a. 10-year, zero coupon bond.
b. 20-year, 10% coupon bond.
c. 20-year, 5% coupon bond.
d. 1-year, 10% coupon bond.
e. 20-year, zero coupon bond.
ANSWER: e. 20-year, zero coupon bond.
8. Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?
a. An 8-year bond with a 9% coupon. b. A 1-year bond with a 15% coupon. c. A 3-year bond with a 10% coupon. d. A 10-year zero coupon bond.
e. A 10-year bond with a 10% coupon.
ANSWER: d. A 10-year zero coupon bond.
9. Which of the following bonds has the greatest interest rate price risk?
a. A 10-year $100 annuity.
b. A 10-year, $1,000 face value, zero coupon bond.
c. A 10-year, $1,000 face value, 10% coupon bond with
annual interest payments.
d. All 10-year bonds have the same price risk since they
have the same maturity.
e. A 10-year, $1,000 face value, 10% coupon bond with
semiannual interest payments.
ANSWER: B
10. If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?
a. 1-year zero coupon bond.
b. 1-year bond with an 8% coupon. C 10-year bond with an 8% coupon. D 10-year bond with a 12% coupon. E 10-year zero coupon bond.
ANSWER: E 10-year zero coupon bond.
11. The Morrissey Company’s bonds mature in 7 years, have
a par value of $1,000, and make an annual coupon payment
of $70. The market interest rate for the bonds is 8.5%.
What is the bond’s price?
N7 I/YR 8.5% PMT $70 FV $1,000 PV $923.22
12. Masson Inc. recently issued noncallable bonds that
mature in 10 years. They have a par value of $1,000 and
an annual coupon of 5.5%. If the current market interest
rate is 7.0%, at what price should the bonds sell?
Coupon rate 5.5% PMT $55 N 10
I/YR FV PV
7.0% $1,000 $894.65
13. Ezzell Enterprises’ noncallable bonds currently sell
for $1,165. They have a 15-year maturity, an annual
coupon of $95, and a par value of $1,000. What is their
yield to maturity?
N 15
PV PMT FV
$1,165 $95 $1,000
I/YR 7.62%
14. Quigley Inc.’s bonds currently sell for $1,080 and
have a par value of $1,000. They pay a $100 annual coupon
and have a 15-year maturity, but they can be called in 5
years at $1,125. What is their yield to maturity (YTM)?
N 15
PV
PMT
FV
I/YR 9.01% = YTM
$1,080 $10 $1,000