Chapter 9 Questions for Course FM

Fall 2005

  1. The nominal rate of interest is 8% and the rate of inflation is 5%.
    Calculate the real rate of interest.
  2. -2.78%
  3. 2.86%
  4. 3.00%
  5. 13.00%
  6. 13.40%
  1. Mindy invests 10,000 for 10 years at a nominal rate of interest is 8%. The rate of inflation is 5% over the 10 year period.
    Calculate the value at the end of 10 years of Mindy’s investment in today’s dollars.
  2. 13,254
  3. 13,439
  4. 16,289
  5. 21,589
  6. 35,166
  1. You are given the following term structure of interest rates:

Length of Investment / Interest Rate
1 / 5.00
2 / 6.00
3 / 6.75
4 / 7.25
5 / 7.50

Which of the following are true:

  1. The yield curve has a positive slope.
  2. The yield curve is inverted.
  3. The interest rates in the table are called forward rates.
  1. All are true except for Item i.
  2. All are true except for Item ii.
  3. All are true except for Item iii.
  4. All Items are true.
  5. The correct answer is not given by a., b., c., and d.

  1. You are given the following term structure of interest rates:

Length of Investment / Interest Rate
1 / 5.00
2 / 6.00
3 / 6.75
4 / 7.25
5 / 7.50

Calculate the present value of the of a five year annuity due of 100 per year.

  1. 412
  2. 415
  3. 435
  4. 437
  5. 442
  1. You are given the following term structure of interest rates:

Length of Investment / Interest Rate
1 / 5.00
2 / 6.00
3 / 6.75
4 / 7.25
5 / 7.50

Determine the three year deferred two year forward rate.

  1. 6.75%
  2. 7.61%
  3. 8.51%
  4. 8.63%
  5. 9.92%

  1. You are given the following term structure of interest rates:

Length of Investment / Interest Rate
1 / 5.00
2 / 6.00
3 / 6.75
4 / 7.25
5 / 7.50

Determine the accumulated value of a three year annuity immediate of 100 at the end of each year.

  1. 315.25
  2. 317.36
  3. 318.36
  4. 320.71
  5. 324.12
  1. A 10 year bond has annual coupons of 10 and matures for 100. Which of the following are true:
  2. The term to maturity is 10 years.
  3. The average term to maturity using the method of equated time is 7.5 years.
  4. The Macaulay duration at 8% interest is 6.97.
  5. The modified duration at 8% interest is 6.45.
  1. All are true except for i.
  2. All are true except for ii.
  3. All are true except for iii.
  4. All are true except for iv.
  5. The correct answer is not given by a., b., c., or d.

  1. Which of the following are true:
  2. The average term to maturity under the method of equated time is always greater than the volatility.
  3. The duration is a decreasing function of i.
  4. A zero coupon bond will have a Macauley duration equal to the term to maturity.
  1. All are true except for i.
  2. All are true except for ii.
  3. All are true except for iii.
  4. All are true.
  5. The correct answer is not given by a., b., c., or d.
  1. Calculate the modified duration of an annuity due with payments of 100 for 10 years using an interest rate of 8%.
  1. 3.58
  2. 3.87
  3. 4.17
  4. 4.51
  5. 4.87
  1. Calculate the duration of a perpetuity immediate of 1 less the duration of a perpetuity due of 1 at an interest rate of 10%.
  2. 0.0
  3. 0.9
  4. 1.0
  5. 1.1
  6. 1.2
  1. Megan buys the following bonds:
  2. Bond A with a duration of 7 for 1000;
  3. Bond B with a duration of 5 for 2000; and
  4. Bond C with a duration of 10 for 500.

Calculate the duration of the portfolio.

  1. 6.3
  2. 7.0
  3. 7.3
  4. 8.3
  5. 8.8
  1. John wants to absolutely match a debt that he owes under which he must make payment of 1000 in one year and 2000 in two years. He can purchase the following bonds:
  1. Bond A is a two year bond with annual coupons of 100 and a maturity value of 1000.
  2. Bond B matures in one year for 1000 and pays a coupon of 80.

Calculate the amount of Bond B that John should purchase.

  1. 758
  2. 909
  3. 926
  4. 1000
  5. 1818