit gurantee .....

Option b

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