Question

7) Which of the following 10-year, $10,000 face-value securities would you buy based on the yield to maturity criterion?

A) A 5 percent coupon bond selling for $10,100                       B) A 10 percent coupon bond selling for $10,000

C) A 15 percent coupon bond selling for $10,000                     D) A 15 percent coupon bond selling for $9,900

8) The future value of a security is

A) inversely related to the market interest rate.                 B) directly related to the time until maturity.

C) inversely related to the principal amount.                    D) is not related to the par value.

9) In the primary bond market, the seller is considered to be

A) the lender or the borrower, depending upon whether interest rates are rising or falling.

B) the lender or the borrower, depending upon the use to which the funds are put.

C) the borrower.

D) the lender.

Answer 1

(7) (D)

YTM of all bonds are computed as follows, using Excel RATE function.

Bond - A
Selling Price (PV) ($) =	-10,100
Face Value (FV) ($) =	10,000
Years to Maturity (NPER) =	10
Annual Coupon (PMT) ($) =	500
YTM of Bond =	4.87%
Bond - B
Selling Price (PV) ($) =	-10,000
Face Value (FV) ($) =	10,000
Years to Maturity (NPER) =	10
Annual Coupon (PMT) ($) =	1,000
YTM of Bond =	10.00%
Bond - C
Selling Price (PV) ($) =	-10,000
Face Value (FV) ($) =	10,000
Years to Maturity (NPER) =	10
Annual Coupon (PMT) ($) =	1,500
YTM of Bond =	15.00%
Bond - D
Selling Price (PV) ($) =	-9,900
Face Value (FV) ($) =	10,000
Years to Maturity (NPER) =	10
Annual Coupon (PMT) ($) =	1,500

Since bond D has highest YTM, this is to be selected.

(8) (B)

The higher the interest rate, the higher the maturity period and the higher the principal amount, the higher the future value.

(9) (C)

Seller of a bond is the company which is trying to borrow money by issuing bonds.