AFME 325

Exercises for quiz 1

1. Which of the following 1000 face-value securities has the LOWEST yield to maturity?
a) A coupon bond with a 15% coupon rate selling for 900
b) A coupon bond with a 5% coupon rate selling for 1, 000
c) A coupon bond with a 15% coupon rate selling for1, 000
d) A coupon bond with a 10% coupon rate selling for 1, 000
2. Consider a coupon bond with an annual coupon payment C = 100, a face value F = 3,000,
and a maturity date 1/1/2014. Suppose you BUY this bond on 1/1/2011 for Pb = 2500 and
you SELL it one year later on 1/1/2012 for 3050. Which of the following statements are
TRUE for this transaction:
a) Your current yield is C/Pb.
b) Your return rate from 1/1/2011 to 1/1/2012 is your current yield plus the rate of your capital
gain or loss.
c) Your return rate is MORE than your current yield.
d) All of the above are true.
3. If a coupon bond with an 8000 face value and a 5 year maturity has a 400 coupon payment
and a purchase price of 10,000, then the CURRENT YIELD is
a) 4 percent
b) 5 percent
c) 8 percent
d) 10 percent
4. If i is the yield to maturity on coupon bonds, which situation below should you prefer to be a
LENDER?
a) i = 2 percent and the expected inflation rate = -2 percent
b) i = 12 percent and the expected inflation rate = 10 percent
c) i = 8 percent and the expected inflation rate = 9 percent
d) i = 6 percent and the expected inflation rate = 1 percent
5. Which of the following 1000 face-value securities has the HIGHEST yield to maturity?
a) A 4 percent coupon bond selling for $1, 000
b) An 8 percent coupon bond selling for $1, 000
c) A 10 percent coupon bond selling for $1, 000
d) A 10 percent coupon bond selling for $1, 100
6. Which of the following explains the distinction between the YIELD TO
MATURITY on a financial asset and its RETURN RATE:
a) the yield to maturity ignores capital gain or loss that might accrue to an
investor who sells a financial asset prior to maturity.
b) the return rate for any given holding period takes into account capital gain
or loss over the holding period but not the payments over the holding
period.
c) the return rate calculated for a holding period less than the financial
asset's maturity fully takes into account all remaining payments until
maturity.

d) All of the above.

7. The yield on a discount basis for a 100 government bond that sells for 98.50 and

matures in 90 days is
a) 1.50%
b) 4.80%
c) 6.00%
d) 4.94%
8. Consider the coupon bonds below with a face value of 1000. For which of the
following bonds is the current yield the best approximation to the yield to maturity?
e) Bond 1: 10 years to maturity, P = 995
f) Bond 2: 8 years to maturity, P = 995
g) Bond 3: 10 years to maturity, P = 1080
h) Bond 4: 8 years to maturity, P = 1080

9. The .. on an asset over a holding period is defined as the payments to

the owner over the holding period plus the change in the assets value
over the holding period expressed as a fraction of the assets puchase
price.
a) yield to maturity
b) return rate
c) current yield
d) capital gains (or losses)
10. Would an euro tomorrow be worth more to you today when the interest rate is 20% or

when it is 10%?
11. If I = 10%, what is the PV of a security that pays you 1100 next year, 1210 the year

after, and 1331 the year after that?

12.Find the yield on a discount basis for a 100 bond that sells for 98.50 and matures in 90 days.
13.What is the loan amount if the amount payable in two years is 2420 for a simple loan at 10
percent interest?
14.Find the yield to maturity if a 10,000 face-value discount bond maturing in one year is
selling for $5,000.
15. Consider a $1000 U. S. Treasury Bill with 270 days to maturity. If the yield to

maturity is 3.8%, what is the price of the Tbill? What is the discount yield (i.e. yield
on a discount basis)?
16.Congratulations! You have just won a lottery. You have a choice between receiving 100,000 a
year for 20 years or an immediate payment of 1,200,000. Which choice should you take if the
interest rate is 3 percent? Just write the formula that you will use to make a decision and do
not calculate.