ECONOMICS 353 (SECTION 2) L. Tesfatsion/Spring 01
EXERCISE SET 4: 5 POINTS TOTAL DUE: Tuesday, Feb 13, 2:10 P.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 BROWN bubble (answer) sheet and write "353 SECTION 2-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:
1-2 Which of the following statements are true for COUPON BONDS?
A A. The borrower makes a coupon payment in every payment period until
the maturity date, at which time the borrower also pays the face value.
B. The borrower repays the entire principal plus interest at the
maturity date in a balloon coupon payment.
C. U.S. Treasury bills are examples of coupon bonds
D. The borrower repays the entire loan by making the same fixed payment
in every payment period up to and including the maturity date
E. A and C of the above
2-2 The COUPON RATE on a coupon bond with a purchase price of $300, a $400
face value, annual coupon payments of $20, and a 10-year maturity is
A. the coupon payment $20 divided by the purchase price $300.
B B. the coupon payment $20 divided by the face value $400.
C. total coupon payments ($200) divided by the maturity 10.
D. one coupon payment per year.
3-2 If the annual interest rate is 7 percent, the PRESENT VALUE TODAY of a
payment of $450 that you will receive four years from now is
4
A. $450 multiplied by .28 C. $450 multiplied by (1 + .07)
4
B B. $450 divided by (1 + .07) D. $450 divided by (1 + .28)
4-2 Letting "*" denote multiplication, if the annual interest rate is 9
percent, then the PRESENT VALUE TODAY of a payment stream ($30, $70) with $30
to be received at the end of the first year and $70 to be received at the end
of the second year is given by
2
A. $30/(1 + .09) + $70/(1 + .09)
B. $30/(1 + .09) + $70/(1 + .09)
2
C. $30*(1 + .09) + $70*(1 + .09)
2
D D. $30/(1 + .09) + $70/(1 + .09)
5-2 The (ANNUAL) YIELD TO MATURITY i on a coupon bond with a purchase
price $200, a face value $250, a 2-year coupon payment stream ($20,$20),
and a 2-year maturity is calculated as follows:
A. i equals the present value of the coupon payment stream ($20, $20).
B B. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($20,$270), results in a present
value equal to $200.
C. i equals the coupon payment $20 divided by the purchase price $200.
D. i equals the total coupon payments $40 divided by the maturity 2.
