Question

1) Which of the following is a statement of weak form efficiency?
Select one:
a. if markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns
b. if the markets are efficient in the weak form, then prices will adjust immediately to public information
c. If the markets are efficient in the weak form, then prices reflect all information
d. None of the above

2) The real risk free rate is 3%, inflation is expected to be 2% this year, and the maturity risk premium is zero. Ignoring any cross-product terms, what is the equilibrium rate of return on a 1-year T-bond?
Select one:
a. 4.95%
b. 5,05%
c. 5,00%
d. 5,10%

3) If a bond sells at a high premium, then which of the following relationships hold true? (P₀ represents the price of a bond and YTM is the bond's yield to maturity.)
Select one:
a. P0 < par and YTM > the coupon rate.
b. P0 > par and YTM > the coupon rate.
c. P0 > par and YTM < the coupon rate.
d. P0 < par and YTM < the coupon rate.

4) _______ are financial assets.

Select one:
a. Bonds
b. Machines
c. Stocks
d. a and c

5) A 6-year Bond, 8% semi-annual coupon bond sells at par ($1000). Another bond of equal risk, maturity, and par value pays a 8% annual coupon. What is the price of the annual coupon bond?

Select one:
a. $992,64
b. $980,43
c. $900,00
d. $850,00

Answer 1

Answers-

Q 1)

The Option a is correct.
if markets are efficient in the weak form, then it is impossible to make consistently superior profits by using trading rules based on past returns.

The Options b and c are incorrect.

Q 2)

The correct option is c.
The equilibrium rate of return on a 1-year T-bond = real risk free rate + expected inflation = 3 % + 2 % = 5 %

Q 3)

The correct option is b. P0 > par and YTM > the coupon rate.
For preium bonds P0 > par and P0 < par for discount bonds and YTM > coupon rate

Q 4)

The correct Option is d. both options a and c are correct.
Bonds and stocks are financial assets.
Option b Machines are not financial assets.

Q 5)  

Face value = FV = $ 1000
Coupon rate = PMT = 8 % / annum = 0.08 x $ 1000 = $ 80
Number of years = N = 6
YTM = I/Y = 8 % semiannual compounding = ( 1 + (0.08 /2))2  - 1
= 1.0816 - 1
= 0.0816
= 8.16 %

YTM = 8.16 %

Present Value = PV = $ 992.64

The correct Option is a.