DEBT

Question 1

The yield to maturity for a premium bond is:

A.   stated interest rate - annual capital loss / bond par value 
B.   stated interest rate + annual capital gain / bond par value    C.   stated interest rate - annual capital loss / bond average value    D.   stated interest rate + annual capital gain / bond average value

Answer 1

The best answer is C.

The formula for yield to maturity for a premium bond is:
ANNUAL INTEREST - ANNUAL CAPITAL LOSS/ (BOND COST + REDEMPTION PRICE)/2 = YIELD TO MATURITY FOR A PREMIUM BOND

Question 2

Zero coupon bonds:

A. do not pay interest
B. pay interest semi-annually
C. pay interest annually
D. pay interest at maturity

Answer 2

The best answer is D.
Zero coupon bonds do not make semi-annual interest payments. The bonds are bought at a deep discount and mature at par. The difference is the interest earned, so all of the interest is paid at maturity.

Question 3

Which statement is TRUE when comparing short and long term bonds?

A.   Short term bonds fluctuate more in value and short term maturities are more liquid    B.   Short term bonds fluctuate more in value but long term maturities are more liquid    C.   Long term bonds fluctuate more in value but short term maturities are more liquid 
D.   Long term bonds fluctuate more in value and long term maturities are more liquid

Answer 3

The best answer is C.
Long term bonds fluctuate more in value than do short term bonds in response to market interest rate changes. Short term bonds do not fluctuate much in value as interest rates move since they will be redeemed shortly at par. There is more active trading of short term debt than long term debt, so short term debt is more liquid.