ANSWER OUTLINE
ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 99
EXERCISE SET 4: 5 POINTS TOTAL DUE: Tuesday, March 2, 2:10 P.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
Please FILL IN YOUR NAME on Side 1 of the accompanying General Purpose
NCS Answer Sheet and use a #2 pencil to MARK YOUR ANSWERS on Side 1 of this
Answer Sheet to the following five multiple choice questions.
Note: If you missed the answer sheet hand-out in class, you can obtain an
answer sheet from Sue Streeter (4-6600) in 382 Heady Hall.
1-2 Which of the following are true in general for coupon bonds?
A. The owner of the coupon bond receives a fixed payment every
year until the maturity date, when the face value is repaid.
B. U.S. Treasury bonds and notes are examples of coupon bonds.
C. Corporate bonds are examples of coupon bonds.
D D. All of the above
E. Only A and B of the above
2-2 Which of the following are true for the current yield?
A. The current yield is defined as the coupon payment divided by the
price of the security.
B. The formula for the current yield is identical to the formula
describing the yield to maturity for a consol.
C. The current yield will be a close approximation for the yield to
maturity the longer the time to maturity, and also the closer the
bond price is to its face value.
D D. All of the above are true
E. Only A and B of the above are true.
3-2 Which of the following $1000 face-value securities has the LOWEST
yield to maturity?
A A. A 5 percent coupon bond selling for $1,000
B. A 10 percent coupon bond selling for $1,000
C. A 15 percent coupon bond selling for $1,000
D. A 15 percent coupon bond selling for $900
4-2 The current yield on a coupon bond with a $6000 face value, a
10 percent coupon rate, and a current purchase price of $5000 is
A. 5 percent
B. 10 percent
C C. 12 percent
D. 15 percent
E. None of the above
5-2 In which of the following situations would you prefer to be borrowing?
A. The interest rate is 9 percent and the expected inflation rate
is 7 percent.
B. The interest rate is 4 percent and the expected inflation rate
is 1 percent.
C. The interest rate is 13 percent and the expected inflation rate
is 15 percent.
D D. The interest rate is 25 percent and the expected inflation rate
is 50 percent.
