finance data bank
106. The outstanding bonds of Winter Time Products
provide a real rate of return of 3.03 percent. The current rate of inflation is
4.68 percent. What is the actual nominal rate of return on these bonds?
A. 7.58 percent
B. 7.33 percent
C. 7.71 percent
D. 7.76 percent
E. 7.85 percent
107. The yield to maturity on a bond is currently 8.46
percent. The real rate of return is 3.22 percent. What is the rate of
inflation?
A. 5.08 percent
B. 5.64 percent
C. 6.24 percent
D. 6.53 percent
E. 6.71 percent
108. A zero coupon bond with a face value of $1,000 is
issued with an initial price of $212.56. The bond matures in 25 years. What is
the implicit interest, in dollars, for the first year of the bond's life?
A. $12.72
B. $13.58
C. $13.90
D. $15.63
E. $15.89
109. Northern Warehouses wants to raise $11.4 million
to expand its business. To accomplish this, it plans to sell 40year, $1,000
face value, zerocoupon bonds. The bonds will be priced to yield 8.75 percent.
What is the minimum number of bonds it must sell to raise the $11.4 million it
needs?
A. 210,411
B. 239,800
C. 254,907
D. 326,029
E. 350,448
110. You have won a contest and will receive $2,500 a
year in real terms for the next 3 years. Each payment will be received at the
end of the period with the first payment occurring one year from today. The
relevant nominal discount rate is 6.3 percent and the inflation rate is 4.5
percent. What are your winnings worth today?
A. $7,249
B. $7,367
C. $7,401
D. $7,500
E. $7,838
111. You purchased an investment which will pay you
$8,000, in real dollars, a year for the next three years. Each payment will be
received at the end of the period with the first payment occurring one year
from today. The nominal discount rate is 7.5 percent and the inflation rate is
2.9 percent. What is the present value of these payments?
A. $21,720
B. $22,004
C. $22,511
D. $23,406
E. $23,529
Essay Questions
112. Define liquidity risk, default risk, and taxability risk and explain how these risks relate to bonds and bond yields.
113. Inflation has remained low for the past three years but you have come to the conclusion that trend is ending and inflation will increase significantly over the next 18 months. Assume you have reached this conclusion prior to other investors reaching the same conclusion. What adjustments should you make to your bond portfolio in light of your conclusions?
114. Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.
115. Describe the relationships that exist between the coupon rate, the yield to maturity, and the current yield for both a discount bond and a premium bond.
Multiple Choice Questions
116. Sylvan Trees has a 7 percent coupon bond on the
market with ten years left to maturity. The bond makes annual payments and
currently sells for $861.20. What is the yieldtomaturity?
A. 8.50 percent
B. 8.68 percent
C. 8.92 percent
D. 9.18 percent
E. 9.27 percent
117. Kaiser Industries has bonds on the market making
annual payments, with 14 years to maturity, and selling for $1,382.01. At this
price, the bonds yield 7.5 percent. What is the coupon rate?
A. 8.00 percent
B. 8.50 percent
C. 9.00 percent
D. 10.50 percent
E. 12.00 percent
118. Dexter Mills issued 20year bonds a year ago at a
coupon rate of 11.4 percent. The bonds make semiannual payments. The
yieldtomaturity on these bonds is 9.2 percent. What is the current bond
price?
A. $985.55
B. $991.90
C. $1,192.16
D. $1,195.84
E. $1,198.00
119. Soo Lee Imports issued 17year bonds 2 years ago
at a coupon rate of 10.3 percent. The bonds make semiannual payments. These
bonds currently sell for 102 percent of par value. What is the yieldtomaturity?
A. 9.98 percent
B. 10.04 percent
C. 10.13 percent
D. 10.27 percent
E. 10.42 percent
120. Bryceton, Inc. has bonds on the market with 13
years to maturity, a yieldtomaturity of 9.2 percent, and a current price of
$895.09. The bonds make semiannual payments. What is the coupon rate?
A. 7.80 percent
B. 8.00 percent
C. 8.25 percent
D. 8.40 percent
E. 8.65 percent
121. Suppose the real rate is 9.5 percent and the
inflation rate is 1.8 percent. What rate would you expect to see on a Treasury
bill?
A. 9.50 percent
B. 11.30 percent
C. 11.47 percent
D. 11.56 percent
E. 11.60 percent
122. An investment offers a 10.5 percent total return
over the coming year. Sam Bernanke thinks the total real return on this
investment will be only 4.5 percent. What does Sam believe the inflation rate
will be for the next year?
A. 5.60 percent
B. 5.67 percent
C. 5.74 percent
D. 6.00 percent
E. 6.21 percent
123. Bond S is a 4 percent coupon bond. Bond T is a 10
percent coupon bond. Both bonds have 11 years to maturity, make semiannual
payments, and have a yieldtomaturity of 7 percent. If interest rates suddenly
rise by 2 percent, what will the percentage change in the price of Bond T
be?
A. 15.16 percent
B. 14.87 percent
C. 13.56 percent
D. 12.92 percent
E. 12.67 percent
124. Technical Sales, Inc. has 6.6 percent coupon
bonds on the market with 9 years left to maturity. The bonds make semiannual
payments and currently sell for 88.79 percent of par. What is the effective
annual yield?
A. 8.34 percent
B. 8.40 percent
C. 8.52 percent
D. 8.58 percent
E. 8.60 percent
125. Bonner Metals wants to issue new 18year bonds
for some muchneeded expansion projects. The company currently has 11 percent
bonds on the market that sell for $1,459.51, make semiannual payments, and
mature in 18 years. What should the coupon rate be on the new bonds if the firm
wants to sell them at par?
A. 5.75 percent
B. 6.23 percent
C. 6.41 percent
D. 6.60 percent
E. 6.79 percent
This cannot be solved directly, so it's easiest to just use the calculator
method to get an answer. You can then use the calculator answer as the rate in
the formula just to verify that your answer is correct..
126. You purchase a bond with an invoice price of
$1,460. The bond has a coupon rate of 9.4 percent, and there are 3 months to
the next semiannual coupon date. What is the clean price of this bond?
A. $1,436.50
B. $1,452.17
C. $1,460.00
D. $1,467.83
E. $1,483.50
127. Suppose the following bond quote for the Beta
Company appears in the financial page of today's newspaper. Assume the bond has
a face value of $1,000 and the current date is April 15, 2009. What is the
yield to maturity on this bond?
A. 6.64 percent
B. 8.96 percent
C. 10.23 percent
D. 12.47 percent
E. 13.27 percent
128. You want to have $1.04 million in real dollars in
an account when you retire in 46 years. The nominal return on your investment
is 8 percent and the inflation rate is 3.5 percent. What is the real amount you
must deposit each year to achieve your goal?
A. $6,667.67
B. $6,878.49
C. $7,433.02
D. $7,515.09
E. $7,744.12
129. The yieldtomaturity on a bond is the interest
rate you earn on your investment if interest rates do not change. If you
actually sell the bond before it matures, your realized return is known as the
holding period yield. Suppose that today, you buy a 12 percent annual coupon
bond for $1,000. The bond has 13 years to maturity. Two years from now, the
yieldtomaturity has declined to 11 percent and you decide to sell. What is
your holding period yield?
A. 8.84 percent
B. 9.49 percent
C. 12.00 percent
D. 13.01 percent
E. 14.89 percent
25. Your grandmother is gifting you $100 a month for
four years while you attend college to earn your bachelor's degree. At a 5.5 percent
discount rate, what are these payments worth to you on the day you enter
college?
A. $4,201.16
B. $4,299.88
C. $4,509.19
D. $4,608.87
E. $4,800.00
26. You just won the grand prize in a national writing
contest! As your prize, you will receive $2,000 a month for ten years. If you
can earn 7 percent on your money, what is this prize worth to you today?
A. $172,252.71
B. $178,411.06
C. $181,338.40
D. $185,333.33
E. $190,450.25
27. Phil can afford $180 a month for 5 years for a car
loan. If the interest rate is 8.6 percent, how much can he afford to borrow to
purchase a car?
A. $7,750.00
B. $8,348.03
C. $8,752.84
D. $9,266.67
E. $9,400.00
28. You are the beneficiary of a life insurance
policy. The insurance company informs you that you have two options for
receiving the insurance proceeds. You can receive a lump sum of $200,000 today
or receive payments of $1,400 a month for 20 years. You can earn 6 percent on
your money. Which option should you take and why?
A. You should accept the payments because they are worth $209,414 to you
today.
B. You should accept the payments because they are worth $247,800 to you
today.
C. You should accept the payments because they are worth $336,000 to you
today.
D. You should accept the $200,000 because the payments are only worth
$189,311 to you today.
E. You should accept the $200,000 because the payments are only worth
$195,413 to you today.
29. Your employer contributes $75 a week to your
retirement plan. Assume that you work for your employer for another 20 years
and that the applicable discount rate is 7.5 percent. Given these assumptions,
what is this employee benefit worth to you today?
A. $40,384.69
B. $42,618.46
C. $44,211.11
D. $44,306.16
E. $44,987.74
30. The Design Team just decided to save $1,500 a
month for the next 5 years as a safety net for recessionary periods. The money
will be set aside in a separate savings account which pays 4.5 percent interest
compounded monthly. The first deposit will be made today. What would today's deposit
amount have to be if the firm opted for one lump sum deposit today that would
yield the same amount of savings as the monthly deposits after 5 years?
A. $80,459.07
B. $80,760.79
C. $81,068.18
D. $81,333.33
E. $81,548.20
31. You need some money today and the only friend you
have that has any is your miserly friend. He agrees to loan you the money you
need, if you make payments of $25 a month for the next six months. In keeping
with his reputation, he requires that the first payment be paid today. He also
charges you 1.5 percent interest per month. How much money are you
borrowing?
A. $134.09
B. $138.22
C. $139.50
D. $142.68
E. $144.57

Rating:
5/
Solution: finance data bank