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Quiz 05.07.

2019
MS/MBA-Management Sciences

Question 1

Consider a coupon bond that has a $1,000 par value and a coupon rate of 10%. The bond is currently
selling for $1,150 and has eight years to maturity? What is the bond’s yield to maturity?

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Question 2

Assume that you just won the state lottery. Your prize can be taken either in the form of $40,000 at the
end of each of the next 25 years or as a single payment of $500,000 paid immediately.

a. If you expect to be able to earn 5% annually on your investments over the next 25 years (i.e. 5%
is the appropriate discount rate), ignoring taxes and other considerations, which alternative
should you take? Assume that your only decision criteria is selecting the option with the highest
present value.
b. Would your decision in part (a) be altered if you could earn 7% rather than 5% on your
investments over the next 25 years?

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Quiz 05.07.2019
MS/MBA-Management Sciences

Question 3

Find the price of a $1000 Forster Corp bond which is going to mature in six and a half years. It pays
interest semiannually; has coupon of 11%; and the bondholders have a required rate of return of 12%
annually on their investment.

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Question 4

Zeller Co bonds are selling at $602.50 each because the bondholders' required rate of return is 16%. The
bonds pay interest semiannually and they will mature after 10 years. Find the coupon rate of these
bonds.

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