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1 A new one-year bond pays interest of 1.04%. A new two-year bond pays interest of 1.46%. Using expectations theory of term structure and assuming the market is in equilibrium, what interest rate does the market expect a new one year bond to have one year from now? a. 0.42% b. 1.18% c. 1.25% d. 1.88%   

2. The value of any asset a. is based upon the benefits provided by the asset in prior years. b. is based upon the benefits that the asset will provide the owner of the asset this year. c. equals the present value of future benefits accruing to the asset’s owner. d. is not described by any of the above.   ANS: C DIF: E REF: Learning Objectives   

3. The greater the uncertainty about an asset’s future benefits, a. the lower the discount rate investors will apply when discounting those benefits to the present. b. the higher the discount rate investors will apply when discounting those benefits to the present. c. the greater is the present value of those benefits. d. none of the above.  

 4. You will be recieving $204,000.00 at the end of each year for the next 20 years.  If the correct discount rate for such a stream of cash flows is 10% then what is the present value of the cash flows? a. $1,736,767.00 b. $4,080,000.00 c. $185,454.55 d. none of the above  

5. A bond’s coupon rate

a. equals its annual coupon payment divided by the bonds’ current market price. b. varies during the life of the bond. c. equals its annual coupon payment divided by its par value. d. both a and b are correct. 

 6. WeOweYou, Inc. has a 12 year bond outstanding that makes 9.5% annual coupon payments.  If the appropriate discount rate for such a bond is 7%, what the the appropriate price for the bond? a. $1,200.73 b. $1,000.00 c. $1,198.57 d. $754.56  

7. WeOweEveryone, Inc. has a 12 year bond outstanding that has 9.5% coupon rate.  If the appropriate discount rate for such a bond is 7%, what the the appropriate price for the semi-annual coupon paying bond? a. $1,200.73 b. $1,198.57 c. $1,000.00 d. $762.77  

8  Elroy Investors is interested in purchasing the bonds of the Judy Company.  Judy’s bonds are currently priced at $1,100.00 and have 14 years to maturity.  If the bonds have a 6% coupon rate what is the yield-to-maturity of these annual coupon paying bonds? a. 5.00% b. 4.99% c. 2.50% d. none of the above.