BOND VALUATION CLASS QUESTIONS

Information for 1 & 2

Consider the following $1,000 par value zero-coupon bonds:

Bond Years to Maturity Price

A 1 $909.09

B 2 $811.62

C 3 $711.78

D 4 $635.52

1). The yield to maturity on bond A is .

a.10%

b.11%

c.12%

d.14%

e.none of the above

2). The yield to maturity on bond C is .

a.10%

b.11%

c.12%

d.14%

e.none of the above

3). A coupon bond that pays interest annually is selling at par value of $1,000, matures in 5 years, and has a coupon rate of 9%. The yield to maturity on this bond is

a.6.00%

b.8.33%

c.9.00%

d.45.00%

4). Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, .

a.both bonds will increase in value, but bond A will increase more than bond B

b.both bonds will increase in value, but bond B will increase more than bond A

c.both bonds will decrease in value, but bond A will decrease more than bond B

d.both bonds will decrease in value, but bond B will decrease more than bond A

5). A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in 5 years has a yield of 6.7%. A bond issued by General Motors due in 5 years has a yield of 7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by Exxon and General Motors, respectively, are

a.1.0% and 1.2%

b.0.5% and .7%

c.1.2% and 1.0%

d.0.7% and 0.5%

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