Exam 2 Key
SECTION 1

3PM

VERSION 2

SECTION 2

4:30PM VERSION 3

1. The 7 percent semiannual coupon bonds of the Garden Supplies Co. are selling for
$976, have a face value of $1,000, and have a yield to maturity of 8.079 percent. How many years will it be until these bonds mature?
A. 2.50 years
b. 3.15 years
c. 5.00 years
d. 7.85 years
e. 10.00 years
N = ? = 5/2=2.5; I=8.079;PV=-976;PMT=70/2=35;FV=1000

BLOOMS TAXONOMY QUESTION TYPE: APPLICATION
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: BASIC
Ross - Chapter 006 #83
SECTION: 6.1
TOPIC: TIME TO MATURITY
TYPE: PROBLEMS

2. You own two bonds. Both bonds pay annual interest, have 8 percent coupons, $1,000 face values, and currently have 8 percent yields to maturity. Bond 1 has 9 years to maturity and Bond 2 has 6 years to maturity.
If the market rate of interest rises unexpectedly to 9 percent, Bond _____ will be the most volatile with a price decrease of _____ percent.
a. 1; 7.26
B. 1; 6.00
c. 1; 4.49
d. 2; 1.61
e. 2; 3.57
Both bonds have a starting price of $1,000 since their coupon rates are equal to their yields to maturity. All else equal, with longer maturity bond will have the most interest rate risk (Bond 1). Price after interest rate change for Bond 1: N=9;I=9;PV=?=940.05;PMT=80;FV=1000. Percent change in price = (940.05 1000)/1000 = -.05995 = -6%

BLOOMS TAXONOMY QUESTION TYPE: ANALYSIS
LEARNING OBJECTIVE NUMBER: 2
LEVEL OF DIFFICULTY: INTERMEDIATE
Ross - Chapter 006 #98
SECTION: 6.1
TOPIC: INTEREST RATE RISK
TYPE: PROBLEMS

3. The 6.5 percent, $1,000 face value bonds of The Theta Co. are currently selling at $1,035.80. These bonds have 13 years left until maturity. What is the current yield?
a. 6.09 percent
B. 6.28 percent
c. 6.50 percent
d. 6.71 percent
e. 6.95 percent
Current yield = (.065  $1,000) / $1,035.80 = .06275 = 6.28 percent