ANSWER OUTLINE
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 00
EXERCISE SET 4: 5 POINTS TOTAL DUE: Tuesday, February 15, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
*NOTE:* Please FILL IN YOUR NAME, BIRTH DATE, AND ID (SOC SEC) No. on Side 1
of the accompanying answer sheet and write "353 SECTION 1-EXERCISE SET 2" in
the top margin of Side 1. Use a #2 pencil to MARK YOUR ANSWERS on Side 1
of the answer sheet to the following five multiple choice questions:
1-1 Key features that distinguish simple loan contracts from fixed payment
loan contracts include the following:
A. for simple loans, the payment schedule is not determined in advance.
B. for simple loans, the lender pays both principal and interest.
C C. for simple loans, the lender does not receive any payment
until the maturity date.
D. for simple loans, the lender receives regular payments of variable
size at specified intervals during the course of the loan
E. none of the above.
2-1. A coupon bond pays the owner of the bond (i.e., the lender)
A. a fixed amount in each period from the start through the maturity date.
B. a single payment at the maturity date consisting of the face value of
the bond plus an interest payment.
C C. a fixed payment at regular intervals plus the face value of the
bond at the maturity date.
D. a single payment at the maturity date equal to the bond's face value.
E. none of the above.
3-1. If a coupon bond with a face value of $5,000 has a coupon rate of 13
percent, then the coupon payment is
A A. $650
B. $1,300
C. $130
D. $65
E. None of the above
4-1. With an annual interest rate of 8 percent, the present value of
$100 received next year is defined to be the value given by the formula
A. 1.08 times $100 = $108
B. 1.80 times $100 = $180
C C. $100 divided by 1.08 = $92.59
D. 0.92 times $100 = $92
E. $100 divided by 1.80 = $55.56
5-1. Which of the following are true statements for the yield to maturity:
A. It is the interest rate that equates the present value of payments
received from a debt claim to its current value.
B. Economists consider it to be the most accurate measure of interest rates.
C. For coupon bonds, the yield to maturity is always closely
approximated by the coupon rate.
D. All of the above.
E E. Only A and B of the above.
