ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 01
EXERCISE SET 5: 5 POINTS TOTAL DUE: Tuesday, Feb 20, 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 5" 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 If a 10-year $5,000 coupon bond (i.e., a coupon bond with a $5000 face
value and a 10 year maturity) has a coupon rate of 13 percent and a purchase
price of $4,000, then the coupon payment is
A. $1,300
B B. $650
C. $130
D. $520
2-1 If a two-year security selling for $200 pays $110 at the end of the first
year and $121 at the end of the second year, then (letting * denote
multiplication) its yield to maturity i is the solution to
A. i = [$110 + $121]/$200
B. $200 = [$110 + $121]/(1+i)
C C. $200*(1+i)*(1+i) - $110*(1+i) - $121 = 0
D. i = [$110 + $121 - $200]/$200
3-1 Which of the following $1000 face-value securities has the LOWEST
yield to maturity:
A. A 5 percent coupon bond with a purchase price of $600
B. A 5 percent coupon bond with a purchase price of $800
C. A 5 percent coupon bond with a purchase price of $1000
D D. A 5 percent coupon bond with a purchase price of $1200
4-1 Which of the following $5000 face-value securities has the HIGHEST
yield to maturity?
A. A 7 percent coupon bond with a purchase price of $5000
B. A 5 percent coupon bond with a purchase price of $8000
C C. A 7 percent coupon bond with a purchase price of $4000
D. A 6 percent coupon bond with a purchase price of $6000
5-1 Which of the following statements are FALSE for the current yield ic of
a coupon bond:
A. ic is the coupon payment divided by the purchase price of the bond.
B. For a consol bond, the formula for the ic reduces to the formula
for the yield to maturity.
C. The ic is a better approximation to the yield to maturity the
longer the bond's time to maturity, all else equal
D. The ic is a better approximation to the yield to maturity the closer
the bond's purchase price is to the bond's face value, all else equal.
E E. none of the above
