Additional Practice Problems for Chapter 5 Bond Pricing and Interest Rate Risk Financial Markets and Institutions Dr. Yeager NOTE: Coupon rates, including semiannual coupons, are always expressed as annual rates. 1. $5,000 invested at 6%, compounded quarterly, will be worth how much after 5 years? A) $6,691 B) $16,036 C) $6,734 D) $5,386 2. Judy would like to accumulate $70,000 by the time her son starts college in ten years. What amount would she need to deposit now in a deposit account earning 6%, compounded yearly, to accumulate her savings goal? A) $4,200 B) $39,513 C) $39,088 D) $125,359 3. If a $5000 par value bond has an 8% annual coupon, a 4-year maturity, and similar bonds are yielding 11%, what is the price of the bond? A) $480.22 B) $906.93 C) $1,813.85 D) $4,534.63 E) $5,000.00 4. A corporate bond, paying $650 interest at the end of each year for 6 years, has a face value of $10,000. If market rates on newly issued similarly rated corporate bonds are now 7.5%, what is the current market price of this bond? A) $9530.62 B) $10,000.00 C) $10,048.41 D) $11,065.00 Page 1 5. A $1000 bond with an annual coupon of 7% matures in eight years. The bond is now selling for $950, what is the expected yield to maturity on the bond? A) 6.5% B) 7.9% C) 9.0% D) 8.3% 6. What is the price of a $1,000 face value bond with a 10% coupon if the required market rate is 10%? A) more than $1,000 B) $1,000 C) less than $1,000 D) cannot determine without know the maturity 7. What is the price of a $1,000 face value bond with a 10% semiannual coupon if the required market rate is 10% and the bond matures in 5 years? A) $829.60 B) $1,000.00 C) $926.40 D) $1,040.80 8. A semiannual payment bond with a $1,000 par has a 5% coupon rate, a 6% YTM, and 5 years to maturity. What is the bond's duration? A) 5.00 years B) 4.85 years C) 4.76 years D) 4.47 years 9. A semiannual payment bond with a $3,000 par has a 7% coupon rate, a 6% YTM, and 5 years to maturity. What is the bond's duration? A) 14.55 years B) 4.57 years C) 4.46 years D) 4.32 years Page 2 10. Suppose you have a 5-year investment horizon and you are considering one of the following three bonds: Bond Duration Bond 1 8 years Maturity 10 years Bond 2 5 years 7 years Bond 3 3 years 6 years a. If you believe interest rates will fall and you wish to earn more than the promised yield, which of the three bonds above should you choose? Explain why in terms of the change in sale price and reinvestment income. b. If you believe interest rates will increase and you wish to earn more than the promised yield which of the three bonds above should you choose? Explain why in terms of the change in sale price and reinvestment income. c. If you do not know which way interest rates may move and you wish to ensure you earn the promised yield which of the three bonds above should you choose? Explain why in terms of the change in sale price and reinvestment income. 11. A $1000 bond with a coupon rate of 10%, interest paid semiannually, matures in eight years and sells for $1120. What is the yield to maturity? A) 10.8% B) 11.0% C) 7.9% D) 7.6% 12. Bond A has a duration of 5.6 while bond B has a duration of 6.0. We can be certain that Bond B A) will have greater price variability, given a change in interest rates, relative to bond A. B) will have a longer maturity than bond A. C) will have a higher coupon rate than bond A. D) will have less price variability, given a change in interest rates, relative to bond A. 13. A 3-year zero coupon bond selling at $900 and yielding 12.18 percent has a duration of A) 3 years. B) 2.78 years. C) 2.50 years. D) 2 years. Page 3 14. A $8000 2-year 10% coupon bond is priced at $8000 in the market. The duration is A) less than two years. B) more than two years. C) 10%. D) 2 years. 15. The duration of a $1000, 2-year, 7% coupon bond (interest paid annually) is when market rates are 8%? A) 2.036 B) 1.934 C) 1.902 D) 1.856 16. A $3,500 par, 8% Treasury bond maturing in three years is priced to yield 7%. Its market price (assuming semiannual compounding) is A) $3408.26 B) $2847.25 C) $3,246.25 D) $3,593.25 17. If a 7% coupon (semiannual) bond purchased at par with a face value of $1,000 sells 2 years later for $990, what is the holding period rate of return (annualized)? A) 8% B) 6.52% C) 7.32% D) 5.75% 18. Calculate the percentage volatility of a $1,000 face value 8% coupon bond whose price has varied from $1,020 to $1,050. A) 30 B) 5 C) 3 D) 50 19. Tom deposits $10,000 in a savings deposit paying 4% compounded monthly. What amount would he have at the end of seven years? A) $13,225 B) $13,159 C) $13,179 D) $13,325 Page 4