prashantsahni

Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity. Assume the term structure of interest rates is flat at 6%. If the term structure of interest rates does not change over the next twelve-month interval, the bond's price change (as a percentage of par) will be closest to:

A) 0.84.

B) -0.84.

C) 0.00.

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The bond price change is computed as follows: Bond Price Change = New Price − Old Price = (5/1.06 + 105/1.062) − (5/1.06 + 5/1.062 + 105/1.063) = 98.17 − 97.33 = 0.84.
The value -0.84 is the correct price change but the sign is wrong. The value 0.00 is incorrect because although the term structure of interest rates does not change the bond price increases since it is selling at a discount relative to par.

prashantsahni

The price and yield on a bond have:

A) positive relation.

B) no relation.

C) inverse relation.

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Interest rates and a bond's price have an inverse relationship. If interest rates increase the bond price will decrease and if interest rates decrease the bond price will increase.

prashantsahni

Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged (8%). What will have happened to the bond's price during this period?

A) It will have increased.

B) It will have decreased.

C) It will have remained constant.

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The bond is sold at a premium, as time passes the bond’s price will move toward par. Thus it will fall.
N = 10; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,134
N = 9; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,125

prashantsahni

A 12-year, $1,000 face value zero-coupon bond is priced to yield a return of 7.50% compounded semi-annually. What is the bond’s price?

A) $250.00

B) $419.85.

C) $413.32.

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Using an equation: Pricezerocoupon = Face Value × [ 1 / ( 1 + i/n)n × 2]
Here, Pricezerocoupon = 1000 × [ 1 / (1+ 0.075/2)12 × 2] = 1000 × 0.41332 = 413.32.
Using the calculator: N = (12 × 2) = 24, I/Y = 7.50 / 2 = 3.75, FV = 1000, PMT = 0. PV = -413.32

prashantsahni

What would an investor pay for a 25-year zero coupon bond if they required 11%? (Assume semi-annual compounding.)

A) $68.77

B) $1,035.25

C) $103.53

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N = 50, I/Y = 5.5, PMT = 0, FV = 1,000
CPT PV = 68.77

prashantsahni

A zero-coupon bond has a yield to maturity of 9.6% (annual basis) and a par value of $1,000. If the bond matures in 10 years, today's price of the bond would be:

A) $399.85.

B) $422.41.

C) $391.54.

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I = 9.6; FV = 1,000; N = 10; PMT = 0; CPT → PV = 399.85

prashantsahni

What is the value of a zero-coupon bond if the term structure of interest rates is flat at 6% and the bond has two years remaining to maturity?

A) 83.75.

B) 100.00.

C) 88.85.

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The bond price is computed as follows: Zero-Coupon Bond Price = 100/1.034 = 88.85.
The value 83.75 is incorrect because the principal is discounted over a three-year period but the bond has only two years remaining to maturity. The value 100.00 is incorrect because the principal received at maturity has to be discounted over a period of two years.

prashantsahni

A 15-year, $1,000 face value zero-coupon bond is priced to yield a return of 8.00% compounded semi-annually. What is the price of the bond, and how much interest will the bond pay over its life, respectively?

Bond Price

Interest

A) $691.68 $308.32

B) $308.32 $691.68

C) $389.75 $610.25

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Using an equation: Pricezerocoupon = Face Value × [ 1 / ( 1 + i/n)n × 2 ]

Here, Pricezerocoupon = 1000 × [ 1 / (1+ 0.080/2)15 × 2] = 1000 × 0.30832 = 308.32. So, interest = Face – Price = 1000 – 308.32 = 691.68.

Using the calculator: N = (15 × 2) = 30, I/Y = 8.00 / 2 = 4.00, FV = 1000, PMT = 0. PV = -308.32. Again, Face – Price = 1000 – 308.32 = 691.68.

prashantsahni

A zero-coupon bond matures three years from today, has a par value of $1,000 and a yield to maturity of 8.5% (assuming semi-annual compounding). What is the current value of this issue?

A) $78.29.

B) $779.01.

C) $782.91.

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The value of the bond is computed as follows:
Bond Value = $1,000 / 1.04256 = $779.01.
N = 6; I/Y = 4.25; PMT = 0; FV = 1,000; CPT → PV = 779.01.

prashantsahni

What is the yield to maturity (YTM) of a 20-year, U.S. zero-coupon bond selling for $300?

A) 7.20%.

B) 6.11%.

C) 3.06%.

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N = 40; PV = 300; FV = 1,000; CPT → I = 3.055 × 2 = 6.11.