Question

Which of the following statements about annuity due and ordinary annuity is true?

		FV of annuity due = (FV of ordinary annuity) / (1+i)
		FV of ordinary annuity = (FV of annuity due) * (1+i)
		PV of ordinary annuity = (PV of annuity due) * (1+i)
		PV of annuity due = (PV of ordinary annuity) * (1+i)

In 1815, The British Government issued a consol. If we assume the consol promised to pay $25 per year in perpetuity. What would the consol be worth if the discount rate is 5%?

		$100
		$500
		$1,000
		$2,000

What is the beta for a market portfolio such as S&P 500 index portfolio?

		Less than 1.0
		Close to 1.0
		Larger than 1.0
		Don’t know.

A 10-year corporate bond has an annual coupon payment of 2.8%. The bond is currently selling at par ($1,000). Which of the following statement is NOT correct?

		The bond’s yield to maturity is 2.8%.
		The bond’s current yield is 2.8%.
		If the bond’s yield to maturity remains constant, the bond’s price will remain at par.
		The bond’s capital gain yield is 2.8%.

Answer 1

The correct statement is

PV of annuity due = (PV of ordinary annuity) * (1+i)

Since payments are made/received at the beginning of each year instead of end as in case of ordinary annuity, it earns 1 period extra interest

Also,

FV of annuity due = (FV of ordinary annuity)*(1+i)

Value = Annual cash flows/Discount rate

= 25/5%

= $500

Beta of market portfolio = 1

Hence, the answer is

Close to 1.0

The bond’s capital gain yield is 2.8%, Capital gains yield will be 0 as dividends are paid

And the bond trades at par, hence, no capital gains