Topic 5 Mastery*

Question 1

Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk?

• A 10% coupon-paying bond with 10 years until maturity.
• A zero-coupon bond with 20 years until maturity.
• A 5% coupon-paying bond with 20 years until maturity.
• A 10% coupon-paying bond with 200 years until maturity.

Answer 1

• A zero-coupon bond with 20 years until maturity.

Question 2

Which of the following is correct for a bond priced at $1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments?

Each payment of interest equals $110
Each payment of interest equals $55
Each payment of interest equals $50.
Each payment of interest equals $100

Answer 2

Each payment of interest equals $50.

The par value of the bond =1000 $

Hence yearly interest payment = Coupon Rate * Par Value = 10%*1000 =100 $

Since the interest is paid semiannually , semiannual interest payment = 100/2 =50$

Hence the amount of next interest payment= 50$

Question 3

The discount rate that makes the present value of a bond's payments equal to its price is termed the: 
  coupon rate. 
  yield to maturity. 
  current yield. 
  rate of return.

Answer 3

yield to maturity.

Question 4

Which of the following statements best describes the real interest rate?

Real interest rates can be negative, zero, or positive.
Real interest rates can decline only to zero.
Real interest rates exceed inflation rates.
Real interest rates traditionally exceed nominal rates.

Answer 4

Real interest rates can be negative, zero, or positive.