Department

Economics for Management StudiesCourse Code

MGEA06H3Professor

Iris AuStudy Guide

FinalThis

**preview**shows half of the first page. to view the full**1 pages of the document.**From 2006 Past Exam

29. A bond which matures in three years has a face value of $1000, and a coupon

interest rate (printed on the bond) of 7% (this means that the bond will pay $70 in one

year, another $70 in two years, and in three years will pay another $70 and return the face

value of $1000). If the current interest rate in the economy is 5%, then you would

expect this bond to sell today for (to the nearest penny):

A) $1000 B) $1060 C) $1054.46 D) $1065.54

E) $940 F) $947.51 G) $932.49 H) $960

I) $1040 J) $1060.40 K) $1059.60 L) $1120

M) none of the above

30. A bond which matures in two years has a face value of $1000, and a coupon interest

rate (printed on the bond) of 10% (this means that the bond will pay $100 in one year,

and in two years will pay another $100 and return the face value of $1000). If the bond

is currently selling for $1044.89, what is the current interest rate that makes this bond just

worth buying (to the nearest one decimal point)?

A) 0% B) 1% C) 2% D) 3% E) 3.3% F) 4% G) 4.5%

H) 5% I) 6% J) 6.7% K) 6.9% L) 7% M) 7.2% N) 7.5%

O) 7.6% P) 7.8% Q) 8.1% R) 8.2% S) 8.5% T) 8.8% U) 9%

V) 9.1% W) 9.2% X) 9.9% Y) 10% Z) none of the above

31. The government issues a 10-year bond with a face value of $10,000 and a coupon

rate of 4%. A financial entrepreneur takes the bond and uses it to create new financial

products by “stripping” the coupons off the bond. One of his new products is a “strip

bond” which pays $10,000 in 10 years, but no interest either during the 10 year period or

at the end. The current interest rate is 4%. You would expect this strip bond to sell

today for (to the nearest penny):

A) $10,000 B) $9600 C) $6000 D) $6755.64

E) $6346.48 F) $6244.36 G) $3244.36 H) $5755.64

I) $5244.36 J) $6524.79 K) $6948.72 L) $4572.11

M) none of the above

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