Question 1

You are thinking of purchasing a 5-year bond,with a face value of $8,000,on the secondary bond market.The bond was issued three years ago,so it will mature two years from today.If the interest rate is 10 percent (0.10)per year,what is the value of the bond?

Accepted Answer

To calculate the value of the bond, we need to find the present value of the future payments (interest and principal) discounted at the given interest rate.

The bond has two more years to maturity, during which it will pay an annual interest of 10% of $8,000, or $800. At maturity, it will also pay the face value of $8,000.

Using the formula for the present value of an annuity and the present value of a lump sum, we get:

PV = 800 x (1 - 1/(1+0.10)^2)/0.10 + 800/(1+0.10)^2 + 8,000/(1+0.10)^2 = $6,611.57

Therefore, the best choice is A.

Question 2

A newly issued bond with a face value of $8,000 and no coupon payments is priced at $7,000.The bond will mature in one year.What is the yield on this bond?

Accepted Answer

The yield on the bond can be calculated using the formula:
yield = (face value - price) / price
yield = (8,000 - 7,000) / 7,000
yield = 0.143 or 14.3 percent (rounded to one decimal place)

Question 3

If a bond is sold in the secondary market,

Accepted Answer

In the secondary market, the bond is being sold between investors, and the issuing firm is not involved in the transaction. Therefore, the firm does not obtain any part of the price.

Question 4

You have two bonds,both with a face value of $7,000.One of them matures one year from today,while the other matures one year after that.If the interest rate is 8 percent (0.08)per year,what is the difference in value between the two bonds?

Accepted Answer

The answer of You have two bonds,both with a face...

Question 5

What would you pay for a newly issued 10-year bond with face value of $10,000 and no coupon payments? Assume the interest rate is 5 percent (0.05)per year.

Accepted Answer

Since the bond has no coupon payments, the only payment will occur when the bond matures and we receive the face value of $10,000. Using the formula for present value of a single future payment: 
PV = FV / (1 + r)^n 
where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. 
Plugging in the numbers: 
PV = 10,000 / (1 + 0.05)^10 
PV = 10,000 / 1.62889 
PV = $6,139.13 
Therefore, the best choice is B.

Question 6

Your aunt gives you a PepsiCo bond with face value of $5,000.It will mature in two years.Currently,the interest rate is 10 percent (0.10)per year.How will the value of the bond change if the interest rate falls to 5 percent tomorrow morning?

Accepted Answer

To determine the change in the value of the bond, we need to calculate the present value of the bond at both the current interest rate of 10% and the new interest rate of 5%.

First, we calculate the present value of the bond at the current interest rate of 10% using the present value formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the face value, r is the interest rate, and n is the number of periods.

PV = $5,000 / (1 + 0.10)^2 = $4,132.23

Next, we calculate the present value of the bond at the new interest rate of 5% using the same formula:

PV = $5,000 / (1 + 0.05)^2 = $4,535.13

The change in the value of the bond is the difference between the present values at the two interest rates:

$4,535.13 - $4,132.23 = $402.90

Therefore, the answer is B: It will rise by $402.90.

Question 7

A newly issued bond with a face value of $12,000 and no coupon payments is priced at $9,000.The bond will mature in one year.What is the yield on this bond?

Accepted Answer

The yield on the bond is calculated as the return on investment over the initial investment. Here, the return is the difference between the maturity value ($12,000) and the purchase price ($9,000), which is $3,000. The yield is $3,000 / $9,000 = 0.333 or 33.3 percent.

Question 8

Which of the following will lower the present value of a bond?

Accepted Answer

An increased risk of default will lower the present value of a bond because investors will demand a higher return to compensate for the increased risk. The other options (a fall in the interest rate, an increase in the principal, and a shorter time to maturity) will all increase the present value of a bond because they make the bond more valuable to investors.

Question 9

You are thinking of buying a newly issued,5-year bond that has a face value of $10,000 and offers no annual coupon payments.What is the most you should pay for this bond,if the interest rate is 5 percent (0.05)per year?

Accepted Answer

The answer of You are thinking of buying a newly...

Question 10

Microsoft issues a 2-year bond with a face value of $5,000.In addition to the principal paid at maturity,the bond has 2 annual coupon payments of $500 each,to be received at the end of the first and second year respectively.If the interest rate is 10 percent (0.10)per year,what is the value of the newly issued bond?

Accepted Answer

The answer of Microsoft issues a 2-year bond with a...

Question 11

Consider three bonds,from Corporation X,Corporation Y,and Corporation Z.The X and Y bonds mature in 1 year,while the Z bond matures in 2 years.The Y and Z bonds have face values of $5,000,while the X bond has a face value of $4,000.If the interest rate is 10 percent (0.10)per year,rank the three bonds from highest present value to lowest present value.

Accepted Answer

To calculate the present value, we use the formula PV = FV/(1+r)^n, where FV is the face value, r is the interest rate, and n is the number of periods.

For bond X: PV = 4,000/(1+0.10)^1 = $3,636.36 
For bond Y: PV = 5,000/(1+0.10)^1 = $4,545.45 
For bond Z: PV = 5,000/(1+0.10)^2 + 5,000/(1+0.10)^2 = $8,264.46

Therefore, the ranking from highest to lowest present value is: Z, Y, X. The correct answer is choice C.

Question 12

Which of the following will increase the yield on a bond?

Accepted Answer

An increased risk of default makes a bond riskier to investors. To compensate for this higher risk, investors demand a higher yield.

Question 13

Which of the following states the relationship between a bond's price and its yield?

Accepted Answer

There exists an inverse relationship between a bond's price and its yield. As the price of a bond increases, the yield demanded by investors decreases, and vice versa. This is because when the bond's price rises, its yield falls to adjust for the increase in demand, and when the bond's price falls, its yield rises to adjust for the decrease in demand. Therefore, as the price rises, the yield falls, and as the price falls, the yield rises.

Question 14

The key difference between the primary and secondary bond markets is that __________ bonds are traded on the primary market,while __________ bonds are traded on the secondary market.

Accepted Answer

The primary market is where newly issued securities, including bonds, are sold for the first time to investors directly from the issuer. On the other hand, the secondary market is where previously issued securities, including bonds, are bought and sold among investors. Therefore, option A is the correct answer.

Question 15

What is the value of a newly issued 10-year bond with face value of $10,000 and no coupon payments? Assume the interest rate is 7 percent (0.07)per year.

Accepted Answer

A bond with no coupon payments is called a zero-coupon bond. The value of a zero-coupon bond can be calculated using the formula:
Bond Value = Face Value / (1 + interest rate)^number of years
In this case, the bond has a face value of $10,000 and a 10-year maturity. The interest rate is 7 percent or 0.07. Substituting these values into the formula:
Bond Value = $10,000 / (1 + 0.07)^10
= $10,000 / 1.96715
= $5,083.49
Therefore, the value of the newly issued bond is $5,083.49. Choice B is the correct answer.

Question 16

A bond with a face value of $10,000 (and no coupon payments)is always worth

Accepted Answer

The answer of A bond with a face value of...

Question 17

The interest rate on U.S.government securities is often called the

Accepted Answer

The term "riskless rate" refers to the interest rate on U.S. government securities because these securities are considered to have no credit risk, which means there is no chance of default on the part of the U.S. government. This makes them a benchmark for other interest rates in the economy. The prime rate is the interest rate that banks charge their most creditworthy customers, not a government rate. The public discount and universal discount are not common terms in finance. The superior rate is not a commonly used term in finance either.

Question 18

What is the value of a newly issued 3-year bond with a face value of $5,000 and no coupon payments? Assume the interest rate is 8 percent (0.08)per year.

Accepted Answer

To calculate the value of the bond, we need to discount the face value ($5,000) by the present value factor for a 3-year bond at 8% interest, which is 0.7938. Therefore, the value of the bond is $3,969.16.

Question 19

You are thinking of buying a 10-year bond on the secondary bond market.The face value of the bond is $10,000,the interest rate is 5 percent (0.05)per year,and the bond was issued exactly eight years ago.What is the value of the bond today?

Accepted Answer

The value of the bond today can be calculated by finding the present value of its remaining cash flows. This includes the present value of the bond's coupon payments for the next 2 years and the present value of its face value, which will be paid at the end of the 10th year. Assuming a 5% annual interest rate, the formula for the present value of an annuity (the coupon payments) and the present value of a lump sum (the face value) can be used. The bond pays 5% of its $10,000 face value annually, which is $500 per year. The present value of these coupon payments for 2 years and the $10,000 face value can be calculated as follows:$$ \text{Present Value of Coupons} = \frac{500}{(1+0.05)^1} + \frac{500}{(1+0.05)^2} $$$$ \text{Present Value of Face Value} = \frac{10,000}{(1+0.05)^2} $$$$ \text{Present Value of Coupons} = \frac{500}{1.05} + \frac{500}{1.1025} = 476.19 + 453.51 = 929.70 $$$$ \text{Present Value of Face Value} = \frac{10,000}{1.1025} = 9,070.30 $$Adding the present value of the coupons to the present value of the face value gives the total present value of the bond:$$ 929.70 + 9,070.30 = 10,000.00 $$However, the correct calculation for the present value of the bond directly considering the remaining cash flows should result in a value that reflects the current worth of those future payments, given the 5% interest rate. The mistake in the explanation lies in the incorrect summation of the present value of the coupons and the face value, which was misleadingly presented. The correct approach is to calculate the present value of the remaining cash flows (coupon payments and the face value repayment at maturity), which would typically yield a value that accounts for the time value of money at the specified interest rate. The correct answer, based on the standard present value calculation for bonds, would consider the discounted value of the remaining coupon payments and the face value, accurately reflecting the bond's worth on the secondary market. The initial explanation mistakenly summed the values without correctly applying the present value formula for each cash flow. The correct value, considering the bond's specifications and the market interest rate, would indeed reflect the bond's market value, aligning with the principles of financial valuation.

Question 20

A financial asset is

Accepted Answer

A financial asset is a type of asset that represents a monetary claim on an entity. It is not a physical asset, like a piece of equipment or property, but rather a promise to pay future income in some form, such as a bond or stock.

Quiz 13: Capital and Financial Markets

You are thinking of purchasing a 5-year bond,with a face value of $8,000,on the secondary bond market.The bond was issued three years ago,so it will mature two years from today.If the interest rate is 10 percent (0.10) per year,what is the value of the bond?

A newly issued bond with a face value of $8,000 and no coupon payments is priced at $7,000.The bond will mature in one year.What is the yield on this bond?

If a bond is sold in the secondary market,

You have two bonds,both with a face value of $7,000.One of them matures one year from today,while the other matures one year after that.If the interest rate is 8 percent (0.08) per year,what is the difference in value between the two bonds?

What would you pay for a newly issued 10-year bond with face value of $10,000 and no coupon payments? Assume the interest rate is 5 percent (0.05) per year.

Your aunt gives you a PepsiCo bond with face value of $5,000.It will mature in two years.Currently,the interest rate is 10 percent (0.10) per year.How will the value of the bond change if the interest rate falls to 5 percent tomorrow morning?

A newly issued bond with a face value of $12,000 and no coupon payments is priced at $9,000.The bond will mature in one year.What is the yield on this bond?

Which of the following will lower the present value of a bond?

You are thinking of buying a newly issued,5-year bond that has a face value of $10,000 and offers no annual coupon payments.What is the most you should pay for this bond,if the interest rate is 5 percent (0.05) per year?

Which of the following will increase the yield on a bond?

Which of the following states the relationship between a bond's price and its yield?

The key difference between the primary and secondary bond markets is that bonds are traded on the primary market,while bonds are traded on the secondary market.

What is the value of a newly issued 10-year bond with face value of $10,000 and no coupon payments? Assume the interest rate is 7 percent (0.07) per year.

A bond with a face value of $10,000 (and no coupon payments) is always worth

The interest rate on U.S.government securities is often called the

What is the value of a newly issued 3-year bond with a face value of $5,000 and no coupon payments? Assume the interest rate is 8 percent (0.08) per year.

You are thinking of buying a 10-year bond on the secondary bond market.The face value of the bond is $10,000,the interest rate is 5 percent (0.05) per year,and the bond was issued exactly eight years ago.What is the value of the bond today?

A financial asset is