Fins2624 Online Quiz Solutions

1.If you are borrowing money and paying interest, would you prefer an interest rate that compounds

Southlake Corporation issued $900,000 of 8% bonds on March 1, 20X1. The bonds pay interest on March 1 and September 1 and mature in 10 years. Assume the independent cases that follow.

The yield to maturity on a 15-year bond is a true estimate of the cost of 30-year bond

3. Which of the following statements about the yield-to-maturity is true? a) Discounting all cash flows of a bond with the bond’s yield-to-maturity only gives us the correct price if we have a flat term structure of interest rates. b) The yield-to-maturity is upwards sloping. c) The yield-to-maturity is always a spot rate. d) Several of the above statements are true. e) None of the above statements are true. E is correct. The yield-to-maturity, y is the constant hypothetical interest rate that solves P = 1 FV c 1− + T y (1 + y) (1 + y)T

D* = 3.59/1.053 = 3.41 years Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

What would happen to the price, current yield, and total return of each bond over time assuming constant future interest rates?

34) The formula for a bond yield is determined using which of the following components: A

3. Assume that 11% is the market rate of interest in on January 1, 1975. Compute the present value at January 1, 1975 of all payments that will be made on

In question four, Janet was asked to solve a question that deals with annuity payments, specifically, ordinary annuities. It starts by asking of how much you will make if you add $2,000 every year and it is compounded by 10% interest every year. These, for the most part, are future value problems. The first one comes out to be a future value of $12,210.20, which does not satisfy the need for $20,000. The next part asks what the value would be if the interest was compounded semiannually. You have to do an equation in order to find out what the effective annual interest rate. Through this equation you come out with a value of 10.25% and after the calculator calculations you come out with a future value of $12,271.11, also not meeting the demand for that first year of college. The next part asks what payment will you need in order to get to that $20,000 number and the present value comes to be $3,275.95. Next, the case asks what original payment you would need in order

Investing in the 25-year bond at a return rate of 7.5% per year is valuable for Marlene in the short-term trading opportunity. If Marlene buys the 7.5%, 25-year bond currently priced at $852, she will receive a profit of $137.42 after the first 2 years. This bond’s investment return will rise in the following years until the 25-year maturity period. Investing in this bond has redemption amounts that lead to good performance of the bond by the holder. This is likely to result in Marlene receiving more investment returns than her original investment at maturity of

Through this method, we obtained theoretical yields of the 4.25% coupon bond and 10.625% coupon bond to be 2.899% and 2.639% respectively. The corresponding theoretical prices of the bonds are $108.27 for the 4.25% coupon bond and $149.31 for the 10.625% coupon bond (see Table 1 above).

We assume that the coupon interest is fixed, then the price of bonds(P)is the discounted cash flows of each period:

Let’s say you have a 4 year 10% annual coupon bond, with a yield (‘yield to maturity’ or ‘yield to redemption’) of 12%. From this information, the price can be calculated as 93.93%.

A bond is trading at a price of 100 with a yield of 8%. If the yield increases by 1 basis point. the price of the bond will decrease to 99.95. If the yield decreases by 1 basis point. the price of the bond will increase to 100.04. What is the modified duration of the bond?

Yield to maturity, market value of the bonds if the time to maturity was increased decreased by 5 years?