Question

2) If a security pays $110 in one year and $133 in three years, its present value is $200 if the interest rate is

A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent.

7) The price of a coupon bond and the interest rate are ________ related; that is, as the interest rate ________, the price of the bond ________.

A) positively; rises; rises B) negatively; falls; falls C) positively; rises; falls D) negatively; rises; falls

You are considering buying a lottery which will give you two payments, one payment for one year later and the other for two years later. Assume that the lottery pays you one year later either $9,000 with the probability of 2/3 or $3,000 with the probability of 1/3, and two years later either $9,000 with the probability of 1/3 or $3,000 with the probability of 2/3. Then what would be the fair price of the lottery when the interest rate is 10%? (How much are you willing to pay now for the lottery?)

What is the fair price of a discount bond (zero coupon bond) with a $5,000 face value that matures in two years if we assume that the annual market interest rates are 6 percent?

What is the price of a 3 percent coupon bond, payable annually, with a $5,000 face value that matures in 4 years if we assume that the annual market interest rates are 3.5 percent?

Answer 1

6. Let er be the interest rate . Present value = Future Value (strin . 200 = 1 Put r= 54.- ous Scheck. 12 200 177 = 219.65 200 - 200 - 11 ) + ( 1toos 11 110 (a toos) .. #s, lo y Put - 200 110 r-loy & check 133 200 = Itoil) + (1 toll - 9 - 10 of Caption B)