ANSWER OUTLINE
ECONOMICS 353 (SECTION 1) L. Tesfatsion/Spring 02
EXERCISE 5: 6 POINTS TOTAL DUE: Tuesday, February 26, 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 5" 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. The current yield on a coupon bond with a $7000 face value, a 5 percent
coupon rate, an 8 year maturity, and a current purchase price of $3500 is
A. 5 percent
B. 8 percent
C C. 10 percent
D. 16 percent
E. 20 percent
Q2. Which of the following statements is/are FALSE for the current yield ic of
a coupon bond with coupon payment C, face value F, and maturity N.
A. For a consol bond, the ic equals the yield to maturity.
B. For fixed C and F, the ic is a better approximation for the yield to
maturity the greater is the bond's time to maturity N.
C C. For fixed C, F, and N, the ic is a better approximation for the yield to
maturity the more the bond's purchase price exceeds the face value F.
D. all of the above are false statements
E. only A and B are false statements
Q3. Distinctive aspects of the financial bond pages reported in major
newspapers such as the Wall Street Journal and the New York Times that have
to be understood to make any sense out of them include:
A. For T-bond/notes, if two maturity dates are reported, the first is
for dealers and the second is for all other prospective buyers.
B. For T-Bill quotes, dealers have negative bid-asked spreads.
C. For T-Bill quotes, discount yields (calculated for both bid and asked
prices) are reported rather than the bid and ask prices themselves.
D. For T-bonds/notes and corporate bonds, the listed securities prices
are reported per $100 of face value, so numbers less than 100
correspond to prices less than face value and vice versa.
E E. Only C and D above
Q4. Consider a coupon bond that has an annual coupon payment C=$100, a face
value F=$3,000, and a maturity date January 1, 2008. Suppose you BUY this
bond on January 1, 2003 for Pb=$2500 and you SELL it on January 1, 2004 for
$2000. Which of the following statements is/are TRUE for this bond:
A. Your (annual) current yield on this bond from 1/1/2003 to 1/1/2004 is
equal to C=$100 divided by the purchase price Pb=$2500.
B. Your return rate on this bond from 1/1/2003 to 1/1/2004 can be expressed
as the sum of the current yield and the rate of your capital gain or loss.
C. Your return rate on this bond from 1/1/2003 to 1/1/2004 is LESS than
the current yield on the bond.
D D. All of the above are true.
E. Only A and B are true.
Q5 Suppose a consol bond pays $1 at 11:59 P.M. on December 31 of each
year. Suppose you purchased the consol bond for $100 at midnight on
December 31, 2000, and you sold it for $109 at midnight on December 31, 2001.
Suppose the inflation rate during 2001 was 3 percent. Then your NOMINAL
return rate on the consol bond for 2001 was _______ and your REAL return rate
on the consol bond for 2001 was _________.
A. 1 percent; -2 percent
B. 1 percent; 4 percent
C. 9 percent; 6 percent
D D. 10 percent; 7 percent
E. 10 percent; 13 percent
Q6. When the price of bonds is BELOW the equilibrium price level, then
there is an ________ bonds and the price of bonds can be expected to ____.
A. excess supply of; rise
B B. excess demand for; rise
C. excess supply of; fall
D. excess demand for; fall
