ANSWER OUTLINE
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 02
EXERCISE 4: 6 POINTS TOTAL DUE: Tuesday, February 19, 9:30 A.M.
*IMPORTANT REMINDER: LATE ASSIGNMENTS CANNOT BE ACCEPTED -- NO EXCEPTIONS*
*INSTRUCTIONS:*
(1) Please FILL IN YOUR NAME, BIRTH DATE, AND ID (SOC SEC) No. on Side 1
of your bubble sheet and write "353 SECTION 1-EXERCISE 4" in the top margin
of Side 1.
(2) Use a #2 pencil# to MARK YOUR ANSWERS on Side 1 of the bubble sheet to
the following six multiple choice questions.
(3) Please note that these six questions continue onto the back side of
this question sheet. Each question is worth 1 point.
Q1. Which of the following statements is/are true in general for FIXED PAYMENT
loans?
A. At maturity the borrower makes one fixed payment, equal to face value.
B. The borrower makes only one fixed payment, at maturity, and this payment
combines interest and principal repayment.
C. The borrower makes the same fixed payment in every payment period until
maturity, where the payments consist entirely of principal repayments.
D D. The borrower makes the same fixed payment in every payment period until
maturity, where the payments consist of both interest and principal.
Q2. Which of the following statements is/are true in general for COUPON BONDS?
A A. The issuer makes a fixed coupon payment in every payment period during
the life of the bond, plus a face value payment at maturity.
B. The issuer makes a fixed coupon payment in every payment period during
the life of the bond, where the present value of these cumulated payments
equals the face value of the bond.
C. Treasury bills are examples of coupon bonds.
D. Only A and C of the above
E. Only B and C of the above
Q3. The COUPON RATE on a coupon bond with a purchase price of $2500, a $3000
face value, annual coupon payments of $125, and a 4-year maturity is
A. the coupon payment $125 divided by the purchase price $2500.
B B. the coupon payment $125 divided by the face value $3000.
C. the average coupon payment per year, which here is $125.
D. total coupon payments ($500) divided by the purchase price $2500.
Q4. Letting "*" denote multiplication, if the annual interest rate is 5 percent,
then the PRESENT VALUE of a payment stream ($50,$0,$0,$70) with $50 to be
received at the end of the FIRST year, $0 to be received at the end of the
SECOND and THIRD years, and $70 to be received at the end of the FOURTH year
is given by
A. $50/(1.05) + $70/(1.20)
4
B. $50*(1.05) + $70*(1.05)
C. [$50 + $70]/(1.20)
4
D D. $50/(1.05) + $70/(1.05)
Q5. The (ANNUAL) YIELD TO MATURITY i on a coupon bond with a purchase
price $650, a face value $750, a 2-year coupon payment stream ($50,$50),
and a 2-year maturity is calculated as follows:
A. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($50,$50), results in a present
value equal to $650.
B B. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($50,$800), results in a present
value equal to $650.
C. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($50,$50), results in a present
value equal to $750.
D. i equals the annual interest rate that, when used to calculate the
present value of the income stream ($50,$800), results in a present
value equal to $750.
Q6. Which of the following $6000 face-value securities has the HIGHEST
yield to maturity?
A. A coupon bond with a coupon rate of 5 percent that sells for $6,000
B. A coupon bond with a coupon rate of 10 percent that sells for $6,000
C C. A coupon bond with a coupon rate of 15 percent that sells for $6,000
D. A coupon bond with a coupon rate of 15 percent that sells for $6,200
