Question

2. Which of the following bonds would you prefer to be buying? Assume n = 30 for all bond maturities.

A)  A $10,000 face-value security with a 6% coupon rate selling for $9,000.

B)  A $10,000 face-value security with a 6% coupon rate selling for $10,000.

C)  A $10,000 face-value security with a 6% coupon rate selling for $11,000.

D)  A $10,000 face-value security with a 7% coupon rate selling for $9,500.

E)  A $10,000 face-value security with a 7% coupon rate selling for $11,500.

3. If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you expect that

A) the coupon payments on your bond will rise.                    B) the par value of your bond will rise.

C) the market price of your bond will rise.                            D) the market price of your bond will fall.

5. The market interest rate is ________ than the ________ rate when the bond price is ________ its face value.

A) greater; discount; above                                                B) greater; coupon; above

C) greater; coupon; below                                                 D) greater; perpetuity; above

7. The key to present value calculations is that they

A) allow easy comparison of taxable and non-taxable investments.

B) provide a common unit for measuring funds at different times.

C) provide accurate answers only in a low-inflation environment.

D) provide accurate answers only in a high-inflation environment.

Answer 1

2. I prefer to buy option D, " A $10,000 face-value security with a 7% coupon rate selling for $9,500."

Buying a bond with maturity of 30 Years, at discount of $ 9500 with 7% coupon rate will yield 7.42% if we hold the bond till maturity. Rest bond options will yield less that this bond.

3. If, while you are holding a coupon bond, the interest rates on other similar bonds fall, you expect that  the par value of your bond will rise.

There is invesre relationship between bond and its yield. when the market interest rate falls the bond that paying higher interest will see rise in is value and will trade at premium.

5.  The market interest rate is greater than the coupon rate when the bond price is below its face value.

when the market rate is greater than coupon rate the bond will trade at discount as the bond is paying less than the market rate.

7. The key to present value calculations is that they provide a common unit for measuring funds at different times.