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Question(s) / Instruction(s):

A nominal cash flow discounted by the nominal interest rate has the same present value as the same cash flow expressed in real dollars discounted by the real interest rate.

a.            True

b.            False


2. A retired couple would like to convert $200 000 in retirement savings into an annuity making annual payments that would preserve their purchasing power over the next 20 years. The first payment will arrive in one year. Assuming an EAR of 5% and an inflation rate of 2%, how much should the annual payment be in todays dollars?

a.            $16048.52

b.            $13370.14

c.             $12231.34

d.            $18878.59


3. Comparing two bonds with the same coupon rate and face value but different maturities, for a given decrease in interest rates the shorter maturity bond will increase in price more than the longer maturity bond

a.            True

b.            False


4. The 1 year spot rate is 5%. The 2 year spot rate is 5%. The 3 year spot rate is 6%. Choose the false statement below.

The yield to maturity on a 3-year strip is 6%.

The yield to maturity on a 2-year 8% coupon bond is 5%.

2r3 is 6%.

1r2 is 5%.


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