12. A General Electric bond, with a face value of $1000 carries a coupon rate of
ID: 2820053 • Letter: 1
Question
12. A General Electric bond, with a face value of $1000 carries a coupon rate of 8%, has nine years until maturity, and has a yield to maturity of 7%. How much interest is paid annually to the bondholders? A. $800 B. $70 C.$90 D. $80 E $700 13, Referring to the previous problem (#12), note that the YTM is 7%. This tells you that: A. There is a higher risk of default on the bond B. Interest rates have increased since the bond was purchased C The bond was purchased at a premium D. The bond was purchased at a discount E. This is an example of a floating rate bond 14. Modified Duration is a term used in the bond trading world to measure what? A. B. C. D. E. The sensitivity of interest rates to changes in bond prices The sensitivity of a bond's price to changes in interest rates The term of a bond adjusted for inflation The volatility of stock prices Whether or not a bond is investment grade (as opposed to "junk bonds") 15. The source of all interest rate changes is the Federal Reserve Board. The FRB can control the amount of money in the system by tweaking the federal funds rate. If the FRB would happen to increase the federal funds rate, thereby causing an increase in market interest rates systemwide, it would cause: A. Bond prices to increase B. Old bonds to be redeemed in exchange for the higher interest rate C. Bond prices to decrease D. Bond prices on domestic issues would rise but ther e would be no impact on foreign investments. 16. The book value of a corporation is a less than reliable measurement of the real value of a company because: A. Some assets are recorded at historical cost B. Intangible assets (i.e. intellectual property) are often not recorded on the books C. Buildings are depreciated and therefore not reported at their real value. D. All the above E. None of the aboveExplanation / Answer
12.
Face value = $1,000
Coupon rate = 8%
Annual Interest Payment = Face Value × Coupon rate
= $1,000 × 8%
= $80
Annual Interest Payment is $80.
Option (D) is correct answer.
13.
Current Yield to maturity is 7% and Coupon rate is 8%. The relationship between price of bond and market interest rate is inverse. That is when interest rate rise, price of bond decreases and when interest rate falls bond price increase.
So, since, YTM of bond decrease from 8% to 7%, Bond is selling at premium.
Option (C) is correct answer.
14.
Modified duration of bond is the term use in the bond trading world to measure sensitivity of change in price of bond with change in interest rate of bond.
Option (B) is correct answer.
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