ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 01
EXERCISE SET 4: 5 POINTS TOTAL DUE: Tuesday, Feb 13, 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 a RED bubble (answer) sheet and write "353 SECTION 1-EXERCISE SET 4" in
the top margin of Side 1. Use a #2 pencil to MARK YOUR ANSWERS on Side 1 of
the bubble sheet to the following five multiple choice questions:
1-1 Which of the following statements are true for FIXED PAYMENT LOANS?
A. The borrower makes a fixed interest payment in every payment period until
the maturity date, at which time the borrower also pays the face value.
B. The borrower is required to make all principal plus interest payments
in one fixed payment occurring at the maturity date of the loan.
C. The borrower repays the entire loan by making the same fixed payment
in every payment period up to and including the maturity date.
D. Installment loans and mortgages are frequently of the fixed payment type.
E E. C and D of the above
2-1 The COUPON RATE on a coupon bond with a purchase price of $150, a $200
face value, annual coupon payments of $10, and a 5-year maturity is
A. the coupon payment $10 divided by the purchase price $150.
B. one coupon payment per year.
C C. the coupon payment $10 divided by the face value $200.
D. total coupon payments ($50) divided by the maturity 5.
3-1 If the annual interest rate is 6 percent, then the PRESENT VALUE TODAY of a
payment of $800 that you will receive three years from now is
3
A. $800 multiplied by (1 + .06) C. $800 divided by (1 + .18)
3
B B. $800 divided by (1 + .06) D. $800 divided by .18
4-1 Letting "*" denote multiplication, if the annual interest rate is 5
percent, then the PRESENT VALUE TODAY of a payment stream ($60, $30) with $60
to be received at the end of the first year and $30 to be received at the end
of the second year is given by
2
A. $60*(1 + .05) + $30*(1 + .05) C. $60*(1 + .05) + $30/(1 + .05)
2 2
B B. $60/(1 + .05) + $30/(1 + .05) D. [$60 + $30] divided by (1 + .05)
5-1 The (ANNUAL) YIELD TO MATURITY i on a coupon bond with a purchase
price $450, a face value $500, a 2-year coupon payment stream ($50,$50),
and a 2-year maturity is calculated as follows:
A. i equals the total coupon payments $100 divided by the maturity 2.
B. i equals the coupon payment $50 divided by the purchase price $450.
C C. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($50,$550), results in a present
value equal to $450.
D. i equals the present value of the coupon payment stream ($50, $50)
