Deck 7: Interest Rates and Bond Valuation

Question 1

Based on the table of zero coupon bond prices,below,what is the shape of the yield curve? Each bond has a face value of $100.

A) Flat
B) Upward sloping
C) Downward sloping
D) Not enough information

Answer 1

Flat

Question 2

The table,below,shows market prices for four zero coupon bonds with four different terms: one,two,three and four years.The bonds all have a face value of $1,000.The yield curve derived from the bond prices in the table above is best described as:

A) Upward sloping with a 2% spread between short and long term yields
B) Downward sloping with a 2% spread between short and long term yields
C) Flat
D) Upward Sloping with a 1% spread between short and long term yields
E) Downward Sloping with a 1% spread between short and long term yields

Answer 2

Upward sloping with a 2% spread between short and long term yields

Question 3

The prices of three zero-coupon bonds are provided in the table below.All three bonds have a face value of $1,000.The three bonds have three different terms to maturity.What is the yield on the bond with 2 years to maturity?

A) 4.07%
B) 4.16%
C) 4.02%
D) 3.59%
E) 3.98%

Answer 3

4.07%

Question 4

Tootsie Roll Industries' 10-year bonds are priced to yield 7%.Economists predict that real rates and inflation will remain constant over the next ten years at 3% and 2%,respectively.Bond analysts estimate that the maturity risk premium for a 10-year maturity is 0.25% and that the liquidity risk premium for Tootsie's bond is 0.50%.What is the default risk premium for Tootsie's bond?

A) 0.94%
B) 0.99%
C) 1.00%
D) 1.09%
E) 1.19%

Question 5

To raise funds for Gravina Island Bridge,the Government of Alaska issued bonds.The bonds have a face value of $1,000,15 years to maturity and a 7% coupon rate (annual coupons with the first coupon due in one year).The bonds are priced to yield 10%.U.S.Government T-Bonds with a 7% (annual)coupon rate and 15 years to maturity currently yield 7%.What is the default risk premium applied to the Gravina Bridge Bonds? (Assume that the Gravina bonds have the same liquidity risk premium as the T-Bonds.)

A) 1%
B) 2%
C) 3%
D) 4%
E) 5%

Question 6

Crystal Clear Inc.is undertaking a new investment opportunity and would like to issue bonds to fund the project.The bonds would be 30-year zero-coupon bonds with a $1,000 face value,and 100 bonds will be issued.If the bonds are to yield 7%,how much will Crystal Clear receive when the bonds are issued?

A) $13,136.71
B) $14,056.28
C) $12,277.30
D) $10,000.00
E) $11,341.24

Question 7

The 5-year T-Note yields 6% and the 10-year T-Note yields 7%.Economists predict that real rates and inflation will remain constant over the next ten years at 3% and 2%,respectively.What is the difference between maturity risk premium for the 10-year bond and the 5-year bond? Assume that neither bond's yield includes a liquidity risk premium.

A) 0.94%
B) 1.00%
C) 1.94%
D) 2.00%
E) 3.00%

Question 8

At the latest auction,1-year T-Bills were priced to yield 2%.Economists expect interest rates to rise next year.In particular,they expect that the auction next year will result in 1-year T-Bill yields of 2.5%.Tomorrow,the Treasury Department will auction 2-year T-Notes.What yield do you expect they will have?

A) 2.00%
B) 2.25%
C) 2.50%
D) 4.00%
E) 4.50%

Question 9

The prices of a number of $1,000 (face value)zero-coupon bonds are provided in the Table,below.Compute the yields on the zero coupon bonds.Plot the yield curve.What is the shape of the yield curve?

A) Upward sloping
B) Downward sloping
C) V-shaped
D) Flat

Question 10

The prices of three zero-coupon bonds are provided in the table below.All three bonds have a face value of $1,000.The three bonds have three different terms to maturity.What is the yield on the bond with 3 years to maturity?

A) 4.15%
B) 4.32%
C) 4.51%
D) 4.02%
E) 4.35%

Question 11

The real rate of interest over the next two years is expected to remain at 2% per annum.Inflation is expected to be 1.5% per annum over the next two years.At the last auction,2-year T-Notes were priced to yield 4%.What is the maturity risk premium for two year maturities? (Assume that the T-Notes have no liquidity risk.)

A) 0.40%
B) 0.43%
C) 0.45%
D) 0.47%
E) 0.50%

Question 12

The nominal rate of interest is 6% and the real rate of interest is 3%.What is the expected inflation rate?

A) 2.51%
B) 2.91%
C) 3.00%
D) 4.91%
E) 4.04%

Question 13

What is the shape of the yield curve given the data on the three zero coupon bonds in the table below? (Assume that each bond has a face value of $1,000.)

A) Downward sloping
B) Upward then downward sloping
C) Downward then upward sloping
D) Upward sloping
E) Flat

Question 14

The nominal rate of interest is 5% and the expected inflation rate is 2%.What is the real rate of interest?

A) 2.50%
B) 2.94%
C) 3.94%
D) 4.00%
E) 4.04%

Question 15

The Associated Dry Goods Corp.zero coupon bond has 7 years to maturity and a face value of $1,000.The bond trades for $759.92 to yield 4%.What are the cash flows from the bond?

A) $240.08
B) $759.92
C) $1,000.00
D) $1,759.92
E) $946.31

Question 16

Consider a $1,000 face value zero coupon bond which matures in 15 years.What is the fair price for the bond if the yield is 5%?

A) $481.02
B) $520.68
C) $465.32
D) $536.39
E) $386.45

Question 17

How much should an investor pay for a bond that returns $10,000 at the end of five years if market interest rates are 4%?

A) $8,128.59
B) $8,219.27
C) $8,547.74
D) $9,615.38
E) Bond prices cannot be computed if the bond does not make coupon payments.

Question 18

What is the yield to maturity of a zero-coupon bond that sells for $990 and will pay $1,000 in one year?

A) 0.1%
B) 1.0%
C) 1.1%
D) 10.0%
E) 11.0%

Question 19

The real rate of interest is 2% and the expected inflation rate is 2%.What is the nominal rate of interest?

A) 2.02%
B) 3.04%
C) 4.00%
D) 4.04%
E) 4.24%

Question 20

Which of the graphs below is the correct depiction of the yield curve given the data on the three zero coupon bonds in the table below?
Zero Coupon Bond Prices and Yields

A) Graph A
B) Graph B
C) Graph C
D) Graph D
E) Graph E

Question 21

Consider a 35 year coupon bond with a face value of $1,000 that pays $80 annual coupons (beginning one year from today).Assume that you invest each coupon in a bank that pays 8% interest.By the maturity date of the bond,how much interest have you earned by investing the coupons? Express your answer as a proportion of all of the money that you have received from owning the bond by the maturity date.

A) 54%
B) 59%
C) 64%
D) 69%
E) 74%

Question 22

Assume that Microsoft bonds have just left the printer and have a stated coupon of $100 (a coupon rate of 10%)and a yield-to-maturity of 15%.The bonds mature in three years and the next coupon is due in one year.What is the fair price for the bond today?

A) $956.52
B) $885.84
C) $832.39
D) $1,000
E) $918.71

Question 23

In September 2000 the Pullman Group arranged a bond issue for the estate of the late Marvin Gaye.The collateral on the bonds (and source of cash flow for interest and principal payments)consisted of future royalties from classic songs such as "What's Going On," and "I Heard It Though The Grapevine." The bond issue had a $1,000 face value and a coupon rate of 5%.If the bond matures in 26 years,pays semiannual coupons,and the yield to maturity is 6%,what will the bond sell for? Calculate your answer to two decimal points.

A) $444.85
B) $869.17
C) $869.97
D) $871.35
E) $976.17

Question 24

Schlitz Brewery Inc.bonds are trading today for a price of $961.29.The bond currently has 10 years until maturity and has a yield to maturity of 5%.The bond pays annual coupons and the next coupon is due in one year.What is the coupon rate of the bond?

A) 3.0%
B) 3.5%
C) 4.0%
D) 4.5%
E) 5.0%

Question 25

Consider a 30 year coupon bond with $75 annual coupons.The next coupon is due one year from today.Assume that the yield curve is flat and so all yields are 8%,and yields are expected to remain constant over the bond's life.At maturity,how much interest will a bond investor have earned on the re-invested coupons?

A) $6,246.24
B) $4,300.25
C) $2,025.00
D) $7,754.70
E) $8,496.24

Question 26

The table below shows market prices for four zero coupon bonds with four different terms: one,two,three and four years.The bonds all have a face value of $1,000.Which line best represents the yield curve derived from the bond prices in the table? Use the letter labels at the end of each line.
Zero Coupon Bond Prices

A) A
B) B
C) C
D) D

Question 27

The bonds of Vandalay Inc.pay annual coupons at the rate of 7%.They mature in 15 years with a face value of $1,000.What is their price if their yield is 6%?

A) $731.70
B) $908.92
C) $1,000
D) $1,097.12
E) $1,279.83

Question 28

A 2-year T-Note has a face value of $1,000 and pays annual coupons of $75.The next coupon is due in one year.What is the correct price for the coupon bond today? Use the term structure of interest rates shown below to answer the question.

A) $982
B) $992
C) $1,002
D) $1,012
E) $1,022

Question 29

Consider a 35 year coupon bond that pays $80 annual coupons (beginning one year from today).What is the future value of the coupons at maturity if you can invest them at 8%?

A) $13,785.34
B) $16,214.36
C) $8,496.24
D) $14,100.34
E) $3,495.30

Question 30

Consider a 6-year corporate bond issued by Vandelay Industries.The bond has a face value of $1,000,and has an annual coupon rate of 6.8%.The yield to maturity of the bond is 8.2%.What is the fair price for the bond today?

A) $961.29
B) $935.67
C) $1000.92
D) $1000.00
E) $623.21

Question 31

The US Government has a 3-year 5% coupon bond with a face value of $1,000.The bond pays annual coupons and the first coupon is due in one year.Using the data on zero coupon US Government bond yields in the table,below,what is the price of the coupon bond?

A) $1,010
B) $1,020
C) $1,030
D) $1,000
E) $1,040

Question 32

The Federal Government 2-year coupon bond has a face value of $1,000 and pays annual coupons of $33.The next coupon is due in one year.Currently,the one and two-year spot rates on Federal Government zero coupon bonds are 4% and 4.5%.What is the correct price for the coupon bond at time zero (immediately)?

A) $977.68
B) $1,000.00
C) $976.17
D) $1,025.00
E) $1,023.49

Question 33

Consider a Federal Government coupon bond with a $1,000 face value and a coupon rate of 1%.If the bond matures in 25 years,pays semi-annual coupons,and the yield to maturity is 5%,then what will the bond sell for?

A) $432.75
B) $365.77
C) $436.24
D) $1,000
E) $804.02

Question 34

You have just purchased a 15-year,$1,000 par value US Government bond for $909.20.The yield to maturity on the bond is 8.6%.What is the coupon rate?

A) 7.5%
B) 8.6%
C) 9.0%
D) 7.0%
E) 15.0%

Question 35

To raise funds for Gravina Island Bridge,the Government of Alaska issued bonds.The bonds,called "Nowhere Bonds" have a face value of $1,000,15 years to maturity and a 7% coupon rate (annual coupons with the first coupon due in one year).The bonds are priced at $771.82.What is the yield to maturity of the Nowhere Bonds?

A) 5%
B) 6%
C) 7%
D) 9%
E) 10%

Question 36

You just purchased a Federal Government bond for $1,180.23.The bond has a coupon rate of 6%,a face value of $1,000,and yields 3.8%.In how many years will this bond mature?

A) 8 years
B) 9 years
C) 10 years
D) 11 years
E) 12 years

Question 37

Consider a 30 year coupon bond that pays $75 annual coupons (beginning one year from today).What is the sum (undiscounted)of the coupons?

A) $2,250
B) $3,015
C) $2,495
D) $2,800
E) $2,500

Question 38

3M bonds are currently trading at $1,104.07.The bonds have a face value of $1,000,an annual coupon rate of 6.75%,and mature in 4 years.What is the yield-to-maturity?

A) 3.89%
B) 6.25%
C) 8.04%
D) 7.25%
E) 6.85%

Question 39

Acme Inc.just issued a bond with a $10,000 face value and a coupon rate of 7%.If the bond has a life of 30 years,pays semi-annual coupons,and the yield to maturity is 9%,what will the bond sell for?

A) $7,936.20
B) $4,349.49
C) $7,945.27
D) $10,000
E) $7,904.45

Question 40

A U.S.Government T-Bond with a 15-year maturity has a coupon rate of 5%.The bond has a face value of $1,000 and pays its coupons semi-annually.The next coupon is due in six months.The bond trades for $949.38 to yield 5.5%.What are the cash flows from the bond?

A) $750.00
B) $800.62
C) $1,000.00
D) $1,750.00
E) $2,699.38

Question 41

Universal Exports Inc.just issued $1,000 face bonds for $1,211.The bonds have a maturity of ten years and a coupon rate of 10%.What is the bonds' yield to maturity?

A) 7%
B) 8%
C) 10%
D) 11%
E) 12%

Question 42

What is the yield to maturity for a four-year,5% annual coupon bond selling for $965.34?

A) 3%
B) 4%
C) 5%
D) 6%
E) 7%

Question 43

Three-year T-Notes with a coupon of 10% are trading for $951.96 to yield 12%.(With a $1,000 face value.)Microsoft has just issued a three year bond with a 10% coupon and a face value of $1,000.Analysts estimate that the default risk premium on Microsoft bonds is 3% and the liquidity risk premium is the same as the T-Note.What is the fair price for the Microsoft bond today?

A) $885.84
B) $956.52
C) $857.25
D) $1000
E) $918.71

Question 44

Man-zeer Inc.,(a Kramer/Costanza joint venture)bonds are currently trading at $974.79.The bonds have a face value of $1,000,an annual coupon rate of 7.5% with payments made semi-annually,and mature in 20 years.What is the yield-to-maturity?

A) 4.26%
B) 4.55%
C) 7.45%
D) 7.75%
E) 11.56%

Question 45

The yield to maturity for a bond selling at par is

A) unchanged once the bond sells at par.
B) below the coupon rate.
C) above the coupon rate.
D) a value that remains fixed, unlike the coupon rate which changes daily.
E) equal to the coupon rate.

Question 46

Consider a 35 year coupon bond with a face value of $1,000 that pays $80 annual coupons (beginning one year from today).Assume that you invest each coupon in a bank that pays 8% interest.On the maturity date,how much money do you have (in total)from the bond?

A) $1,000.00
B) $3,800.00
C) $12,785.34
D) $13,785.34
E) $14,785.34

Question 47

What is the value of a six-year,6% semiannual bond if market yields on similar bonds are 4%? The face value of the bond is $1,000.

A) $1,099.26
B) $1,028.17
C) $1,104.83
D) $1,105.75
E) $1,000.02

Question 48

What is the price of a four-year,10% annual coupon bond if the yield to maturity is 5%? The bond's face value is $1,000.

A) $ 947.87
B) $ 896.47
C) $1,177.30
D) $1,000.00
E) $1,216.90

Question 49

The ________ is the percentage return an investor will earn if a bond is purchased at the current market price and held until maturity.

A) yield to call
B) yield to maturity
C) coupon yield
D) face amount
E) coupon interest rate

Question 50

A bond sold five weeks ago for $950.The bond is worth $900 in today's market.The face value of the bond is $1,000.Assuming no changes in risk,which of the following is mostly likely true?

A) The coupon rate increased.
B) Interest rates are lower now than they were five weeks ago.
C) The bond is within one year of maturity.
D) The issuer threatened to call the bond at 110% of par value.
E) Interest rates are higher now than they were five weeks ago.

Question 51

What is the value of a 25-year bond with a $1,000 face value and an 8% coupon rate that yields 4%?

A) $ 716.84
B) $1,124.67
C) $1,624.88
D) $ 996.53
E) $1,087.22

Question 52

What is the price of a five-year bond with a $1,000 face value and a 5% annual coupon rate that currently yields 7%?

A) $784
B) $897
C) $918
D) $1,000
E) $1,087

Question 53

What is the yield to maturity of a 10% annual coupon bond selling for $900 that matures in ten years?

A) 7.75%
B) 8.75%
C) 9.75%
D) 10.75%
E) 11.75%

Question 54

What is the yield to maturity of a bond with a 10% annual coupon rate,a price of $800,ten years to maturity and a face value of $1,000?

A) 8.81%
B) 9.81%
C) 10.81%
D) 11.81%
E) 13.81%

Question 55

Fortunate Frames Inc.just issued 20-year,6% coupon bonds at par.Lucky Lenses Inc.has 20-year bonds outstanding that are viewed by investors as having the same risk as Fortunate's bonds.Lucky's bonds are selling at a discount.What does this indicate about the coupon rates on these two bonds?

A) Lucky's coupon rate must be lower than Fortunate's coupon rate.
B) They must have the same coupon rate.
C) Fortunate's coupon rate must be lower than Lucky's coupon rate.

Question 56

A semi-annual coupon matures in one year.It has a face value of $1,000,a coupon rate of 4%,and the next semi-annual coupon is due in six months.The bond trades for $971.50.What is the yield to maturity of the bond?

A) 3.50%
B) 3.56%
C) 4.00%
D) 7.00%
E) 7.12%

Question 57

You are in possession of a bond that has 3 years remaining to maturity.The original maturity on the bond was 30 years.The bond has a $1,000 face value and a 9% coupon rate.If interest is paid annually and bonds with similar risk currently have an interest rate of 10%,what is the current value of the bond?

A) $906
B) $975
C) $1,000
D) $1,025
E) $1,103

Question 58

If a five-year bond paying semiannual interest sells for $1,000 and has a yield to maturity of 10%,what is the semiannual coupon payment?

A) $10
B) $50
C) $75
D) $100
E) $120

Question 59

You can buy a bond with a face value of $1,000 and annual coupon payments of $80.The yield to maturity on bonds of similar risk is 7%.This bond should sell

A) at a discount.
B) at a premium.
C) at par.

Question 60

Bank of America bonds are currently trading at $952.31.The bonds have a face value of $1,000,a coupon rate of 8% with payments made semi-annually,and mature in 20 years.What is the yield to maturity?

A) 7.0%
B) 7.5%
C) 8.0%
D) 8.5%
E) 9.0%

Question 61

A US Government 4% coupon bond has 10 years remaining to maturity.The bond pays annual coupons and the next coupon is due in one year.The face value of the bond is $100.The bond is currently trading for $74.43 and yields 6%.Calculate your capital gain return if you buy the bond today,hold it for one year and sell it after the next coupon.(Assume that yields are expected to remain constant at the current level over the bond's life.)

A) 0.6%
B) 1.6%
C) 2.6%
D) 4%
E) 6%

Question 62

Assume that the Microsoft bonds have a face value of $1,000,5-years to maturity and pay annual coupons of $100.The next coupon is due in one year.The yield on equivalently risky corporate bonds is currently 5%.Assume the yield stays at 5% over the life of the bond.Determine the price of the bond today and after each of the first four coupon payments.Plot those prices on a graph with price on the y-axis and time on the x-axis.(The x-axis starts at time 0 and ends on the date of the fourth coupon.)What do you note about the time path (slope of the line)of the bond price?

A) It is upward sloping.
B) It is downward sloping.
C) It is a horizontal line.

Question 63

A $1,000 face value bond has a coupon rate of 5%.Bonds of similar risk currently yield 7%.This bond should be selling

A) at a premium.
B) for its face value.
C) at a discount.
D) at the price for which Treasury bonds of the same maturity are currently selling.
E) Cannot be determined without further information.

Question 64

Each bond in the table has a face value of $100.The coupon bonds pay annual coupons,and the next coupon is due in one year.Assume that the yield curve is flat and all yields are currently 3.5%.If interest rates are forecast to rise to 4% from 3.5%,then what is the percentage change in price for the bond whose price changes the most?

A) -4.4%
B) -3.5%
C) -2.5%
D) -1.5%
E) -0.5%

Question 65

Each bond in the table has a face value of $100.The coupon bonds pay annual coupons,and the next coupon is due in one year.Assume that the yield curve is flat and all yields are currently 3.5%.If interest rates are forecast to rise to 4% from 3.5%,then which bond's price will decline by the greatest percentage amount?

A) T-Note Strip
B) T-Bill
C) 8-year T-Note
D) 7-year T-Note

Question 66

A bond with an annual coupon of $100 originally sold at par for $1,000.The current yield to maturity on this bond is 9%.Assuming no change in risk,this bond would sell at a ________ in order to compensate ________.

A) discount; the issuer for the higher cost of borrowing
B) discount; the seller for the above market coupon rate
C) premium; the seller for the above market coupon rate
D) premium; the purchaser for the above market coupon rate
E) discount; the purchaser for the above market coupon rate

Question 67

A US Government bond has 10 years remaining to maturity,pays annual coupons (yesterday)of $40,and has a face value of $1,000.The current price of the bond is $1,085.30 to yield 3%.If you buy the bond today,hold it for one year and sell it after the next coupon,then what return will you earn for the year? (Assume that yields are expected to remain constant at the current level over the bond's life.)

A) 3%
B) 3.25%
C) 3.5%
D) 3.69%
E) 4%

Question 68

Consider a 3-year bond maturing Sept 30,2019.Assume that you bought the bond on Sept 30,2016,at a price of $1,074.56 ($1,000 face value).If rates stay as they are for the rest of the year,what percentage change in price do you expect over the next year based on your estimate of the bond price after the second coupon is paid (Sept 30,2017)? Assume that the bond pays semi-annual coupons (4.5% annual coupon rate)and has a bond equivalent yield of 1.93% per annum.

A) -2.3%
B) 0.88%
C) 0.50%
D) 0.65%
E) 0.76%

Question 69

Assume that the Microsoft bonds have 5-years to maturity and pay annual coupons of $100.The next coupon is due in one year.The yield on equivalently risky corporate bonds is currently 15%.Assume the yield stays at 15% over the life of the bond.Determine the price of the bond today and after each of the first four coupon payments.Plot those prices on a graph with price on the y-axis and time on the x-axis.(The x-axis starts at time 0 and ends on the date of the fourth coupon.)What do you note about the time path (slope of the line)of the bond price?

A) It is upward sloping.
B) It is downward sloping.
C) It is a horizontal line.

Question 70

Consider two recent bond issues by Microsoft: both have face values of $1,000 and coupon rates of 10% but one bond (call it the short bond)has five years to maturity and the other,the long bond,has twenty years to maturity.Assume that yields fall from 15% to 5%.Which bond will experience a greater price increase,and by how much?

A) Long bonds by $384
B) Short bonds by $384
C) The change in price is equal for both bonds
D) Long bonds by $936
E) Short bonds by $936

Question 71

Suppose that you are reviewing a price sheet for bonds and see the following prices (per $100 face value)reported.Without calculating the price of each bond,which bond seems to be reported incorrectly?

A) Bond V
B) Bond X
C) Bond Z
D) Bond Y
E) Bond W

Question 72

A US Government bond has 15 years remaining to maturity,pays annual coupons (yesterday)of $90,and has a face value of $1,000.The current price of the bond is $923.94 to yield 10%.Calculate your return if you buy the bond today,hold it for one year and sell it after the next coupon.What percentage of your return will be attributable to coupon interest (as opposed to capital gain)? (Assume that yields are expected to remain constant at the current level over the bond's life.)

A) 67%
B) 77%
C) 87%
D) 91%
E) 97%

Question 73

Microsoft just issued a bond with annual coupons and twenty years to maturity.The bond has a face value of $1,000 and a coupon rate of 10%.If the yield on equivalently risky corporate bonds is currently 10%,then what were the proceeds to Microsoft from the bond issue?

A) $1,000
B) $1,100
C) $1,200
D) $900
E) $100

Question 74

Consider two recent bond issues by Microsoft: both have face values of $1,000 and coupon rates of 10% but one bond (call it the short bond)has five years to maturity and the other,the long bond,has twenty years to maturity.Which bond do you expect to be more sensitive to a change in yields? That is,for a given change in yield which bond (the long or the short)will experience a greater change in price?

A) The long bond
B) They are equally sensitive.
C) The short bond

Question 75

In general,if interest rates ________,bond prices ________.

A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
E) Answers C and D are correct.

Question 76

Each bond in the table has a face value of $100.The coupon bonds pay annual coupons,and the next coupon is due in one year.Assume that the yield curve is flat and all yields are currently 3.5%.If interest rates are forecast to rise to 4% from 3.5%,what is your profit if you short-sell the bond with the biggest anticipated (percentage)decline.(Assume you short-sell only one bond.)

A) -$3.13
B) -$2.13
C) $2.13
D) $3.13
E) $4.13

Question 77

Which of the following bonds carries the greatest amount of interest rate risk?

A) A 7%, 3-year bond
B) A 5%, 12-year bond
C) A 2%, 25-year bond
D) A 25%, 1-year bond
E) A 4%, 9-year bond

Question 78

The economy is slowing and many forecasters predict a recession.You expect the monetary authorities to relax monetary policy which will cause interest rates to fall.You expect the yield on the Walt Disney 10-year bond to fall from 5% to 4%.The bond has a face value of $1,000,and a coupon of 3.25%.If you want to make $5,000 by investing in bonds to profit from the interest rate change,what position do you take?

A) Buy 67 bonds
B) Buy 81 bonds
C) Buy 48 bonds
D) Short sell 55 bonds
E) Short sell 92 bonds

Question 79

A $1,000 face value bond has a 9% annual coupon rate.The next coupon is due in one year.The bond matures in 15 years and the yield on the bond is 10%.What is the difference in price if the yield rises to 11%?

A) -$67.76
B) -$6.77
C) $6.77
D) $9.24
E) $67.76

Question 80

A bond sells at a discount when

A) its price equals its face value.
B) its price exceeds its face value.
C) an investor does not receive periodic interest payments from a coupon bond.
D) its price is lower than its face value.
E) the broker charges a low commission on the sale.