Baran

11、Which of the following statements regarding accrued interest is most accurate?

A) The accrued interest is paid by the seller of the bond to the buyer (new owner) of the bond. 
 
B) The bond is trading flat if the bond issuer is in default and the bond is trading without accrued interest. 
 
C) If the seller must pay the buyer accrued interest, the bond is said to be trading cum-par. 
 
D) If the buyer must pay the seller the accrued interest, the bond is said to be trading ex-coupon. 
 

Baran

 The correct answer is B

The accrued interest is paid by the new owner of the bond to the seller of the bond. If the buyer must pay the seller accrued interest, the bond is said to be trading cum-coupon. Otherwise, it is trading ex-coupon.

Baran

AIM 2: Distinguish among simple, semiannual, monthly, daily, and continuously compounded rates and compute simple, semiannual, monthly, daily, and continuously compounded rates given a discount factor or market interest rate for a specified period.

1、A Treasury bill, with 45 days until maturity, has an effective annual yield of 12.50%. The bill's holding period yield is closest to:

A) 1.57%.
 
 
B) 12.50%.
 
 
C) 1.46%.
 
 
D) 1.54%.

Baran

 The correct answer is C

The effective annual yield (EAY) is equal to the annualized holding period yield (HPY) based on a 365-day year. EAY = (1 + HPY)365/t ? 1. HPY = (EAY + 1)t/365 ? 1 = (1.125)45/365 ? 1 = 1.46%.

Baran

2、Use a stated rate of 9% compounded periodically to answer the following three questions. Select the choice that is the closest to the correct answer.

The semi-annual effective rate is:

A) 9.00%.
 
B) 9.20%.
 
C) 10.25%.
 
D) 9.31%.

Baran

The correct answer is B

First, we need to calculate the periodic rate, or 0.09 / 2 = 0.045.
Then, the effective semi-annual rate = (1 + 0.045)2 ? 1 = 0.09203, or 9.20%.

Baran

The quarterly effective rate is:
A) 9.31%.
 
B) 9.00%.
 
C) 9.20%.
 
D) 9.40%. 
 

Baran

 The correct answer is A

First, we need to calculate the periodic rate, or 0.09 / 4 = 0.0225.
Then, the effective annual rate = (1 + 0.0225)4 ? 1 = 0.09308, or 9.31%.

Baran

The continuously compounded rate is:
A) 9.42%.
 
B) 9.20%.
 
C) 9.45%.
 
D) 9.67%.

Baran

The correct answer is A

The continuously compounded rate = er ? 1 = e0.09 ? 1 = 0.09417, or 9.42%.
Calculator Keystrokes for et: Using the TI BA, enter [0.09] [2nd] [ex] (this is the key with LN on the face of the button). On the HP, enter [0.09] [g] [ex] (this key is located in blue on the key with 1/x in white print).