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2) What is the present value of $500.00 to be paid in two years if the interest rate is 5 percent? A) $500.00 B) $453.51 C) $550.00 D) $476.25

B) $453.51

3) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent.

B) 10 percent.

1) With an interest rate of 6 percent, the present value of $100 next year is approximately A) $106. B) $100. C) $94. D) $92.

C) $94.

20) Your favorite uncle advises you to purchase long-term bonds because their interest rate is 10%. Should you follow his advice?

It depends on where you think interest rates are headed in the future. If you think interest rates will be going up, you should not follow your uncle's advice because you would then have to discount your bond if you needed to sell it before the maturity date. Long-term bonds have a greater interest-rate risk.

PROBLEM 7. What is the yield to maturity on a simple loan for $1 million that requires a repayment of $2 million in five years' time?

PV=$2,000,000/(1+i)5= $1,000,000 hence solving for i, (1+i)5=2, i=20.2-1, i=0.149 or 14.9%

4) To claim that a lottery winner who is to receive $1 million per year for twenty years has won $20 million ignores the process of A) par value. B) discounting the future. C) deflation. D) face value.

B) discounting the future.

16) The return on a 5 percent coupon bond that initially sells for $1,000 and sells for $950 next year is A) 0 percent. B) -5 percent. C) 5 percent. D) -10 percent.

A) 0 percent.

19) In which of the following situations would you prefer to be the borrower? A) The interest rate is 25 percent and the expected inflation rate is 50 percent. B) The interest rate is 4 percent and the expected inflation rate is 1 percent. C) The interest rate is 13 percent and the expected inflation rate is 15 percent. D) The interest rate is 9 percent and the expected inflation rate is 7 percent.

A) The interest rate is 25 percent and the expected inflation rate is 50 percent.

14) For a 3-year simple loan of $10,000 at 10 percent, the amount to be repaid is A) $10,030. B) $10,300. C) $13,000. D) $13,310.

D) $13,310.

18) If the nominal rate of interest is 2 percent, and the expected inflation rate is -10 percent, the real rate of interest is A) 2 percent. B) 8 percent. C) 10 percent. D) 12 percent.

D) 12 percent.

15) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 next year? A) -5 percent B) 10 percent C) 5 percent D) 25 percent

D) 25 percent

6) A fully amortized loan is another name for A) an unsecured loan. B) a simple loan. C) a commercial loan. D) a fixed-payment loan.

D) a fixed-payment loan.

17) The riskiness of an asset's returns due to changes in interest rates is A) asset risk. B) exchange-rate risk. C) price risk. D) interest-rate risk.

D) interest-rate risk.

PROBLEM 3. If the interest rate is 10%, what the present value of a security that pays you $1,100 next year, $1,210 the year after, and $1,331 the year after that?

$1,100/(1+0.1)+$1,210/(1+0.1)2+$1,331/(1+0.1)3 = $3,000

PROBLEM 5. 5. Write down the formula to calculate the yield to maturity on a 20-year 10% coupon bond with $1,000 face value that sells for $2,000.

$2,000=$100/(1+i)+$100/(1+i)2+ ...+$100/(1+i)20+$1,000/(1+i)20

7) The dollar amount of the yearly coupon payment expressed as a percentage of the face value of the bond is called the bond's A) face value rate. B) coupon rate. C) maturity rate. D) payment rate.

B) coupon rate.

9) A bond that is bought at a price below its face value and the face value is repaid at a maturity date is called a A) simple loan. B) discount bond. C) coupon bond. D) fixed-payment loan.

B) discount bond.

11) The interest rate that equates the present value of payments received from a debt instrument with its value today is the A) real interest rate. B) yield to maturity. C) current yield. D) simple interest rate.

B) yield to maturity.

12) Economists consider the ________ to be the most accurate measure of interest rates. A) current yield. B) yield to maturity. C) simple interest rate. D) real interest rate.

B) yield to maturity.

13) If the amount payable in two years is $2420 for a simple loan at 10 percent interest, the loan amount is A) $1000. B) $1210. C) $2000. D) $2200.

C) $2000.

8) If a $5,000 coupon bond has a coupon rate of 13 percent, then the coupon payment every year is A) $130. B) $13. C) $650. D) $1,300.

C) $650.

5) Which of the following are true of fixed payment loans? A) Commercial loans to businesses are often of this type. B) The borrower pays interest periodically and the principal at the maturity date. C) Installment loans and mortgages are frequently of the fixed payment type. D) The borrower repays both the principal and interest at the maturity date.

C) Installment loans and mortgages are frequently of the fixed payment type.

10) A discount bond A) pays the bondholder a fixed amount every period and the face value at maturity. B) pays all interest and the face value at maturity. C) pays the face value at maturity plus any capital gain. D) pays the bondholder the face value at maturity.

D) pays the bondholder the face value at maturity.


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