Question

Pleaae solve all

14. (I) A discount bond requires the borrower to repay the principal at the maturity date plus an interest payment. (II) A coupon bond pays the lender a fixed interest payment every year until the maturity date, when a specified final amount (face or par value) is repaid. A) (D) is true, (II) false. C) Both are true. B) (1) is false, (II) true. D) Both are false. 15. With an interest rate of 10 percent, the price of a zero coupon bond with face value of $1000 and maturity of two years is approximately A) 8797 B) $826 C) 8909 D) $1210 16. Tom wants to borrow $8000 from his aunt to buy a car and promises to pay her back with $9000 next year. The yield to maturity of this loan is A) 8.5 percent. B) 10.5 percent. C) 12.5 percent. D) 5.5 percent. 17. What is the price of a 5% coupon bond with a face value of $1,000, an 8% yield to maturity, and ten years to maturity? A) $753 B) $ 799 C) $ 816 D) S 913 18. If you expect the inflation rate to be 5 percent next year and a one-year bond has a yield to maturity of 4 percent, then the real interest rate on this bond is A) - 1 percent B) 1 percent C)-9 percent D) 9 percent. 19. What is the return on a 4 percent coupon bond with face value of $1000 that initially sells for $900 and sells for $806 one year later? A) 4 percent B) -5 percent C) -9 percent D) -6 percent 20. If an investor's investment is longer than the term to maturity of a bond, he or she is exposed to A) yield-to-maturity risk. C) reinvestment risk. B) bond-market risk. D) interest-rate risk.

Answer 1

14.B)

discount bond is a bond where face value is repaid at the time of maturity and is issued at a discount to face value.

15 B)

pv of zero coupon bond=1000/(1.1)^2=826.45

16 c)

YIELD to maturity=(9000-8000)/8000=12.5%

17 b)

year	coupon	principal	present value factor at 8%	present value of bond
1	50		0.93	46
2	50		0.86	43
3	50		0.79	40
4	50		0.74	37
5	50		0.68	34
6	50		0.63	32
7	50		0.58	29
8	50		0.54	27
9	50		0.50	25
10	50	1000	0.46	486
				799

18) A

real interest rate is -1% which is difference between YTM of 1 year bond and inflation rate

19) D

return on bond= (interest coupon +changes in value of bond)/purchase price of bond

=((1000*4%)+(806-900))/900

=(40-94)/900

=-54/900*100= -6%

20.c) reinvestment risk

reinvestment risk refers to inability to reinvest the funds at a rate comparable to current rates