Chapter 2 Bond valuation

What does the time value of money (TVM) principle state?

• Money today is worth more than the same amount in the future.

• Money in the future is always worth more than money today.

• Money has no value unless it is invested.

• Inflation does not affect the value of money.

If you invest $1,000 at an annual interest rate of 8%, compounded monthly, how much will you have after 3 years?

• $1,080

• $1,240

• $1,268.24

• $1,380

The present value (PV) of a future cash flow is:

• Higher when the discount rate is higher.
  
  
  

• Lower when the discount rate is higher.

• Unaffected by the discount rate.

• Always equal to the future value

What happens to the price of a bond when interest rates rise?

• The price increases.
  
  
  

• The price decreases.

• The price remains the same.

• The price doubles.

A bond with a face value of $1,000, 5 year to maturity and a coupon rate of 5% pays how much annually in interest?

• $50
  

• $500

• $5

• $100

Which of the following describes an annuity due?

• Payments occur at the end of each period.
  
  

• Payments occur at the beginning of each period.

• Payments vary each period.

• Payments are made only once.

A bond is selling at a premium when:

• The bond's price is lower than its face value.

• The bond's price is equal to its face value.

• The bond's price is higher than its face value.

• The bond has no interest payments.

Which of the following factors affects a bond’s duration?

• Coupon rate

• Time to maturity

• Interest rate changes

• All of the above

What is the present value of a bond's future cash flows called?

• Market value

• Book value

• Intrinsic value

• Par value

A bond has a face value of $1,000, an 8% annual interest rate, and a 10-year maturity, with both principal and interest paid in full at maturity. Determine the bond’s price 3 years after issuance, given that the investor’s required rate of return is 10% per year.

• $980.50

• $1,050.75

• $923.68

• $694