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  • Q&ans Hw3a

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    Abdulaziz Faisal
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    This document contains 10 multiple choice questions testing concepts related to bond valuation and duration. The questions cover topics such as how duration is affected by coupon rate and maturity, the definition of duration, calculating annual compound rates of return, and calculating bond prices given yield to maturity. All 10 questions are correctly answered.

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    Original Title

    Q&ANS HW3A

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    This document contains 10 multiple choice questions testing concepts related to bond valuation and duration. The questions cover topics such as how duration is affected by coupon rate and maturity, the definition of duration, calculating annual compound rates of return, and calculating bond prices given yield to maturity. All 10 questions are correctly answered.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    14 views9 pages

    Q&ans Hw3a

    Uploaded by

    Abdulaziz Faisal
    This document contains 10 multiple choice questions testing concepts related to bond valuation and duration. The questions cover topics such as how duration is affected by coupon rate and maturity, the definition of duration, calculating annual compound rates of return, and calculating bond prices given yield to maturity. All 10 questions are correctly answered.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 9

    Score: 1/1 Points 100 %

    1. Award: 0.10 out of 0.10 points

    All is held constant, the ________ the coupon and the ________ the maturity; the ________ the duration of a bond.

     larger; longer; longer

     larger; longer; shorter

     smaller; shorter; longer

     smaller; shorter; shorter

    ✓  None of these choices are correct.

    References

    Multiple Choice Difficulty: 2 Medium


    2. Award: 0.10 out of 0.10 points

    Duration is:

     the elasticity of a security's value to small coupon changes.

    ✓  the weighted average time to maturity of the bond's cash flows.

     the time until the investor recovers the price of the bond in today's dollars.

     greater than maturity for deep discount bonds and less than maturity for premium bonds.

     the second derivative of the bond price formula with respect to the yield to maturity.

    References

    Multiple Choice Difficulty: 1 Easy

    3. Award: 0.10 out of 0.10 points

    The required rate of return on a bond is:

     the interest rate that equates the current market price of the bond with the present value of all future cash flows received.

     equivalent to the current yield for nonpar bonds.

     less than the expected return for discount bonds and greater than the expected return for premium bonds.

     inversely related to a bond's risk and coupon.

    ✓  None of these choices are correct.

    References

    Multiple Choice Difficulty: 1 Easy


    4. Award: 0.10 out of 0.10 points

    You bought a stock three years ago and paid $45 per share. You collected a $2 dividend per share each year you held the stock and then you sold the stock for $47 per share. What was
    your annual compound rate of return?

     8.89%

     8.51%

    ✓  5.84%

     4.44%

     2.96%

    Use a financial calculator to solve for IRR as follows:


    CF0 = −$45, CF1 = $2, CF2 = $2, CF3 = $49,
    Compute for IRR = 5.84%.

    References

    Multiple Choice Difficulty: 3 Hard


    5. Award: 0.10 out of 0.10 points

    The duration of a 180-day T-Bill is (in years):

    ✓  0.493.

     0.246.

     1.

     0.

     indeterminate.

    180/365 = 0.493

    References

    Multiple Choice Difficulty: 2 Medium


    6. Award: 0.10 out of 0.10 points

    If an N-year security recovered the same percentage of its cost in present value terms each year, the duration would be:

     N.
     0.

    ✓  sum of the years/N.

     N!/N2.

     None of these choices are correct.

    References

    Multiple Choice Difficulty: 2 Medium


    7. Award: 0.10 out of 0.10 points

    A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent?

     $1,261.32

    ✓  $1,253.12

     $1,250.94

     $1,263.45

     $1,264.79

    Price = $40.00 × PVIFA (5.5%/2, 15 years × 2) + $1,000 × PVIF (5.5%/2, 15 years × 2)

    Calculator Method:
    N = 30
    PMT = −40
    I/Y = 2.75
    FV = −1,000
    Solve for PV which is $1,253.12.

    References

    Multiple Choice Difficulty: 2 Medium


    8. Award: 0.10 out of 0.10 points

    The duration of a 91-day T-Bill is (in years):

     0.325.

    ✓  0.249.

     0.715.

     0.

     Indeterminate.

    91/365 = 0.249

    References

    Multiple Choice Difficulty: 2 Medium


    9. Award: 0.10 out of 0.10 points

    An eight-year corporate bond has a 7 percent coupon rate. What should be the bond's price if the required return is 6 percent and the bond pays interest semiannually?

    ✓  $1,062.81

     $1,062.10

     $1,053.45

     $1,052.99

     $1,049.49

    Price = $35.00 × PVIFA (6%/2, 8 years × 2) + $1,000 × PVIF (6%/2, 8 years × 2)

    Calculator Method:
    N = 16
    PMT = −35
    I/Y = 3
    FV = −1,000
    Solve for PV which is $1,062.81.

    References

    Multiple Choice Difficulty: 2 Medium


    10. Award: 0.10 out of 0.10 points

    The basic principle of valuation states that the value of any asset is:

    ✓  the present value of all future cash flows generated by the asset.

     the sum of all future cash flows generated by the asset.

     the present value of next year’s cash flow only.

     the degree of cash flow riskiness is not a relevant factor in valuation.

     None of these choices are correct.

    References

    Multiple Choice Difficulty: 1 Easy

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