Topic 2

Question 1

Which one of the following will increase the NPV of a project?

A. an increase in the discount rate
B. increasing the amount of the initial cash investment
C. having all future cash flows occur in the final year vs. evenly spaced over 5 years
D. decreasing the final periods cash flow
E. having all future cash flows occur in the first year vs. evenly spaced over 5 years

Answer 1

D. decreasing the final periods cash flow (?)

Question 2

The current price of a $1,000 zero-coupon bond is $900. What is the implied interest rate?

A. .111%
B. 11.11%
C. 5.26%
D. 9.0%

Answer 2

B. 11.11%

Question 3

What is the current price of a 1-year $1,000 zero-coupon bond if the interest rate is 10%?

A. $900
B. $909
C. $1000
D. $1100

Answer 3

B. $909

Question 4

What is the current price of a 2-year $1,000 zero-coupon bond if the interest rate is 10%?

A. $750
B. $800
C. $826
D. $909
E. $1000

Answer 4

C. $826

Question 5

A $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity has a:

A. current yield equal to 6.22%
B. current yield equal to 6.00%
C. coupon rate equal to 6.22%
D. coupon rate equal to 6.00%
E.both a and d
F.none of the above

Answer 5

C. coupon rate equal to 6.22%

Question 6

You purchase a $1,000 face value bond purchased for $965.00, with an annual coupon of $60, and 20 years to maturity. It is currently selling for $925, this implies

A. The current yield has increased
B. The current yield has decreased
C. The coupon rate has decreased
D. none of the above

Answer 6

A. The current yield has increased

Question 7

If the quantity of bonds demanded exceeds the quantity of bonds supplied, bond prices:

A. would rise and yields would fall
B. would fall and yields would increase
C. will rise and yields will remain constant
D. will rise and yields would increase

Answer 7

A. would rise and yields would fall

Question 8

The risk spread is

A. the difference between a bond’s purchase price and selling price
B. the difference between the bond’s yield and the yield on a U.S. Treasury bond of the same maturity
C. less than zero for a U.S. Treasury bond
D.assigned by a bond-rating agency

Answer 8

B. the difference between the bond’s yield and the yield on a U.S. Treasury bond of the same maturity

Question 9

You buy a bond today for $100. Tomorrow, someone comes along and offers to purchase the bond for $110. What does this imply about their risk premium relative to yourpremium? If the bond has a $5 coupon, what is someone’s yield?

A. Lower, 5%
B. Higher, 5%
C. Lower, 5.55%
D. Higher, 4.55%
E. None of the above

Answer 9

E. None of the above

Question 10

Inflation expectations
10-year TIPS are yielding 2.3% while 10-year treasury bonds are yielding 4.9%. What is “expected inflation”?

A. 2%
B. 2.4%
C. 2.6%
D. 2.8%
E. 3%

Answer 10

C. 2.6%

Question 11

According to the Expectations Theory of the term structure, if interest rates are expected to be 2%, 2% and 4% over the next three years, which yield is the closest to the yield on a three-year bond today?

A. 2%
B. 2.7%
C. 4%
D. 4.3%
E. 8%

Answer 11

B. 2.7%

Question 12

An upward sloping yield curve implies

A. future interest rates falling
B. future interest rates rising
C. short term bonds are more risky than long term bonds
D. long term bonds are more risky than short term bonds

Answer 12

C. short term bonds are more risky than long term bonds (D?)

Question 13

In general, a ____ yield curve signals the economy is likely to ____ in the next year

A. downward sloping; expand
B. flat; shrink
C. upward sloping; expand
D. upward sloping; shrink
E. flat; expand

Answer 13

B. flat; shrink