chapter-07-interest-rates-and-bond-valuation-2

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111. You purchased an investment which will pay you
$8,000, in real dollars, a year for the next three years. Each payment will be
received at the end of the period with the first payment occurring one year
from today. The nominal discount rate is 7.5 percent and the inflation rate is
2.9 percent. What is the present value of these payments?
A. $21,720
B. $22,004
C. $22,511
D. $23,406
E. $23,529

Essay Questions

112. Define liquidity risk, default risk, and
taxability risk and explain how these risks relate to bonds and bond
yields.

113. Inflation has remained low for the past three
years but you have come to the conclusion that trend is ending and inflation
will increase significantly over the next 18 months. Assume you have reached this
conclusion prior to other investors reaching the same conclusion. What
adjustments should you make to your bond portfolio in light of your
conclusions?

114. Explain the conditions that would need to exist
for the Treasury yield curve to be downward sloping.

115. Describe the relationships that exist between the
coupon rate, the yield to maturity, and the current yield for both a discount
bond and a premium bond.

Multiple Choice Questions

116. Sylvan Trees has a 7 percent coupon bond on the
market with ten years left to maturity. The bond makes annual payments and
currently sells for $861.20. What is the yield-to-maturity?
A. 8.50 percent
B. 8.68 percent
C. 8.92 percent
D. 9.18 percent
E. 9.27 percent

117. Kaiser Industries has bonds on the market making
annual payments, with 14 years to maturity, and selling for $1,382.01. At this
price, the bonds yield 7.5 percent. What is the coupon rate?
A. 8.00 percent
B. 8.50 percent
C. 9.00 percent
D. 10.50 percent
E. 12.00 percent

118. Dexter Mills issued 20-year bonds a year ago at a
coupon rate of 11.4 percent. The bonds make semiannual payments. The
yield-to-maturity on these bonds is 9.2 percent. What is the current bond
price?
A. $985.55
B. $991.90
C. $1,192.16
D. $1,195.84
E. $1,198.00

119. Soo Lee Imports issued 17-year bonds 2 years ago
at a coupon rate of 10.3 percent. The bonds make semiannual payments. These
bonds currently sell for 102 percent of par value. What is the
yield-to-maturity?
A. 9.98 percent
B. 10.04 percent
C. 10.13 percent
D. 10.27 percent
E. 10.42 percent

120. Bryceton, Inc. has bonds on the market with 13
years to maturity, a yield-to-maturity of 9.2 percent, and a current price of
$895.09. The bonds make semiannual payments. What is the coupon rate?
A. 7.80 percent
B. 8.00 percent
C. 8.25 percent
D. 8.40 percent
E. 8.65 percent

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