Chapter 4 Valuing Bonds Chemistry Worksheet With Answers Page 19
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2173. Your friend wants you to invest in his new sporting goods store. For an initial investment, he will pay
you $2,000 per year for the next twenty years. All payments are at the end of the year. You realize
that this is a very risky investment and want a 20% return on each invested dollar. How much are you
willing to loan him today for his new store?
a. $5,946
b. $9,739
c. $10,000
d. $17,027
ANS: B
n = 20, r = 20%, PV =? , PMT = $2,000, FV = $0
PV = $9,739
DIF: M
REF: 4.1 Valuation Basics
74. A $1,000 par value bond makes two coupon payments per year of $60 each. What is the bonds yield to
maturity if the bond currently trades at $1,200 and will mature in two years?
a. 1.78%
b. 3.48%
c. 6.00%
d. 6.43%
ANS: A
n’ = 4, r’ = YTM/2, PV = -$1,200, FV = $1,000, PMT = $60
r’=0.888%
YTM =1.78%
DIF: H
REF: 4.2 Bond Prices and Interest Rates
75. A one-year Treasury security currently returns a 4.50% yield to maturity. A two-year Treasury
security offers a 4.80% yield to maturity. If the expectations hypothesis is true, what is the expected
return on a one-year security next year?
a. 4.80%
b. 4.90%
c. 5.00%
d. 5.10%
ANS: D
(1.045)*(1+x)=(1.048)*(1.048)
DIF: H
REF: 4.5 Advanced Bond Valuation
76. A TIPS bond issued by the Treasury Department was issued with an annual coupon of 5%. The bond
has a par value of $1,000 and will mature in 10 years. Suppose that inflation during the first year of
the bond’s life was 3%. What is the new coupon payment for this bond?
a. $50.97
b. $51.50
c. $53.00
d. $81.50
ANS: B
5%*1000 = $50
$50 * (1+.03) = $51.50
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