Question

Which of the following statements is (are) correct?
(x) Bonds can sell at par but they often sell at either a premium or a discount.
(y) If the market interest rate on a 5.50 percent coupon bond with 15 years left to maturity is 5.50 percent then the bond is selling at par and it is not a premium bond.
(z) If the market interest rate on a 6.25 percent coupon bond with 15 years left to maturity is 5.75 percent then the bond is a discount bond.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

9. A small business is scheduled to pay a $7,625 cash flow in one year and $8,975 in year two, receive a $10,485 cash flow in year 3 and $11,250 in year 4. If interest rates are 7.95 percent per year, what is the combined present value of these cash flows?
A. less than $1,325
B. more than $1,325 but less than $1,600
C. more than $1,600 but less than $1,875
D. more than $1,875 but less than $2,150
E. more than $2,150

10. Assume the account compounds monthly. How many months will it take $34,750 to reach $53,768 when it
grows at an annual rate of 7.32 percent?
A. less than 68.2 months
B. more than 68.2 months but less than 72.8 months

C. more than 72.8 months but less than 76.4 months

D. more than 76.4 months but less than 80.0 months

E. more than 80.0 months

Answer 1

Q8. When Coupon rate is <market interest rate, the bond sells at a price> par value. When Coupon rate is > market interest rate, the bond sells at a price < par value.When Coupon rate is = market interest rate, the bond sells at a price = par value. This makes Statement Y and Z in correct. Looking at statement X, we can say that as interest rates vary from the coupon rate most of the times, bonds often sell at premium or discount. but if interest rate is same as the coupon rate then the bond can sell at par also. So Statement X is correct. The option coinciding with this analysis is OPTION E

Q9. PV can be calculated using the following formula. If a CF is an outflow it should be negative and if it is an inflow it should be positive:

So option C is correct as the PV is between 1600 and 1875

Q10: We need to solve the following equation to find out the number of months:

PMT is the monthly interest = 7.32% x $34,750/12

r is the annual interest rate

r is divided by 12 as there are 12 payments in a year

n is the number of years required

n is multiplied by 12 because we need the number of months

FV is the future value = $53,768

By replacing value of 12n as 80, we get FV as 21775.80, so as 53768 is greater than that, we need to compoind for more than 80 months, therefore, the correct answer is E