Chapter Eight Valuation of Known Cash Flows:Bonds Multiple Choice 1.A is a quantitative method used to infer an asset's value from market information about the prices of other assets and market interest rates. (a)fixed model (b)perpetual valuation model (c)valuation model (d)variable model Answer:(c) 2. are examples of fixed-income securities (a)Common stock and pension funds (b)Mortgages and pension annuities (c)Mutual funds and common stock (d)Preferred stock and common stock Answer:(b) 3. Consider a fixed-income security that promises to pay $150 each year for the next five years.How much is this five-year annuity worth if the appropriate discount rate is 7%per year? (a)$534.74 (b)$615.03 (c)$802.50 (d$867.96 Answer:(b) 8-1
8-1 Chapter Eight Valuation of Known Cash Flows: Bonds Multiple Choice 1. A ________ is a quantitative method used to infer an asset's value from market information about the prices of other assets and market interest rates. (a) fixed model (b) perpetual valuation model (c) valuation model (d) variable model Answer: (c) 2. ________ are examples of fixed-income securities. (a) Common stock and pension funds (b) Mortgages and pension annuities (c) Mutual funds and common stock (d) Preferred stock and common stock Answer: (b) 3. Consider a fixed-income security that promises to pay $150 each year for the next five years. How much is this five-year annuity worth if the appropriate discount rate is 7% per year? (a) $534.74 (b) $615.03 (c) $802.50 (d) $867.96 Answer: (b)
4.Consider a fixed-income security that promises to pay $120 each year for the next four years Calculate the value of this four-year annuity if the appropriate discount rate is 6%per year. (a)$415.81 (b)$508.80 (c)$531.85 (d$629.06 Answer:(a) 5.The price of any existing fixed-income security when market interest rates rise because investors will only be willing to them if they offer a competitive yield. (a)rises;buy (b)rises;sell (c)falls;buy (d)falls;sell Answer:(c) 6.A fall in interest rates causes a in the market value of a fixed-income security. (a)arise (b)a fall (c)no change (d)it cannot be determined from the information given Answer:(a) 7.A change in market interest rates causes in the market values of all existing contracts promising fixed payments in the future. (a)a change in the same direction (b)a change in the opposite direction (c)no change (d)an unpredictable variation Answer:(b) 8-2
8-2 4. Consider a fixed-income security that promises to pay $120 each year for the next four years. Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year. (a) $415.81 (b) $508.80 (c) $531.85 (d) $629.06 Answer: (a) 5. The price of any existing fixed-income security ________ when market interest rates rise because investors will only be willing to ________ them if they offer a competitive yield. (a) rises; buy (b) rises; sell (c) falls; buy (d) falls; sell Answer: (c) 6. A fall in interest rates causes a ________ in the market value of a fixed-income security. (a) a rise (b) a fall (c) no change (d) it cannot be determined from the information given Answer: (a) 7. A change in market interest rates causes ________ in the market values of all existing contracts promising fixed payments in the future. (a) a change in the same direction (b) a change in the opposite direction (c) no change (d) an unpredictable variation Answer: (b)
8.What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate rises from 5%to 6%per year? (a)A rise of 1%causes a drop of $4.87 in market value. (b)A rise of 1%causes a rise of $4.87 in market value. (c)A rise of 1%causes a drop of $8.09 in market value. (d)A rise of 1%causes a rise of $8.09 in market value. Answer:(c) 9.What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate falls from 6%to 5%per year? (a)A fall of 1%causes a drop of $4.87 in market value. (b)A fall of 1%causes a rise of $4.87 in market value. (c)A fall of 1%causes a drop of $8.09 in market value. (d)A fall of 1%causes a rise of $8.09 in market value. Answer:(d) 10.A zero-coupon bond is also known as (a)a perpetual bond (b)a pure discount bond (c)a market rebate (d)an infinite bond Answer:(b) 11.The promised cash payment on a pure discount bond is called its (a)face value (b)par value (c)fixed interest (d)both a and b Answer:(d) 8-3
8-3 8. What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate rises from 5% to 6% per year? (a) A rise of 1% causes a drop of $4.87 in market value. (b) A rise of 1% causes a rise of $4.87 in market value. (c) A rise of 1% causes a drop of $8.09 in market value. (d) A rise of 1% causes a rise of $8.09 in market value. Answer: (c) 9. What happens to the value of a four-year fixed-income security promising $100 per year if the market interest rate falls from 6% to 5% per year? (a) A fall of 1% causes a drop of $4.87 in market value. (b) A fall of 1% causes a rise of $4.87 in market value. (c) A fall of 1% causes a drop of $8.09 in market value. (d) A fall of 1% causes a rise of $8.09 in market value. Answer: (d) 10. A zero-coupon bond is also known as ________. (a) a perpetual bond (b) a pure discount bond (c) a market rebate (d) an infinite bond Answer: (b) 11. The promised cash payment on a pure discount bond is called its ________. (a) face value (b) par value (c) fixed interest (d) both a and b Answer: (d)
12.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000? (a)8.50% (b)9.09% (c)15.00% (d17.65% Answer:(d) 13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000? (a)5.26% (b)10.00% (c)11.11% (d15.79% Answer:(c) 14.Consider a four-year pure discount bond with a face value of $1,000.If its current price is $850, compute its annualized yield. (a)1.17% (b)4.15% (c)5.57% (d17.60% Answer:(b) 15.Consider a three-year pure discount bond with a face value of $1,000.If its current price is $900, compute its annualized yield. (a)1.036% (b)1.111% (c)3.57% (d5.41% Answer:(c) 8-4
8-4 12. What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000? (a) 8.50% (b) 9.09% (c) 15.00% (d) 17.65% Answer: (d) 13. What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000? (a) 5.26% (b) 10.00% (c) 11.11% (d) 15.79% Answer: (c) 14. Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850, compute its annualized yield. (a) 1.17% (b) 4.15% (c) 5.57% (d) 17.60% Answer: (b) 15. Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900, compute its annualized yield. (a) 1.036% (b) 1.111% (c) 3.57% (d) 5.41% Answer: (c)
16.Consider a five-year pure discount bond with a face value of $1,000.If its current price is $780,what is its annualized yield? (a)5.09% (b)2.82% (c)1.28% (d1.05% Answer:(a) 17.A obligates the issuer to make periodic payments of interest to the bondholder for the life of the bond and then to pay the face value of the bond when the bond matures. (a)pure discount (b)zero-coupon (c)perpetual bond (d)coupon bond Answer:(d) 18.The of the bond is interest rate applied to the of the bond to compute the periodic payment. (a)coupon rate:face value (b)maturity rate;face value (c)coupon rate;price (d)maturity rate;price Answer:(a) 19.For a bond with a face value of $1,000 and coupon rate of 11%,what is the annual coupon payment? (a)$100 (b)$110 (c)$1,000 (d$1,100 Answer:(b) 8-5
8-5 16. Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, what is its annualized yield? (a) 5.09% (b) 2.82% (c) 1.28% (d) 1.05% Answer: (a) 17. A ________ obligates the issuer to make periodic payments of interest to the bondholder for the life of the bond and then to pay the face value of the bond when the bond matures. (a) pure discount (b) zero-coupon (c) perpetual bond (d) coupon bond Answer: (d) 18. The ________ of the bond is interest rate applied to the ________ of the bond to compute the periodic payment. (a) coupon rate; face value (b) maturity rate; face value (c) coupon rate; price (d) maturity rate; price Answer: (a) 19. For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment? (a) $100 (b) $110 (c) $1,000 (d) $1,100 Answer: (b)