Question

Interest rates always increase as the length of time until repayment increases.

Question 7 options:

	True
	False

Two years ago you bought a bond with a 5% coupon that matures ten years from now. Today the interest rate on similar bonds is 10%. This bond sells at

Question 8 options:

	A) a premium
	B) a discount
	C) its par value

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 5?

Question 11 options:

	1) ($1.10) (1.08 × 3) (1.02 × 3)
	2) ($1.10) (1.08)3 (1.02)4
	3) ($1.10) (1.08 × 3) (1.02 × 4)
	4) ($1.10) (1.08)3 (1.02)2
	5) ($1.10) (1.08)3 (1.02)3

Answer 1

Question-7)

This Statement is true. Justification for the same is when ever there is more time for repayment of loan the more is the inflation and there is more risk that the borrower may default the loan since future is uncertain. Hence the lender will tend to charge more interest as the tenure of loan increases.

Question-8)

Since the bond which is procured two years ago is giving less copoun as compared to the one currently paying, the person who purchases the bond does not try to purchase the old bond and try to purchase the new one which is paying high interest at a rate 10%. Accordingly, this bond will trade at a discount.

More over when the rate of interest in market reduces then the price of old bond will increase and vice versa

Question -11)

Compounding factor is 1.08 for first three years and there after it is 1.02

Accodingly for first three years it is

1.08*1.08*1.08

And for the next two years it is

1.02*1.02

Finally for first five years the factor is (1.08)³ *(1.02)²

Dividend for year -1 is 1.1

So, the final answer is 1.1*(1.08)³*(1.02)²